Monday, May 03, 2010

Bigger profits make everyone happy? Pigs might fly

Australia’s Fairfax Media have been running a story over the weekend - Capitalism is ruining the planet, and pigs might fly – by Chris Berg is a research fellow with the Institute of Public Affairs and editor of the IPA Review.

I suspect Mr Berg might take issue with the hype created by headline, subhead and outtakes, but his own argument reeks of poorly target information to prove a dubious case. The Sunday Age ran the subhead – Less waste means bigger profits, and that should make everybody happy. Either Mr Berg or the sub-editor live in cuckoo land if they believe that.

The argument is predicated on a research pig, Pig 05049, and seeks to prove that because all of the parts of this butchered pig were utilized in various ways. The suggestion is that tracking the afterlife of one single pig can be extrapolated across the corporate world. That would suggest that industrial waste is no longer an issue, indeed does not exist at all. We all know the truth of that, business will only expend resources to the degree that they will get a maximum return.

As to the joys of profit motive, surely that exists for those who directly benefit. With the announcement of increased taxes on our mining companies we are now hearing more of this lame justification, an incredible range of claims supporting the widely discredited ‘trickle down’ theory. The mining companies are claiming responsibility for Australia’s economic strength, despite the fact that the mineral wealth rightly belongs to the country as a whole. As to any altruistic motive, the new provision was announced on Sunday and mining shares took a dive on Monday.

I would suggest that it is not bigger profits that gain wide approval, rather it is a more equitable distribution of available wealth. I’m not being ‘bolshie’ here, not claiming business should not make profits, but equally they should not make extravagant, unsupportable claims, even if they do really believe them. I am sure Mr Berg did not achieve his exalted position through ignorance, sure that he knows the difference between a credible and a fallacious argument. I would hope so anyway. This article is shallow and misleading, and I hope it’s author feels at least a little guilt.


lindsaylobe said...

Berg has produced one of the articles that makes good points about a limited issue and then seeks to apply that universally to another wider topic - to make erroneous conclusions. It is true specializations inherent in the growth of global business generate efficiencies given free markets and an absence of trade barriers or oligopolies and so forth. But intensive pig farming uses an inordinate amount of fuel and energy to house these intelligent animals all jammed together in what many would regard as both unethical and as a non sustainable agricultural option. It all depends on the circumstances and the real cost of the inputs to determine what is efficient and in the past we have grossly underestimated the cost of energy. The case for an emissions trading scheme was to put a price on emissions to generate investment in cleaner less polluting industries. These new cleaner industries may or may not be as efficient in terms of cost to the polluters. In many cases they won’t – but that is not the issue with which Berg erroneously attributes the market as an efficient cleansing agent.

On the other hand I am less inclined to be accepting of the proposed 40% resources rent tax in its present form. The idea of imposing another 40% additional tax on those profits exceeding the equivalent to long terms bond rate to my mind makes no sense at all since nobody invests in any risky developments expecting a return equivalent to the long term bond rate. There are millions of Mum and Dad investors in BHP who understand this. However if the rate had been imposed on that profit portion that exceeding say the norm in public company expectations( given the risks ) of say 17- 20% returns on investment then it might be much more logical. As it currently stands a tax on super profits is a rather extreme form of misleading verbiage.
Best wishes

Cartledge said...

G’day Lindsay, you notice things are still slow up here. I was delighted we seem to be in part agreement, but: There are millions of Mum and Dad investors in BHP who understand this, fails to thrill. Many years ago, recognizing the cyclical nature of economics, I was opposed to the Keating super policy, predicated as it was on the newly emerging ‘economic rationalism’. To be honest I opposed the latter more strongly, but it seems to me the chooks are now coming home to roost.
Regardless of Rudd policy the economic paradigm is now pressure, just as it was pre Keating. The ‘left’ is emerging in many guises, as you are aware; and are increasingly becoming a feature in minority or coalition governments. Perhaps with that in mind Rudd is playing the ‘markets’ at their own game, but I suspect he holds more cards. On the other hand, I have been wrong before :)

lindsaylobe said...

Hi Cart
My beef is tied up with the notion that a return above the long-term bond rate,
(Currently about 5.7 per cent) is a 'super profit'. That defies all logic, particularly in the very high-risk resources sector. In plain terms it is very bad policy and should have been set around 17-20% as I suggested. The logic is that anyone providing finance understandably want to see returns well above an enterprises cost of capital- currently about 12 per cent.
Bear in mind the resources tax is on top of the company tax rate.
I think I am fair minded and don’t appose some form of rent tax on super profits - but this is simply mad - it will cost Rudd dearly because it is bad policy for any government anywhere in the world !!. That is a shame because up until this point policy seemed on the whole to be okay. Now we have cast Australia unfairly in an extreme light simply because politically one has become too greedy.

Treasury has shown very poor leadership is this regard by publishing an overly rosy picture based upon flawed fundmentals.

Barely had the ink dryed and those robust terms of trade projections were already 20% over stated !! We have suffered a 20% decline in the terms of trade in the last 3 weeks.

Best wishes

D.K. Raed said...

hey cart, I finally lost my wheezing old computer (or it lost me?) so cannot email or access email for now. see my blog. I can still comment there. new computer search begins next week. "Pigs Might Fly" is a good description for how much I might understand about computer stuff. all I know is I need to "repeal and replace" the piece o'crap (that is an oblique reference to what tea-partiers here are threatening to do with our recent healthcare legislation should they win back majority in november).

Cartledge said...

Sorry for stalling on a response Lindsay, like you I was looking for the shoe to drop. While I remain in favour of the resource tax I concede it was a shocking sales effort.
Kev is clearly not a democratic leader, which isn't all bad :) The next act should be riveting.

D.K. Raed said...

Off topic (but semi-current): I was just reading about your new PM Julia Gillard, characterizing her as an unmarried atheist redhead with no children ... hmmm ... I like her already ... though I still don't quite understand what happened to Kevin.

Cartledge said...

DK, along with other assured pundits I was convinced, on Wednesday this week, that the woman destined to be PM had some time to wait.
I make no apologies for admiring Rudd, but election prospects rule the parties. As it happens the change is less dramatic politically than it is socially. Rudd was a poor communicator and team worker. In fact he seemed to break the golden rule of keeping the troops too busy to become a nuisance.
I guess, historically, Labor were seeing a possible Whitlam outcome. The Gillard choice should prove favourable, and under our system a parliamentary coup is far less costly than an election. Some are still bleating that we elected him as PM. In fact I elected my local rep (though he was an independent). I could not have elected Rudd because he was not a candidate in my electorate.
I'm still reeling, but Lindsay might be able to give a more ar6ticulate response.

Cartledge said...

I should add, some are attacking gender, hair colour, lack of marriage and children and there was even one comment that she is an agnostic. I expect most Aussies understand this is a pluralist society.

lindsaylobe said...

Kevin Rudd's death knell politically came as swiftly as it first began when he replaced Kim Beazley whist still in opposition- since both actions were at the behest of the right wing party power factions.
Rudd was a victim of his own making since his centralist non consultative style so disenfranchised colleagues it was embarrassing for all of us to plainly see his lack of party support on the eve of his abrupt ending as Prime Minister.
As a devoted family man his family was the only ones to shed any tears since colleagues were almost unanimous in their opinion he had lost his way and was leading a doomed party wedded to policies which would effectively lead to their decimation at the next election.
Best wishes

Steve Ballmer said...

I utterly love this post! Keep up the good work my friend!

Cartledge said...

Thank you Steve. I am delighted you saw value in the post.