Keith Rankin

The Rankin File: #40

The "reforms", including the "health reforms", constitute a massive cost-raising exercise designed to lead to privatisation, not a "cost­cutting exercise". The mooted splitting up of Electricorp is a more obvious example of cost­raising. It will cost something like a $1billion capital injection to make the separated units commercially viable. That represents the cost of going from a more efficient form of industrial organisation to a less efficient form. The same thing happened in Health. It is now fully acknowledged that having four separate RHAs was a grossly wasteful form of administration.

The general issue can be easily understood simply by referring to the circular flow principle that is central to market economics. The circular flow is shown in the diagram below. Households benefit as consumers and incur costs by letting their labour, capital and/or land to producing firms. In addition to hiring land, labour and capital, firms buy inputs from each other: raw materials, fuels, and business services. Primary producing firms supply raw materials to secondary producers (manufacturers) whose value­added goods are distributed to consumers by firms in the tertiary or service sector.

The tertiary producers are of two main types. Those who supply services to consumers (who are shown in the diagram), and those who provide "business and financial services" to other producing firms. Thus there is feedback in the circular flow that is not shown in the diagram. The most obvious example of feedback is when service sector firms sell to other producers in the primary, secondary or tertiary sectors.

Cost-cutting occurs when the costs - ie the quantity of factors (labour, land or capital) hired by firms - are reduced. There is a productivity benefit if consumption is not cut, or so long as consumption is not cut by as much as factor costs.

Economic growth (as understood by the economics profession) occurs when the consumption of marketed goods increases, either due to an increased use of factors, or to productivity increases (meaning that more is produced without raising factor costs). Typically, the growth process occurs by new firms entering the circular flow, and, by transforming the inputs they draw on, adding net value to the flow. Firms enter the circular flow because there is an unsatisfied demand for their products.

Cost­raising of the sort characterised by the reforms is however, in essence, a parasitic process. New producing firms - "transactors" rather than "transformers" - find ways of drawing inputs from the flow without contributing to the net value of the flow. The transactors profit from the flow by diverting it to themselves while "crowding out" transforming activities. More factors are used to produce fewer consumables than would have been the case in the absence of the reforms.

The reforms have been a political exercise that has enabled a number of new and largely parasitic firms to plug into the circular flow without satisfying the market demands of any consumers or groups of consumers. ("Firm" is a generic term for market producer; as such it includes government agencies.) The reform process has thus been driven by particular groups of suppliers and politicians, and not by the demand forces originating with the consumers who are supposed to determine the allocation of labour, capital and land.

The process works by such firms persuading government agencies to buy additional transaction services - eg through the political advocacy of a model that emphasises the importance to production of supervision, or through the sale of a policy programme that creates an environment in which firms become obliged to buy financial and other services that they would not otherwise have bought.

Every cost represents someone's income. Therefore, parasitic cost­raising exercises create income streams for those managers and capitalists who control and own the firms concerned. The greater the cost incurred, the greater becomes the incomes of those managers and capitalists. (This is an argument that organised business itself applies to labour: the greater the incomes to labourers, then the greater the cost to those who hire labour.)

By definition, parasitic firms do not add to the total consumable value; rather they change the distribution of value in favour of their own principals. Once having inserted themselves into the flow, it is a comparatively easy exercise for cost­plus transactors benefitting from what Immanuel Wallerstein calls "relative monopoly" to gradually ratchet up their charges, thereby raising the costs that have to be borne by everyone else.

There can be do doubt that parasitism does occur within the economic flow, just at it occurs in the biological flows that inspired modern economic thought. The important question is to what extent has parasitism increased or decreased as a result of the reforms. The advocates of reform would probably argue that parasitism has decreased, and they would point to the diminished role of trade unions. My view is that parasitism on behalf of capital has increased by a much greater extent.

The health reforms profit the capitalist class - ie organised business - in two ways. First, as described, by inviting transactor producers into the circular flow, creating incomes for the capitalist transactors. Second, by lowering the supply of the consumable product - in this case, public health care services - a demand is created for a substitute product; namely private health care and private health insurance. These are particularly profitable businesses to be in. Countries which emphasise private health care over public care invariably use an unnecessaraily large share of factor resources in the provision of health care services.

In New Zealand, the "Reforms" - the whole commercialisation process - has been one of creating the political conditions through which the dominant social strata can profitably (for them) insert themselves into the circular flow of what was a well­balanced economy. Those incursions represent additional costs - "transaction costs" is the technical term - and the reforms have been a cost­raising exercise.

The solution to the problems created by the reforms is not to add even more labour and capital inputs, but to regulate the circular flow so as to diminish the extent of capitalist parasitism.

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