Wednesday, 12 June 2013

A country is not a corporation (updated)

In a way this statement is obvious and yet as Brennan McDonald points out many people still seem to think that a country is in fact like a corporation. McDonald asks MFAT Please Kill The Phrase NZ Inc. He writes
The phrase NZ Inc is so nauseating. Please stop using it. New Zealand is a collection of individuals, firms, government agencies, councils, charities, families, iwi and a whole lot of other fluid groups that change their composition and goals frequently.

A country is not a corporate. New Zealand is not some sort of business enterprise that can be called “NZ Inc”.
And he is right, a country is not a corporation. Hayek made the distinction between the "economies" of the small-scale entities such as firms, farms or family units and the "economy" of a nation state, that is the "economy" of a corporation and the "economy" of country. In the case of a firm's (or household's) economy, Hayek argued, the ends around which decisions are made are generally known in advance and decisions about resource allocation are therefore relatively uncomplicated. In this sense then the economy of a household or firm or farm, is the economy of an organisation, or "taxis". But, Hayek goes on to say, the same does not hold for the economy of a large-scale complex society. Society is not an organisation. Owing to its size and the indirect nature of the social relationships within it, Hayek contends that the Knowledge Problem that the economy of such a society consequently faces means that it is not immediately apparent to what use resources should be put. For this reason, Hayek employs the term "catallaxy" to describe the economic aspect of the complex spontaneous order, or cosmos, of a large-scale society.

Another way to see why countries are not corporations is to turn to Paul Krugman's essay entitled, funnily enough, A Country Is Not a Company. A distinction made in the essay is about competition between firms and countries. Firms complete while countries do not, an important distinction. Consider, for example, Coke and Pepsi, they do compete. One of them gains at the others expense, management in each company spends a lot of time and energy trying to out do the other. But what about New Zealand and Australia, do they compete? Of course they don't, Australia's loss is not New Zealand's gain and vice versa. International trade is not a zero-sum game. To see this, note that while Coke may wish to put Pepsi out of business, so that Coke can increase their sales and prices and therefore profits, New Zealand would not gain if we put Australia "out of business".

Why? Well in the Coke/Pepsi case, Coke gains a lot, in terms of sales and profits, from not having Pepsi to complete with and lose little since Pepsi doesn't buy much , if anything, from Coke. Or Coke from Pepsi. This is not true of the New Zealand/Australia example. We may gain some sales if Australia stopped producing, but we would lose much more. Australia is our biggest export market and if they "went out of business", they would stop importing, and that would hurt us a lot. Also they are suppliers of much of our useful imports and that would stop too, which would hurt us even more.

Countries do a lot of trading, but they don't compete. Corporations do little trading but a lot of competing.

Update: Matt Nolan notes that NZ Inc: Good marketing, bad for society

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