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The Wonders of Capitalism

by DoDo Fri Apr 6th, 2007 at 12:17:13 PM EST

Neoliberalism preaches that the Private Sector is always more "efficient" (efficient in what?) than the State, and thus privatisation and deregulation is the suggested solution to every problem (including those arising during/after privatisation and deregulation). I like to counter that the State is least efficient at privatisation.

A nice example is what happened to my own company and what is about to happen to my unit in it. I expand an earlier comment of mine here, but for those who already read it, you'll find the update at the end, with an example that for me captures the essence of capitalism.


Once upon a time, there was a state railway company. It functioned with some chronic problems and was making some loss, but at the same time, public opinion was not friendly to the idea of its privatisation, and no prospective buyers were on the horizon.

What can governments advised by neoliberals/adhering to neoliberalism do?

Until they don't dare a direct attack, the company can be subjected to

  1. denial of investment funds (except for projects co-funded by the EU, and those are done with lack of system awareness), while rival transport modes get major funding (highways, airports), so that there is only depreciation;
  2. further centralisation of decision-making, especially on those involving appropriation of funds: ostensibly for cost control, but in practice putting sand in the gears, and stifling own initiative of the lower ranks;
  3. constant alibi reorganisations: ostensibly towards a 'more rational' or a 'market-oriented' constellation, but in practice achieving a situation where people don't know who is responsible for what (sometimes not even what organisational unit they belong to), and  workers are demoralised (you can live better even in a bad system if you can at least get to learn it);
  4. reductions of the workforce: ostensibly to raise productivity, in practice achieving the loss of the best people (who retire or go into a different business), operational problems where key people were spared, and of course mid-level bosses protecting their favourites and firing able men instead.

With this practice, a merely loss-making state company can be run down into a ghost of its former self in a few years. And then the hyper-hypocritical arguments can come: it is hopelessly loss-making despite our best efforts, so let's cut it up and privatise its parts!

They best leave a further few years between the cutting up (into, say, Passenger Transport, Cargo, Infrastructure) and the sell-off, because cutting up brings further de-coordination and broken-up dependencies.


This is the macro view, now for the micro view.


Despite all prior difficulties and one re-organisation a year, my small unit within the state railway company managed to mostly stay together, make a profit by also taking industry orders, and be highly productive.

But two weeks ago, we learnt of some decisions made without even consulting our low-level bosses:

  1. we have been transplanted from one big branch to another,
  2. our new owners are eyeing us for their quota for further workforce reduction (ordered by the government as part of their 'austerity programme').

The new mid-level bosses wanted us to cut workforce by a third. It didn't count that after prior reorganisations and retirements, we already reached the minimum practicable level of workforce (i.e. where for many tasks there is no replacement man), in fact we'd need more to do more contracts in parallel.

They also dismissed the argument that we make a profit – what's more, originally, with the nice manager-talk argument of streamlining the company profile, they wanted to take away our right to take on outside orders. Now that would have done wonders to company productivity... Fortunately, it now looks that after intense lobbying by our low-level bosses, the mid-levels now seem convinced that it is better for them if we make profit than if they can starve us and later dissolve our unit completely.

But dark clouds still loom over (the remaining of) us, because our new branch is an endangered species. Any sane railwayman (which today excludes all of the private-economy-imported managers and policy-making politicians/government bureaucrats) can deduce that after the other branches of the cut-up company will be privatised, they will discover that they aren't functional without parts of ours. So sooner or later, our branch will be cut up between them, and a rump will remain. Which is then an easy candidate for dissolution.


But we who remain are the lucky ones. Here is how our numbers were reduced by 30%.


Just the one working group that worked only for internal orders (yet still made a profit) was practically handed over as present to a private maintenance company (one also making profit), a former unit of the state railway long privatised. Two more guys have to go, neither of whom did our core activity, but they did some essential stuff for test runs we don't (yet) know how to do... but back from us to them, they are the unlucky ones. This week, they met their new 'owner', and were told:

  1. their wages will be much less than in the state company (where it wasn't too high either);
  2. all special privileges/aliments are gone: no domestic and foreign railway freecard, no railway hospital access, no above-salary internet and food subsidy;
  3. but, the new boss said that this working group asked for too little in their past contracts.

I am confident you can deduce on your own who'll benefit and how much.

I note that for my soon-to-be-former colleagues, the surprise was not in anything said, only in exploitation being so much out in the open. We already know this private company well.

The one big asset of its boss is: good connections among his former colleagues in the hierarchy (and not just in Hungary). Those connections ensure that the firm wins tenders before they are announced, even if it isn't the cheapest. While he can lease state railway facilities for beans or even for free (something we can't hope for would we be privatised). Because those involve the facilities we too use, we met and knew his workers, who often complained of their treatment (both in financial and personal terms).

As a final exercise, calculate the benefit for the State in cutting off an internal part that doesn't make a loss (and could even make profit abroad in the future) and then order its services for more than before.

:: :: :: :: ::

Check the Train Blogging index page for a (hopefully) complete list of ET diaries and stories related to railways and trains.

Display:
The news of this reorganisation came just after my first-ever business trip, when we got an order from Graz/Austria. Our customer, who searched for us specifically (they already had work for us years before), told how difficult it was to find us:
  • name change,
  • on the railway's central homepage (we aren't allowed to maintain one ourselves since the previous 'rational' reorganisation: private-economy-style centralised and outsourced internal services are ah so more effective), English and Deutsch didn't work,
  • when at last he found the well-hidden Hungarian homepage made for us, it was outdated, with a since retired boss displayed as contact person...

And yes, presently I don't even know the new name of my unit.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Apr 6th, 2007 at 12:27:17 PM EST
I'm a little confused Dodo.  
my small unit within the state railway company managed
All of this is happening to you and your colleagues while you are being run by the govenment.  Why doesn't the government have good management, vision for the future, hire effective leaders for your railway company, fire the idiots that are running it today?  Why doesn't your managers immediately fund your own groups profit making potential?  You're describing an existing state run company--why don't you, your colleagues, and their managers fix it?

Change is often needed in the world.  Why don't you guys, within the government structure, and your management, just change it?

If the government model of running things is to be effective, it has to change sometimes.  So if the government model is a good one, why is it not handling this challenge that you are describing.  Obviously you personally have some great ideas for some of the solutions.  

by wchurchill on Fri Apr 6th, 2007 at 02:35:54 PM EST
I'm a little confused Dodo.

Correct.

Why doesn't the government have good management,

Good question. Have you read my diaries on Hungarian politics?

vision for the future,

That one they have, as I pointed out in the first third of the diary. It is to back out from managing things and sell off things.

hire effective leaders for your railway company

It's not hiring, but stopping firing. As I implied in the diary, over the past two decades, every man who understood something about railways was removed from management, and replaced with shiny new able peoplefrom the private economy (or the privatisation bureaucracy) without a faintest clue. For example, the boss of my current branch used to be the liquidation overseer for the closure of a mine...

Why doesn't your managers immediately fund your own groups profit making potential?

As I explained in the diary, because the overriding command from above, from our wonderful rational Jack "neutron-Jack" Welsh-worshipping managers, is to raise productivity by firing people.

why don't you, your colleagues, and their managers fix it?

Why obviously, because the neolibs are stronger in the system. They are using our own weapons against us.

Change is often needed in the world.

Which change are you thinking of?

If the government model of running things is to be effective, it has to change sometimes.

There is no "government model of running things", that's a dualist propaganda language. There are different models of running public companies. But preparing them for sell-off is neither of them. By the way, what do you mean when you use the word "effective"?

Obviously you personally have some great ideas for some of the solutions.

Obviously. You could have read most of them in various train and transport diaries I have written. But I am neither the PM, nor the transport minister, nor opposition leader, nor one of their economic advisers or former teacher, nor an IMF representative, and not even a railway manager. I am powerless, except for ranting to anyone who'd listen. That's why I am here.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Apr 6th, 2007 at 05:02:52 PM EST
[ Parent ]
As I explained in the diary, because the overriding command from above, from our wonderful rational Jack "neutron-Jack" Welsh-worshipping managers, is to raise productivity by firing people.
But GE added hundreds of thousands of jobs over Welch's 20 year tenure.  They developed human resource systems aimed at finding the young, bright, hard working people (like you seem to be) in GE, and giving them more and more responsibility--along with higher earnings.  They were a strong proponent of qualities to improve quality, such as 6 Sigma--these programs raise quality levels and improve productivity at the same time.  you don't improve productivity by firing people--you improve it with new and better practises, with adding technology to people, etc.

if your managers think that firing people is a way to raise productivity, they are far, far from the truth.  and far, far from modern practises of business.  they may be neocons, I don't know them of course, but they are certainly not good business managers using modern techniques of running something.

It just seems odd to entitle your diary "the wonders of capitalism", and then use as an example a government company run by people that don 't seem to understand business principles in use today.  firing people to raise productivity is not a business principle.

by wchurchill on Fri Apr 6th, 2007 at 05:19:10 PM EST
[ Parent ]
But GE added hundreds of thousands of jobs

You are adding up the workers kept of companies bought up, and not substracting those not kept. And you are speaking about a company with large capital influx and no responsibility other than to shareholders, rather than one denied of funds yet obliged to do public service. Apples and oranges, my friend.

finding the young, bright, hard working people

By the way, what shall happen with the rest in your world? And what about the assembled experience of old hands, and the not bright but hard-working who know all the tricks of the trade?

They were a strong proponent of qualities to improve quality

But sometimes with torturous detours. For example, after 1989, a big light bulb maker in Hungary which dominated parts of the world market (f.e. India) was bought up by GE. The first thing they did was to eliminate a large part of the production capacity (along with jobs) and apportion specific geopraphical areas for export -- and thus, also, India was forced to buy bulbs made elsewhere by GE for a higher price. It was years later that they realised that that old light bulb company had a lot of specialist engineers, and Neutron-Jack decided to put a development centre there. Today this former company is a nice good-running little branch, but far from what it could have been.

f your managers think that firing people is a way to raise productivity, they are far, far from the truth.

Very true.

and far, far from modern practises of business.

This is not true in my experience. We are speaking of the business experience of rescue schemes for major loss-making companies. Though it is true that in this case, this is made worse by economical theorical (ideological) ideas of what changes are needed to be made to a state company.

t just seems odd to entitle your diary "the wonders of capitalism", and then use as an example a government company

Nope. I see you are completely ignoring the case of the private company that made me turn the earlier comment into an extended diary and give it this title.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Apr 6th, 2007 at 05:50:21 PM EST
[ Parent ]
sorry, I must have come in, in the middle of the story.  
Despite all prior difficulties and one re-organisation a year, my small unit within the state railway company managed to mostly stay together, makes a profit by also taking industry orders, and is highly productive.

But we learnt today that (1) we have been transplanted from one big branch to another, (2) our new owners are eyeing us for their quota for further workforce reduction ordered by the government. That we make profit doesn't count, in fact it appears that they will take away our right to take on orders. And even so, we already reached the minimum practicable level of workforce, taking away more will mean that we simply won't be able to do our job.

I guess I like you can't understand why the above would happen. I don't understand why someone running a company would take actions to make a profitable unit unprofitable.  and i don't understand why the new owners would want to reduce a workforce, because they are ordered to do so by the government.  I've run businesses, and all of this is nonsensical--so I hope someone brightens up in your company and does the right thing.
by wchurchill on Fri Apr 6th, 2007 at 06:07:57 PM EST
[ Parent ]
you can't understand why the above would happen

No, I perfectly understand why the above could happen.

I don't understand why someone running a company would take actions to make a profitable unit unprofitable.

How many levels of hierarchy did the companies you worked in have had? Because the above sounds extremely naive. (For a private economy example of these things -- because there can be many reasons -- you can't understand, I wrote up one here.)

I've run businesses

So here is a management exercise for you.

  1. You are the top boss of a large company with 4-8 levels of hierarchy and five thousand employees in six hundred different kinds of jobs that is making a loss.
  2. Your credit-worthiness is low.
  3. You have service obligations by law.

How will you turn it around?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Apr 6th, 2007 at 06:17:50 PM EST
[ Parent ]
I don't understand why someone running a company would deliberately take actions to make a profitable unit unprofitable.
I intended to mean the above.  If my comments are implying that I think private business is perfect, I have not intended that.  Mistakes are made all of the time.  In fact I have worked in a very large American corporation where it seemed we had a new manager come in and take over, and after several months have a new insight that he thinks will fix the company, or division, and reorganize in order to in his mind better achieve the goals.  Sometimes the changes work, and sometimes they don't.  But I have seen a reorganization be undone, and put exactly like it was before--an admission of failure, but sometimes the people on top will try to say things just changed.  So mistakes are made, and pretty often.  I've seen situations such as you describe where it's possible to impute personal motivations to such changes--but I've generally given them the benefit of the doubt because there was a business argument that seemed plausible, though it might have later turned out to be wrong.
by wchurchill on Fri Apr 6th, 2007 at 06:55:07 PM EST
[ Parent ]
this one is too general to really answer.  but before even generally commenting, what does service obligations by law mean?--obligations to shareholders to achieve a profit, or something else?
by wchurchill on Fri Apr 6th, 2007 at 06:58:09 PM EST
[ Parent ]
Straight question: in your humble opinion, and for your particular branch of public service, are things better now than they were, say, 10 years ago?

How about 20 years ago?

Leaving aside, of course, the political side of things as much as possible...

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Fri Apr 6th, 2007 at 05:38:24 PM EST
[ Parent ]
On average, they are clearly worse than 10, 20 and 30 years ago. In contrast to the French, Swiss or Austrian state railways, I'd say, for which the opposite is true (except for freight traffic). Meanwhile, the decline on average (if there was one at all) was much less steep for the Czech state railways, and development maybe even pointed upwards for the Slovenian state railways.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Apr 6th, 2007 at 05:59:57 PM EST
[ Parent ]

Isn't this an argument against state run things?

No, this is an argument against letting people who do not believe that the State can do useful things run government assets.

Neolibs, who do not believe in government, should not be allowed near it, as their only goal is to break it.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Apr 6th, 2007 at 05:16:58 PM EST
[ Parent ]
then why don't they hire some good managers rather than neolibs.  some managers that understand how to manage people, improve productivity, set a vision, etc.  why are they hiring these neolibs?
by wchurchill on Fri Apr 6th, 2007 at 05:22:28 PM EST
[ Parent ]
then why don't they hire some good managers rather than neolibs

"They", who they? They are the neolibs.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Apr 6th, 2007 at 05:29:28 PM EST
[ Parent ]
What can governments advised by neoliberals/adhering to neoliberalism do?
I guess I haven't read enough of Dodo's diaries.  why would they listen to neolibs?  why don't they find good managers instead?

With this practice, a merely loss-making state company can be run down into a ghost of its former self in a few years.
Are the people who ran the loss-making state companies neolibs?  
by wchurchill on Fri Apr 6th, 2007 at 05:42:15 PM EST
[ Parent ]
Are the people who ran the loss-making state companies neolibs?

No. Of course, when you do public service, making profit is not the main goal. But those who made a more or less functioning public company into a dysfunctional mess are neolibs.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Apr 6th, 2007 at 05:54:12 PM EST
[ Parent ]
The politicians in power are neolibs and wants to privatise railway, but lack public support for it. Thus they run the railway company in the ground to motivate the privatisation.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri Apr 6th, 2007 at 05:55:29 PM EST
[ Parent ]
good managers

Another obvious thing to emphasize again is that what the job needs is not 'a good manager', but a good railway manager. Railways (at least properly run ones that serve both freight and passengers) are very complex systems, with lots of interdependencies, which a manager should know or his cost-benefit analysis isn't worth anything. Only the command structure of the workforce is hierarchic, but not 'production'.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Apr 6th, 2007 at 06:08:31 PM EST
[ Parent ]
totally agree with this.
by wchurchill on Fri Apr 6th, 2007 at 06:43:05 PM EST
[ Parent ]

then why don't they hire some good managers rather than neolibs.  some managers that understand how to manage people, improve productivity, set a vision, etc.  why are they hiring these neolibs?

That's what the French State used to do (hire good managers). It was prestigious to work for the government, and a good career for ambitious people. Now that government is systematicaly denigrated ("bureaucrats", "lazy", "inefficient", "the cause of all problems", etc...), it's not so prestigious. Plus, in order to avoid "unnecessaty waste of taxpayer money", the government is not allowed to pay as much as banks offer for bright young engineers, thus they go to work in banks, where they are properly "valued".

And it's a self-reinforcing cycle, of course.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Apr 6th, 2007 at 06:06:41 PM EST
[ Parent ]
it sounds incredibly frustrating.
by wchurchill on Fri Apr 6th, 2007 at 06:10:54 PM EST
[ Parent ]
And so it is. This is my life, not theory.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Apr 6th, 2007 at 06:18:28 PM EST
[ Parent ]
Really very sorry about your railway's situation.

I love trains. Freight haulage in US is now I believe, totally privatised (Conrail poof), and a theft-privitaztion pool has been trying to wreck-break up Amtrack(passenger rail) for 35 years.

These thieves(the neolibs) are much more rapacious and parisitic than the railroad guys of old. At least Hill, Harriman,Gould, and the like were attempting to build something.

Course we here, save one, can recognize a metatasizing parasite  when we see it.

"When the abyss stares at me, it wets its pants." Brian Hopkins

by EricC on Fri Apr 6th, 2007 at 08:09:30 PM EST
[ Parent ]
The modern neo-liberal furry episode is indeed frsutrating. They have a political agenda, not a public service in mind.

What is needed to run a complicated public service continuously? It takes much more than just profitability. Profitablity optimization can be irrelevent to public service functioning, or worse. That's why purely commercial management is not a panacea.

The main purpose of public srevice is long term function - short periods of mild financial losses can be acceptable, but surely, the service ought to be self-supporting (and even better) most of the time. The imperative of maximal short-term profits can often tighten the public service "organism" unnecessary, increasing the risk of dysfunctioning.

Besides, large scale buisinesses do not like the grey are of low profits. Privatisation of telephone service worked because it coincided with a technology breakthough, and you can normally make millions here. In many cases, public servises like postal or transportation, can make modest profits regurlarly, but it is not a very effective investment for the buisiness point of view. Once the "last" generation of dedicated supervisors and specialists will be gone, most public service companies will fall into the problematic category and be taken over by "rescue" capitalists. Frequently, a service will be minimized to a "most effective" scale, taking a one-time maximal profit from the assests and functionality.

by das monde on Sat Apr 7th, 2007 at 12:42:28 AM EST
[ Parent ]
Government may never be the most effective "manager" - but is the effectivity everything we may need? Some things have to be done one way or the other - it does not matter much whether effectiently or not.

Take carbon emission regulation, for example. In the long run, trading of emission rights is unavoidable, and presumably the most effective way to cap emissions. The market will indeed be the effective tool to decide the prices. But we need to deal with the CO2 problem now, not in the long run, and preferably not in a wildly degraded environment. Markets cannot help at all so far - there is not enough commercial interest, if any.  We do not know which procedures would be most effective at this stage - but if we allow ourselves to act only "most effeciently", we are too hard on ourselves. Half-measures or clearly sub-optimal procedures can save a lot as well. It is desirable that the government would generate or provoke a free market solution quickly. But to start things moving, the government does not have to restrict itself to the free market framework, or any dogmas.

by das monde on Sat Apr 7th, 2007 at 01:03:40 AM EST


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