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Carillion Collapse – There’s A Reason Why Government Doesn’t Micromanage Companies, It’s Called The USSR

One of those terribly stupid pieces of commentary erupts before us today. Apparently there was some sort of plan which would have made the collapse of Carillion less awful in some manner yet the government didn’t insist that the company followed it. Well, yes, that’s rather the point of our having a private sector. Government gets to butt out of how people lose their own money. Not just the point but the actual purpose. For when we don’t follow this simple rule we end up with an economy like that of the USSR:

The Government knew about a plan which could have reportedly retrieved more than £360 million from Carillion before it collapsed but did not encourage the firm’s directors to pursue it.

It is understood that the Cabinet Office did not consider it appropriate to advise the construction giant on business decisions despite the proposals reportedly put forward by accountants EY in mid-December last year.

According to the Guardian, EY believed breaking up the company, selling the profitable parts and placing the rest into liquidation would have generated £364m, of which £218m could have be put into the company’s pension schemes, which are hundreds of millions of pounds in deficit.

The Government was aware of the plan but did not pressurise Carillion to put it into action, and is understood to have been focusing on ensuring public services run by the outsourcing giant continued.

There’s the obvious point that maybe the plan would have worked and maybe it wouldn’t. But leave that aside. Do we want an economy in which government tells companies the details of how they should run themselves?

Nope, no and no damn way. We can make appeals to freedom and liberty and all that if we wish. But the answer is rooted in basic practicality. Economies that are planned in any detail do not work, those that are unplanned do. Work here is taken to mean that basic economic goal of improving the living standards of the populace over time. We do rather think that’s the basic idea of having that economy in the first place.

The evidence is 1989. When we all looked out over the rubble beyond the Brandenburg Gate we saw societies which were hugely, massively, poorer. Because:

So far this may seem like a purely academic exercise. As soon as one starts to think in terms of growth accounting, however, one arrives at a crucial insight about the process of economic growth: sustained growth in a nation’s per capita income can only occur if there is a rise in output per unit of input.

Mere increases in inputs, without an increase in the efficiency with which those inputs are used–investing in more machinery and infrastructure–must run into diminishing returns; input-driven growth is inevitably limited.

That making the lives of the people better depends upon productivity.

How, then, have today’s advanced nations been able to achieve sustained growth in per capita income over the past 150 years? The answer is that technological advances have lead to a continual increase in total factor productivity–a continual rise in national income for each unit of input. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.

OK, that’s what we’ve done, how about planned economies?

But what they actually found was that Soviet growth was based on rapid growth inputs–end of story. The rate of efficiency growth was not only unspectacular, it was well below the rates achieved in Western economies. Indeed, by some estimates, it was virtually nonexistent.

And that’s why we let people screw up with their own money. Because that’s the system which makes us all richer over time. We don’t use government to provide detailed plans and instructions for the economy because that doesn’t make us all richer over time. Which is why it doesn’t matter than government didn’t press a plan upon Carillion. Because they shouldn’t have pressed a plan upon Carillion. They screwed up, they go bust, that’s how we get richer.

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Nautical Nick
Nautical Nick
6 years ago

I seem to remember making a very similar point to EY’s conclusion on Tim’s other pages a while back. So not that inciteful, really. Presumably there were reasons, good at the time, why that was not followed.

Maritime Barbarian
Maritime Barbarian
6 years ago

Probably pride was involved. Directors don’t want to admit colossal blunders, and that the form was worth more when broken up.
Or they were due a bonus.

(No relation to Nautical Nick).

6 years ago

Another factor is that a government-forced reorganization is a self-fulfilling hint that the company is going out of business. Vendors start withholding shipments and insisting on cash payments, while potential future customers are given a new reason to doubt the company can deliver. Like feel-good laws in which companies have a legal duty to inform employees of a plant closing (so early that it might have been avoided), this move could have hastened Carillion’s collapse.

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