From the Minimal State to a state of Social Cohesion?
Navigating between public and private sector
with the aim of social cohesion
Mixed economy and business.
A fundamental element in the evaluation of a society’s movements between a minimalistic and a maximalistic state, is the organization of the market economy in terms of public and private ownership of firms operating in the economy. Firms may be privately owned, publicly owned, or owned by a mix of private and public shareholders. As long as none of these firms are subsidized, and all of them are confronted with the same market conditions, the difference in their behavior may not be very noticeable. The only difference between them may rest in the type of pressure the owners put on the management to produce results, and the time perspective owners apply in their judgments. Such differences will of course also be seen between private firms themselves.
There seems to be broad political agreement in the Nordic countries that the market mechanism should be the principal tool to handle the enormous amount of information that is needed to make a modern economy function well. To achieve a good balance between people’s needs for goods and services and the availability of these goods and services (through production and imports), requires amounts of information that only the market mechanism is capable of handling properly. The only disagreement on this question, regards how big a role this mechanism should play in the production of publicly financed services, and how big the relative role of publicly owned business firms should be in the market economy. This is a difference of opinion that rests on ideological beliefs. In practical terms, the differences may narrow down to a few questions which have little to do with efficiency.
All Nordic countries adhere to the European Union’s internal market rules. They ensure that all firms operating in the market economy, whether publicly or privately owned, are confronted with the same rules and regulations in the markets they operate.
The incentives offered to a firm’s leaders will generally be different, because media and politicians pay more attention to pay levels in public firms, or firms receiving public support (as we have seen with the financial institutions after the financial crisis). Up to a certain point, pay levels are important for the recruitment of good leaders. However, the pay levels presently seen in top private firms are not necessarily conducive to good, healthy management – as we have seen during the financial crisis and earlier also through the accounting scandals that brought the global auditing firm Andersen down. These pay levels seem to generate greed and megalomany to an extent which leads to a total loss of perspective on the part of the leaders involved.
Public ownership of a firm may be considered desirable if it operates in a critical sector where the national authorities do not wish foreign firms to be the only operators in the market. The energy sector, with the development of Norway’s oil production is a good example of this. This has taken place through a mix of publicly and privately owned firms, and a mix of Norwegian and foreign firms. These mixes have ensured that the Norwegian government has been able to follow closely both the technological and the economic potentials of this sector, and that these potentials have benefited the population at large – and not only the firms involved. The financial sector is another good example of a critical sector. Norway’s largest bank is majority owned by the government. The pay level of the leadership is not governed by the kind of stock options or bonuses that would lead to greedy behavior on the part of its leaders. It is not surprising that this bank did not get mixed up in subprime loans. It has been able to navigate quite solidly through the financial crisis. The solidity of this bank has been crucial for the fast recovery of the Norwegian economy, and it contrasts in a major way to what has happened in Iceland. The telecommunication sector is a third example of a critical sector. Information and communications technology is at the heart of a modern economy’s way of operating. The largest Norwegian telecommunications company is majority owned by the government. It competes with several other companies, but its presence ensures that Norway is able to follow closely the development of this sector.
There is no precise definition of what a critical sector in an economy is, but some sectors are so important that you do not need to doubt their importance. To put it differently: it may be hard to define an elephant, but when you see it you are not in doubt. Regardless of how you define the critical sectors, it is important for a small country like Norway to ensure that they are not run entirely by foreign interests. It is not to be expected that foreign owners would care about Norwegian interests or Norwegian work culture.
While the minimalistic state does not have ownership in any form of business undertaking, the maximalistic state has full ownership of all business undertakings in the country. In a mixed economy, the discussion on critical sectors will govern the degree of public ownership in the market economy. Public ownership of a business company can also have different levels of ambitions, from blocking minority to majority ownership. Whatever the degree of ownership, the international competition rules of the EEA (European Economic Area) and the WTO (World Trade Organization) must be respected. This implies that the differences between private and public ownership will be small when it comes to day to day business and the profitability requirements that are in force there.
Mixed economy and publicly financed services.
While the differences between public and private ownership may be small when it comes to the production of goods and services being sold in open markets, the differences in practice may be very big when it comes to publicly financed services, such as garbage collection. This follows from the point that such services are defined in some detail by the public agencies that wish to provide the services. The agency may decide to run the service as an entirely public service, without opening up for competition by different service providers to take on the job. In this case, international competition rules do not apply for that service. Alternatively, the agency may decide to open up for competing bidders to carry out the service. In that case, the contract to carry out the service has to be given to the firm that offers the service at the cheapest price, within the specifications given by the public agency that opened up for the bidding. The public agency is not allowed to give the contract away to other bidders, if it did not like the outcome of the bidding.
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The expansion in the public sector for the last 60 years has been driven by people’s desires for security, welfare and equality. This has in the Nordic countries been a broad process where all political parties have competed for the voters support by offering initiatives implying ever greater ambitions on behalf of the public sector. The political parties often make claim to the “fatherhood” of this or that initiative. The income from oil production has of course encouraged the ambitions in Norway. Then there has been disagreement on how much of this activity should be carried out by public or private service providers, but these disagreements have not to a large degree been about the ambitions on the service level. Governments of different political colors have had opportunities to reverse the trends, but they have not seized these opportunities in a radical way. The popular support for this social balancing act is very strong.
A fundamental element in the evaluation of a society’s movements between a minimalistic and a maximalistic state, is the organization of the market economy in terms of public and private ownership of firms operating in the economy. Firms may be privately owned, publicly owned, or owned by a mix of private and public shareholders. As long as none of these firms are subsidized, and all of them are confronted with the same market conditions, the difference in their behavior may not be very noticeable. The only difference between them may rest in the type of pressure the owners put on the management to produce results, and the time perspective owners apply in their judgments. Such differences will of course also be seen between private firms themselves.
There seems to be broad political agreement in the Nordic countries that the market mechanism should be the principal tool to handle the enormous amount of information that is needed to make a modern economy function well. To achieve a good balance between people’s needs for goods and services and the availability of these goods and services (through production and imports), requires amounts of information that only the market mechanism is capable of handling properly. The only disagreement on this question, regards how big a role this mechanism should play in the production of publicly financed services, and how big the relative role of publicly owned business firms should be in the market economy. This is a difference of opinion that rests on ideological beliefs. In practical terms, the differences may narrow down to a few questions which have little to do with efficiency.
All Nordic countries adhere to the European Union’s internal market rules. They ensure that all firms operating in the market economy, whether publicly or privately owned, are confronted with the same rules and regulations in the markets they operate.
The incentives offered to a firm’s leaders will generally be different, because media and politicians pay more attention to pay levels in public firms, or firms receiving public support (as we have seen with the financial institutions after the financial crisis). Up to a certain point, pay levels are important for the recruitment of good leaders. However, the pay levels presently seen in top private firms are not necessarily conducive to good, healthy management – as we have seen during the financial crisis and earlier also through the accounting scandals that brought the global auditing firm Andersen down. These pay levels seem to generate greed and megalomany to an extent which leads to a total loss of perspective on the part of the leaders involved.
Public ownership of a firm may be considered desirable if it operates in a critical sector where the national authorities do not wish foreign firms to be the only operators in the market. The energy sector, with the development of Norway’s oil production is a good example of this. This has taken place through a mix of publicly and privately owned firms, and a mix of Norwegian and foreign firms. These mixes have ensured that the Norwegian government has been able to follow closely both the technological and the economic potentials of this sector, and that these potentials have benefited the population at large – and not only the firms involved. The financial sector is another good example of a critical sector. Norway’s largest bank is majority owned by the government. The pay level of the leadership is not governed by the kind of stock options or bonuses that would lead to greedy behavior on the part of its leaders. It is not surprising that this bank did not get mixed up in subprime loans. It has been able to navigate quite solidly through the financial crisis. The solidity of this bank has been crucial for the fast recovery of the Norwegian economy, and it contrasts in a major way to what has happened in Iceland. The telecommunication sector is a third example of a critical sector. Information and communications technology is at the heart of a modern economy’s way of operating. The largest Norwegian telecommunications company is majority owned by the government. It competes with several other companies, but its presence ensures that Norway is able to follow closely the development of this sector.
There is no precise definition of what a critical sector in an economy is, but some sectors are so important that you do not need to doubt their importance. To put it differently: it may be hard to define an elephant, but when you see it you are not in doubt. Regardless of how you define the critical sectors, it is important for a small country like Norway to ensure that they are not run entirely by foreign interests. It is not to be expected that foreign owners would care about Norwegian interests or Norwegian work culture.
While the minimalistic state does not have ownership in any form of business undertaking, the maximalistic state has full ownership of all business undertakings in the country. In a mixed economy, the discussion on critical sectors will govern the degree of public ownership in the market economy. Public ownership of a business company can also have different levels of ambitions, from blocking minority to majority ownership. Whatever the degree of ownership, the international competition rules of the EEA (European Economic Area) and the WTO (World Trade Organization) must be respected. This implies that the differences between private and public ownership will be small when it comes to day to day business and the profitability requirements that are in force there.
Mixed economy and publicly financed services.
While the differences between public and private ownership may be small when it comes to the production of goods and services being sold in open markets, the differences in practice may be very big when it comes to publicly financed services, such as garbage collection. This follows from the point that such services are defined in some detail by the public agencies that wish to provide the services. The agency may decide to run the service as an entirely public service, without opening up for competition by different service providers to take on the job. In this case, international competition rules do not apply for that service. Alternatively, the agency may decide to open up for competing bidders to carry out the service. In that case, the contract to carry out the service has to be given to the firm that offers the service at the cheapest price, within the specifications given by the public agency that opened up for the bidding. The public agency is not allowed to give the contract away to other bidders, if it did not like the outcome of the bidding.
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The expansion in the public sector for the last 60 years has been driven by people’s desires for security, welfare and equality. This has in the Nordic countries been a broad process where all political parties have competed for the voters support by offering initiatives implying ever greater ambitions on behalf of the public sector. The political parties often make claim to the “fatherhood” of this or that initiative. The income from oil production has of course encouraged the ambitions in Norway. Then there has been disagreement on how much of this activity should be carried out by public or private service providers, but these disagreements have not to a large degree been about the ambitions on the service level. Governments of different political colors have had opportunities to reverse the trends, but they have not seized these opportunities in a radical way. The popular support for this social balancing act is very strong.