Getting
re-elected is much easier when voters are content, such as when the economy is
doing well and everyone has work. No wonder we see a president tell media that
the U.S. economy is fantastic but also tell the Fed that the economy is in
trouble and needs a strong boost from a prime rate cut. This is crude, but if
everyone complies it will work. However, in nations with a stronger blend of
state and private sectors, more sophisticated approaches are also available.
Scholars
have long thought that state-owned enterprises (SOEs) have political uses, and
in a recent paper in Administrative Science Quarterly by Carlos Inoue we learn
more about how politicians can use them. The trick in this case is
over-employment, which has to be done very selectively because voters in most
nations are wary of the state, or the enterprises it owns, running up excessive
bills that have to be paid through taxes. That’s why the use of SOEs has to be
sophisticated, not crude.

What was
the cost of all this? In general, SOEs were not costlier than other firms,
because they diverted resources from other areas to create jobs. But they did
have lower profitability as a result of the greater employment during election
years. They spent money – sacrificed profits – exactly when it was useful for
politicians seeking re-election, but not otherwise.
Organizations
are used in so many ways, some of which are far away from their original
purpose. The water-supply industry is important in any nation, because abundant
and clean water helps the society and economy, but at least some of these firms
have a second purpose. This is something that both scholars and practical
readers dislike, but at the same time we have to admire how skillfully it was
done in this case.
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ReplyDeleteGreat article. Thank you for sharing this Prof. Henrich. It is my first time to know that the purpose of an organization is other than maximizing shareholders' wealth. Politicians did do their job skillfully in this setting, and I suspect they have even more options than simply hiring more.
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