Tuesday, June 28, 2005


Opponents of free trade and a world of free markets have a new ally today: Pharmeceutical companies are siding with them. Many foolish world socialists had viewed these companies as a part of the problem world trade, keeping the world's poor vulnerable to disease by charging extortionate prices for medicines. Never mind that these companies sell patented products, and therefore command monopolies granted them by state intervention, and produce them with funding from states in the form of research and development subisidies; the world-socialist movement liked to regard these institutions as creations of free market capitalism, and as some of the worst aspects of globalisation.

But socialists now have them as allies in the fight against free trade.

American pharmaceutical companies are currently funding a scare campaign to frighten US consumers away from supporting free trade in drugs. They claim imported drugs are unsafe even though free trade has been a resounding success in Europe for over two decades.

One drug company funded website, buysafedrugs.info, claims that free trade "is an open door for cheap, unsafe, foreign medications that will flood America, especially poor minorities." Yet these are the same "cheap, unsafe, foreign medications" that Pfizer et al are selling to Americans. If tampering is the issue, the European ones are safer because they are placed in tamper-proof bottles before they leave the factory. As Dr Peter Rost, a Pfizer Vice-President, has pointed out, US drugs are "shipped in big vats to wholesalers, and then poured into smaller, bulk-size containers, from which tablets are dispensed manually to the patient," which means there are lots of entry points for a terrorist.

Opponents of globalisation can include the drug companies along with their other allies, like Pat Buchanon or George Bush.

But the world-socialist movement is oblivious to these things. It has always thought that the ruling elite gained its power because the state did to little, i.e. to intervene in markets. The reverse is the actual truth, as the Globalization Institute say, "Vested interests always like to be protected so that they can rig markets. In DC, drug companies reportedly employ two lobbyists for every member of Congress." And as The Economist wrote when George Bush removed the Steel tariffs that he himself imposed: "In the 20 months since the tariffs were imposed, the steel industry has consolidated. Some ailing steel firms, such as National Steel and Bethlehem Steel, have been gobbled up by larger competitors."

Capitalists hate capitalism, but the left don't recognise this fact. Why would a business man want people to be free to compete with his firm, free to use better techniques, produce better goods, and charge lower prices than him? No business man likes to lose his share of the market. So businessmen are always going to favour intervention to restrict new competitors, to reign in existing ones, and to win himself subsidies at others' expense. The left fail to observe that intervention in the economy is what the ruling classes like and by advocating it, the left not only aids the consolidation and strengthening of the ruling classes, but also aiuds in impoverishing the poor. As George Will writes

Once upon a time, Democrats understood that when Republicans protected, as they did for decades, American industry from the inconvenience of price competition from abroad, the result was higher prices -- a hidden tax -- paid by consumers. Today Democrats advocate protectionism, which they call ``fair trade,'' in the name of protecting what tariffs actually destroy: American jobs. The steel tariffs are, for example, a $100 tax on every new American car, and on the creation of jobs for autoworkers.

Bush imposed the tariffs to court steelworkers. There are 124,000 of them nationwide. But they are most important in Pennsylvania, which had 23 (it now has 21) electoral votes that Bush in 2000 lost by 204,840 votes; Ohio, which had 21 (now 20) electoral votes that he won by 165,019; and West Virginia, which has five electoral votes that he won by 40,978 votes. The steelworkers union has endorsed Dick Gephardt for president.

It is intervention for the benefit of special interests, and at the expense of everybody else - and big business loves it. The trouble is that in supporting state socialism, the left become shills for the ruling classes.

Monday, June 20, 2005


For my dissertation, I have been researching the left libertarians. Left libertarians ought not to be confused with socialist anarchists. Unlike these anarchists, left libertarians believe in the legitimacy of some sort of state and they are fairly at ease with markets. It would be inaccurate, but much simpler to refer to them as Georgists. They agree with other libertarians on the issue of self-ownership, and viewing all rights as property rights; but they disagree with libertarians on the appropriation of land and hold that land or other initially unowned natural resources cannot justly be appropriated unless adequate compensation be paid to all those thereby rendered unable to use or appropriate that land themselves. This usually takes the form of some land value tax.

I shall discuss this issue some other time, but the thing that struck me as odd about their proposal was its practical implication. The left libertarians are uneasy with the idea of appropriation of natural resources, and yet the most pressing problem facing the world's poor is that they have not been able to establish private property in resources. For instance, the Peruvian economist Hernando de Soto, in an experiment to find out how hard life was for a migrant from the countryside to get started in the city of Lima decided to try, with his research team, to set up a fully legal garment workshop in Lima. His team then then started filling out the forms, standing in queues and making bus trips to get all the certification they needed to run, according to the full letter of the law, a small business in Peru. After spending six hours a day at it, they finally managed to register the business... 289 days later. Even though the business was arranged to only operate with one worker, it cost $1,231 to get legal registration, thirty-0ne times the monthly minimum wage. To get the legal authorisation required to build a house on state-owned land took six years and eleven months, and required 207 administrative steps in 52 government offices. Obtaining legal title for that piece of land took 728 steps. The research team also found that if a private bus, jitney or taxi driver wanted to obtain official recognition of his route he faced twenty-six months of red tape.

But this is not just limited to Peru. In the Philippines, if a person had built a dwelling on either state- or privately owned land, to purchase it legally he would have to form an association with his neighbours to qualify for a state housing finance program. The entire process could take 168 steps, involving 53 public and private agencies and take 13 to 15 years. And that is assuming that the state housing finance program has enough funds. If the dwelling is in an area still designated as "agricultural," then the homesteader will have to overcome the further obstacles of turning the land into urban use. This involves 45 more bureaucratic steps, with 13 new entities, and adds another 2 years to the process!

The pattern is echoed throughout Africa, and in much of the developing world. In Kenya, for instance, people do not own the land they farm, and so have no interest in ensuring its capital value, which they cannot own. They cannot use it as collateral to develop their businesses, and so are kept at a small, undercapitalized level.

The same applies in Russia. Russia, since the fall of communism, has become a target for anti-capitalists. They point to the growing poverty and disparities, corruption in its governments, the Mafia style business undertakings. What they don't point to are the absence of property rights in the Russian economy, and how few business operations are actually owned. Russia's economy did not develop during the nineteen-ninties precisely because the Russian government, despite the fall of communism, has still not developed a uniform system of private property rights in land ownership. Land is generally held to be owned by the government and is simply lent or leased to the farmers. This means that it is the government, and not, the farmers that owns the capital value of the land. Given this, there is simply no point in the farmer investing in the land, and its sale or its mortgage is utterly unthinkable. In short, a) he can't use the land to secure capital; b) he has no incentive to invest any other capital in the land, and b) he can't sell the land. As Johann Norberg notes, in In Defense of Global Capitalism, "Fewer than 300,000 out of some ten million Russian farmers have anything resembling title to their land. The government imposes severe restrictions on what people can do with land which really belongs to them." Hernando de Soto quotes the article by Leonard J. Rolfes, Jr, "The Strugle for Private Land Rights in Russia," from Economc Reform Today No. 1, 1996,

[In the former Soviet Union] rights of private possession, use, and alienation of land are inadequately defined and not clearly protected by law . . . Mechanisms used in market economies to protect land rights are still in their infancy . . . The State itself continues to restrict use rights on land that it does not own.

As Norberg says, "Land socialism, of course, inhibits any number of investment opportunities, but because land is often the basis of borrowing, it also impedes the development of a modern credit system." Strangely Russia is portrayed as an example of "hypercapitalism." However, given that capitalism is, in most definitions, a system based on private ownership of goods, services and resources, with titles exchanged on a free market, this could not be further from the truth. "Russian land socialism, coupled with a formidable welter of business regulations and trade controls, leads the Heritage Foundation to find it only the 127th freest economy out of 155 investigated, and in Economic Freedm of the World's corresponding table it comes 117th out of 123, after countries like Syria and Rwanda."

But what is the consequence of all these controls on acquiring land or opening business? The result as these operate as obstacles to building homes and businesses legally and an incentive to opeing them illegally. As PJ O'Rourke notes in his Eat the Rich, "Russia's businesses pay a 35 percent federal tax, plus a 20 percent VAT, plus local taxes that can be as high as 45 percent. That adds up to 100 percent. So a tremendous amount of Russia's business is contucted vie the "informal" economy. And it can be very informal. The way you hail a cab in Moscow is that you don't. You hail any car, and if the driver feels like it, he'll stop, negotiate a fee, and take you where you want to go." Later O'Rourke reports talking to one of the advisors of the Communist presidential-candidate. This advisor described herself as an expert on the black economy, and said that 45 percent of the Russia's trade and industry was now conducted off the books.

As de Soto notes, In every country he and his team investigated it is almost as difficult to stay legal as it is to become legal in the first place. So people don't bother, "and they opt out of the system." In 1976 two-thirds of people working in Venezuela were worked in a legally established enterprise. Today, though, that proportion is down to a half. In Brazil thirty years ago more than two-thirds of new housing erected was for the purpose of rent. Today it is only three-percent. The market went to the extra-legal districts of the favelas where there is no rent control, and rents are paid in US dollars.

Once these newcomers to the city quit the system, they become "extralegal". Their only alternative is to live and work outside the official la, using their own informally binding arrangements to protect and mobilise their assets. These arrangements result from a combination of rules selectively borrowed from the official legal system, ad hoc improvisations and customs brought from their places of origin or locally devised. They are held together by a social contract that is upheld by the community as a whole and enforced by authorities the community has selected. These extralegal social contracts have created a vibrant but undercapitalised sector, the centre of the world of the poor.

Throughout former communist and Third World countires the pattern is the same. People are not idle poor out of work. They are working. The streets are buzzing with activity. Side-street cottage industries grow up manufacturing everything from clothes to pirated designer watches and bags. As de Soto says, "There are workshops that build and rebuild machinery, cars, even buses. The new urban poor have created entire industries and neighbourhoods that have to operate clandstine connections to electricity and water. There are even dentists who fill cavities without a licence."

Most public transport in developing countries is made up of unauthorised buses, jitneys and taxis. In other parts of the Thrid World, most food is supplied by vendours from shanty towns selling produce from carts on the streets or stalls in makeshift buildings they construct. Ded Soto reports,

In 1993 the Mexican Chamber of Commerce estimated the number of street-vendor stands in the Federal District of Mexico City at 150,000, with an additional 293,000 in 43 other Mexican centres. These tiny booths average just 1.5 metres wide. If Mexico city vendors lined up their stands on a single street with no gaps at intersections, they would form a continuous row more than 210 kilometres long. Thousands upon thousands of people work in the extralegal sector - on the streets, from their homes and in the city's unregistered shops, offices and factories. An attempt by the Mexican National Statistics Institute in 1994 to measure the number of informal 'microbusiness' in the entire country came up with a total of 2.65 billion

In Russia the informal sector is even more sophisticated, manufacturing computer hardware and even jet fighters for sale abroad! In Egypt, for instance, if a person wants to acquire and legally register a lot on state-owned desert land, he has to make his way through at least 77 bureaucratic procedures in 31 different public and private agencies. This can take from 5 to 14 years. To build a swelling on former agricultural land can take up to 6 to 11 years of bureaucratic wrangling, and possibly longer. The consequence is that people don’t bother to try to acquire land or establish dwellings legally. 4.7 million Egyptians have built their homes illegally. And even after having built the home, the Egyptian cannot own it formally. If, after finishing his home, he wanted to become a law-abiding citizen and purchase rights in it, he risks having the home demolished, paying a steep fine, and serving a ten year prison sentence. So there is no incentive to formally acquire the property and it remains, officially, unowned.

The most obvious attempts to get around obstacles to the legal aquisition of land are the shanty towns we see throughout the developing world, which are built illegally on government land. However, de Soto's researchers found far more sophisticated ways of getting around the real estate laws. In peru, for example, people formed agricultural co-operatives to buy estates from old owners and turn them into housing and industrial settlements. Because there aren't any easy legal ways to change land tenure, the co-ops subdivide the land illegally into smaller, privately held parcels. Because of this, de Soto says, "few if any have valid title to their ground." In Prot-au-Prince expensive pieces of real estate change hands with nobody bothering to inform the registry office, which is unmanagebly backlogged anyhow. In Manila, housing has sprung up on land the government has designated for industrial use.

In Cairo people try to get around real estate laws in various ways. Residents of older four-story public housing projects build three illegal stories on top of their buildings and sell the apartments to relatives or other clients. In an effort to stamp out high rent, the government froze rent on various apartments at values now worth less than a dollar. As a result legal tenants subdivide these properties into smaller apartments and lease them out illegally at the market price. So the poor hold numerous assets, but they do so extra-legally, having acquired them illegally, or built on them illegally. So the world’s poor actually have access to an enormous amount of wealth, but they don’t formally own it. As Hernando de Soto writes,

When you step out of the door of the Nile Hilton, what you leave behind is not the high-technology world of fax machines and icemakers, television and antibiotics. The people of Cairo have access to all those things. What you are really leaving behind is the world of legally enforceable transactions on property rights. Mortgages and accountable addresses to generate additional wealth are unavailable even to those people in Cairo who would probably strike you as quite rich. Outside Cairo, some of the poorest of the poor live in a district of old tombs called ‘the city of the dead’. But almost all Cairo is a city of the dead – of dead capital, of assets that cannot be used to their fullest. The institutions that give life to Capital – that allow you to secure the interests of third parties with your work and assets – do not exist here.

And how much is this dead capital worth? By the tally de Soto and his researchers made with some Egyptian colleagues, the total value of Egypt’s dead capital in real estate, is some US$240 billion. This is thirty times the value of all the shares on the Cairo stock exchange, and fifty-five times the value of all foreign investment in Egypt.

De Soto writes,

In fact it is legality that is marginal; extralegality has become the norm. The poor have already taken control of vast quantities of real estate and production...This picture of the undercapitalised sector is strikingly different from the conventional wisdom of the developing world. But this is where most people live. It is a world where ownership of assets is difficult to trace and validate and is governed by no legally recognisable set of rules; where the assets potentially useful economic attributes have not been described oir organised; where they cannot be used to obtain surplus value through multiple transactions because their unfixed nature and uncertainty leave too much room for misunderstanding, faulty recollection and reversal of agreement. Where most assets, in short, are dead capital

This capital is dead because it is not formally owned, because it is not formally property.In the Philippines, 57 per cent of city-dwellers and 67 per cent of countryside dwellers live in housing that is dead capital. In Peru 53 per cent of urbanites, and 81 per cent of country people live in extralegal dwellings. In Haiti 68 per cent of city livers have housing that is extra legal, and 97 per cent of people in the countryside live in housing to which nobody has a clear title. In Egypt it is 92 per cent of urban dwellers, and 83 per cent of rural dwellers. Of course, these assets are not worth much by Western standards. A shanty in Port-au-Prince might fetch $500, a cabin in Manilla as little as $2,700. Even a fairly substantial house in Egypt, in a village outside Cairo might only bring $5,000, and a respectable bungalow in the hills around Lima only $20,000. But there are an enormous number of such homes, and collectively their value outweighs that of the rich.

In Haiti the untitled rural and urban real estate holdings are collectively worth some $5.2 billion. That is four times the total assets of all the legally operating companies in Haiti. It is nine times the value of all assets owned by the government. It is 158 times the value of all foreign investment in Haiti's recorded history up until 1995.

In Peru the total value of all extralegally held real estate adds up to some $74 billion. This is five times the total valuation of the Lima Stock Exchange before the slump in 1998. It is eleven time the value of potentially privatisable government enterprises and facilities. It is fourteen times the value of all foreign investment in the country's documented history.

In the Philippines the total value of untitled real estate is $133 billion. That's four times the capitalisation of the 216 domestic companies on the Phillipines Stock Exchange. It is seven times the total deposits in the country's commercial banks. It is nine times the total capital of state-owned enterprises. It is fourteen times the value of all foreign direct investment.

But all this money, all this wealth is absolutely useless to those who hold it precisely because they do not have legal title to it. Because they do not formally own these assets, they cannot access their capital value. As Johann Norberg writes,

And so poor people are forced to live and run micro-businesses in the informal sector, outside the law. Consequently they have no legal protection and do not dare to invest for the long term, even if they can. Their property is not included in a uniform system of ownership which follows transactions and indicates one owner. Without clarity as to who owns what, how transactions are to proceed, who is responsible for payments and services to the address, the property remains “dead capital”. Properties cannot be mortgaged, which would otherwise provide capital for financing the children’s education or investments and expansion of the business. Thus the commonest way for small entrepreneurs in affluent countries to obtain capital is cut off in developing countries. Without a registered address and the possibility of having one’s creditworthiness investigated, it is often impossible to get a phone or water and electricity supply, and the property cannot even be sold.

Entrepreneurs can’t expand their businesses by selling shares, because they can’t prove formal ownership of their businesses. In order to avoid bureaucrats and police they are obliged to keep their businesses small, and so are prevented from utilizing economies of scale. They are also prevented from advertising to expand their market and so income. But whilst a leftist may suggest that, “this obsession on property as the solution for the poverty in the developing world is mere bourgeois ideology to protect the rich,” the opposite is true. It is the rich that benefit the most from the absence of secure property rights. As Norberg writes, on the obstacles that the poor face to working within the law, legally acquiring and developing land, or registering businesses, “To people without big resources or powerful contacts, these are insuperable barriers.” In other words, if you are rich enough, you can afford the time it takes to legally purchase land, to register its ownership, to get permission to build on it, to register a business and acquire licenses or permits. Or if you are well connected enough, you can cut through the bureaucracy easily. Or even if you don’t do this, you can afford to bribe public officials. This means that the rich and well connected can secure land and resources and permission to operate businesses easily, whilst the poor are shut out. Failure to grant formal property rights provides the rich and powerful with monopolistic privileges.

Tuesday, June 14, 2005

Understanding State Capitalism in Sub-Saharan Africa

The brother of South Africa's president, no less, has penned an excellent, though libertarian-lite, piece on the workings of state capitalism in Africa.

Where throughout the world globalisation, where it has been allowed to work - globalisation in the sense of liberalising the economy by removing bariers to entry, ending tariffs, cutting taxes, and reforming land - it has brought prosperity and benefitted the poor of the world tremendously. Between 1965 and 1998, the averaage income of the average world citizen almost doubled, from 2,497 dollars, to 4,839, corrected for purchasing power and in fixed money terms. And this hasn't occurred through the rich nations simply doubling their income whilst the poor remained the same. During this same period the richest one-fifth of the world's population increased their avaerage income from 8,315 to 14,623 dollars, that is, by roughly 75%. The poorest one-fifth of the world's population, however, increased their incomes much faster still, with the average income rising from 551 dollars to 1,137 dollars in the same period - more than doubling. And world consumption is more than twice what it was in 1960. Extreme poverty is generally defined as living on less than one dollar a day. Between 1990 and 1998, the number of people experiencing extreme poverty fell from 1.3 billion, to 1.2 billion.

The glaring exception is sub-Saharan Africa. It is in Africa, south of the Sahara that we find most of the countries whose per capita GDP has actually fallen since 1960. As the World Bank reported "Thirty six percent of the region’s population lives in economies that in 1995 had not regained the per capita income levels first achieved before 1960. Another six percent are below levels first achieved by 1970, 41% below 1980 levels and 11% below 1990 levels. Only 35 million people reside in nations that had higher incomes in 1995 than they had ever reached before." Between 1990 and 1998 Southern Africa's combined GDP fell by 0.6 percent.

Why is this? Moeletsi Mbeki, brother of South Africa's president, has an excellent answer. He plainly understands how free-market capitalism works to create enormous benefits:

In a quest for greater security and comfort, the theory goes, private individuals and their households are driven to seek more and more material wealth. This process in turn compels these private individuals to produce more and more and exchange what they produce with other individuals who are also seeking greater security and comfort. The sum total of these acts of production, exchange and consumption constitute the modern capitalist economy. The capitalist economy is therefore inherently driven to produce more and more so that its denizens may get greater and greater security and comfort.

For the private individuals to produce more and better, they must generate savings that they plough back into the production process as new and improved techniques, processes and products. This enables these private individuals to constantly produce more products, better products and more diverse products that are capable of exchange with other private individuals who are doing the same.

In fact, he also points out that Africa arguably has one of the largest private sectors in the world: "Most Africans live and work in private households that populate the African countryside." So why isn't capitalism working there? Why is it the case that "that the great majority of Africans are today experiencing the opposite; less security and comfort and in many instance they face hunger, homelessness, threats of violence and actual violence, and starvation on a daily basis"? The answer is that free-market capitalism has not been allowed to work in Africa:

In the model described above the underlying assumption is that private individuals are free to pursue their search for security and comfort and they therefore own and control the means of achieving their objectives. They are assumed to be free to exchange what they produce without let or hindrance and that where they are able to make savings, they are free to retain those savings and plough them back in improved techniques or in other investment avenues as they may wish.

This is not the case with the private sector in Sub-Saharan Africa. Africa’s private sector is predominantly made up of peasants and secondly, of subsidiaries of foreign-owned multinational corporations. Neither of these two groups have the complete freedom to operate in the market place because they are both politically dominated by others - non-producers who control the state. Herein lay the weakness of the private sector in Africa that explains its inability to become the engine of economic development. Africa’s private sector lacks political power and is therefore not free to operate to maximize its objectives. Above all, it is not free to decide what happens to its savings.

Start with the peasants, for instance:

Fundamentally, the political elite uses its control of the state to extract the surplus or savings that if the peasant were free to retain they would have invested in improving their production techniques or to diversify into other economic activities. Through marketing boards, taxation systems and the like, the political elite diverts these savings to finance its own consumption and the strengthening of the repressive instruments of the state. The Economist (London,17.07.2004) made the following observation about Ethiopia’s dependence on foreign food donations: “By law, all Ethiopian land is owned by the state. Farmers are loath to invest in improving productivity when they have no title to the land they till. Nor can they use land as collateral to raise credit. And they are taxed so heavily that they rarely have any surplus cash to invest.” A great deal of what Africa’s political elites consume and what the African state consumes, is however not produced locally but is rather imported. Elite and state consumption therefore does not create a significant market for African producers but instead acts as a major drain of national savings that would otherwise have gone into productive investment in Africa.

This is the secret to Africa’s growing impoverishment despite its large private sector. The more the African political elites consolidate their power, the more they strengthen their hold over the state, the more the peasants are likely to become poorer, and the more the African economies are likely to regress or at best, to mark time.

Nigeria is a glaring example. This is a huge country, with great potential for natural resources and agriculture. And yet it has remained abysmally poor. On the advice of the IMF and others, various reforms were instituted at the end of the '80s. But the government dropped these reforms due to their unpopularity at the beginning of the nineties. Regulations and controls were reintroduced, the credit and exchange market was abolished and interest rates were controlled. The result was inflation and unemployment. Between 1992 and 1996 the proportion of extremely poor in Nigeria rose from 43% of the population to the astounding figure of 66 percent. Nigeria today accounts for a quarter of all extreme poverty in southern Africa, and per capita income is lower than it was thirty years ago, falling along with standards in health and education. Mbeki writes,

One of the most striking illustrations of this phenomenon is Nigeria. According to a study of Nigeria prepared by the Centre for the Study of African Economies at Oxford University, over the period from 1980 to 2000 per capita GDP (in $1996 purchasing power parity terms) fell from US$1215 to US$706. The authors point out that growth and poverty are very closely related and that the 40% drop in purchasing power parity understates the size of Nigeria’s problem. “First the fall in real per capita consumption was very much greater while the available evidence suggests that inequality rose. This combination of a very large fall in per capita consumption combined with increasing inequality implies a large rise in poverty.” (5) According to another source, the number of Nigerians living below the poverty line increased from 19 million in 1970 to 90 million in 2000. This was accompanied by a massive rise in inequality. In 1970 the top 2% of the population earned the same income as the bottom 17% but by 2000, the income of the top 2% was equal to that of the bottom 55%.(6)

The most horrific example of the tyranny of the strong state in Africa, and probably in the world is in Robert Mugabe's Zimbabwe. Under Mugabe Zimbabwe has closed its boarders to foreign imports and services and raised inflation tremendously. Mbeki writes,

The one African politician who claims to act in the interests of peasants, Zimbabwe’s Robert Mugabe, has reduced the once proud and almost self-sufficient Zimbabwean peasants to paupers who now have to be fed by the United Nations’ World Food Programme. Africa’s peasants are therefore prey to the forces that have the ability to form political organization and therefore control the state. The way that peasants are preyed upon by the controllers of the state - the political elite - has been studied extensively not least by the World Bank itself.

And now the country is in the grip of famine as Mugabe's followers meet out terrorist attacks on his followers, subject them to large-scale expopriate of land, and Mugabe himself uses his nationalisation of food distribution to starve the opposition. Zimbabwe's extreme poverty grew throughout the 90s by three million people.

After colnial times, multinationa companies fell prey to the appetites and whims of the new African political elites who controlled the newly independent African states. The lucky ones were nationalized and their owners were therefore paid compensation; the not so lucky ones were 'privatized' [confiscated by individual politicians without compensation.]"

Mbeki goes on,

What has been most striking about the political elites in Sub-Saharan Africa has been their aversion to becoming involved in industry whether manufacturing or mining. The private sector in these sectors is therefore still dominated by foreign owned companies with parastatals increasingly playing a minor role.

A recent study by the World Bank shows that the most productive companies in, for example Nigeria, are those owned by Multinational Corporation or by non-African industrialists – Indians, Chinese, Lebanese etc., see Table 2. All these owners are easy targets as they are not represented within the political elites. In common with the peasants, they are therefore subjected to all sorts of official and unofficial taxes ranging from backhanders for factory inspectors and customs officials through to artificially high electricity tariffs, arbitrary municipal rates and the like.

This is another way that the African political elite contributes to fostering Africa’s underdevelopment. By obstructing the operations of industry and diverting a large part of its profit to elite consumption and to capital flight, Africa’s manufacturing industries are unable to grow and therefore to create employment for all grades of workers.

This does not mean that there has been no new investment in sub-Saharan Africa, Mbeki is quick to add. There has been great investment in extraction and in pertoleum development. But here is a key to part of the problem:

The most graphic illustrations of this iron law of African underdevelopment is the role that the oil industry plays in Africa. Oil revenues make it possible for the political elite to literally become detached from the local population and economy and therefore to live in an oasis. When this happens there is therefore no need for the political elite and the state it controls to invest in mass education, health care, housing and transportation infrastructure that the population at large needs. Everything thus goes into a state of decay except of course for the welfare of the political elite and the repressive machinery of the state.

This was how The Economist (London, 25.01.2003) described the impact of oil production on Equatorial Guinea and Gabon: “Equatorial Guinea now pumps more oil per person than Saudi Arabia. Its economy, once negligible, has grown at an incredible 40% annually since 1996, when the oil boom began. A few years ago, the streets of the capital, Malabo, were as quiet as Sao Tome’s are today. Now, Malabo’s pretty Spanish colonial architecture bristles with satellite dishes, and the streets, bathed at night in an orange glow from gas flared at a nearby methanol plant, are gaudy with sports cars, tropical palaces and prostitutes who flutter in from nearby countries such as Cameroon. And the tiny country’s agriculture is blighted: cocoa and snail farmers have rushed to the town to grab at the oil bonanza. Equatorial Guinea was never well governed: Obiang Nguema, the president, seized power by executing his uncle in 1979. But oil has made his regime increasingly paranoid. Several members of the ruling family are thought to want a bigger slurp at the oil barrel. Mr Obiang sees plots everywhere, and arranged periodic crackdowns. Several opposition leaders were jailed last year after a mass trial, to which many defendants turned up with broken arms and legs. Mr Obiang scoffs at western notions of transparency, insisting that how much money his government earns from oil is nobody’s business. ‘Oil has turned him crazy,’ says Celestino Bacale, a brave opposition politician.

“In next door Gabon, Omar Bongo has been in power since 1967. He is more subtle than Mr Obiang. He does not torture his enemies but buys them off. Decades of oil revenues have corrupted Gabonese society and eroded its work ethic. Citizens aspire to soft billets in the civil service, and turn their noses up at menial jobs like taxi driving and shop -keeping, which they leave to immigrants from poorer places such as Togo and Mali. Agriculture in Gabon, as in Equatorial Guinea, is all but dead.”

And, of course, this is where one would expect most foreign support for Africa's state capitalism to come in - from those interested in oil, the oil companies and various members of the US government, for instance?

Johann Norberg echoes Mbeki's views about the problems in Africa not being the result of out of control free-market policies, but of state intervention at the behest of the nations' elites:

The African leaders have been intent on avoiding the policy of the old colonial powers and also the risk of becoming commercially dependent on them, and so they have tried to build self-sufficient economies with draconian tariffs and with nationalisation and detailed control of industry. The economy has been govered by price and exchange controls, and public expenditure has at times run riot. The urban elites have systematically exploited the countryside. Instead of creating markets, countries established purchasing monopolies which paid wretched prices, and they introduced government distibution of foodstuffs. This way the government confiscated the entire agricultural surplus, thereby impoverishing farmers and abolishing the traders' occupation. Production fell and farmers were driven into the informal market. This impeded plans for industrialisation and posed a threat to society when the economic downturn set in during the seventies. After trying to borrow their way out of the crisis, many African states were in free fall by the mid-1980s. Structures collapsed, people starved, there were no medicines and machinery simply stopped when spare parts were missing and batteries went flat and could not be replaced. The fall has stopped since then, but has not yet been followed by an upturn.

Of course, state capitalism from abroad, specifically the "western" world adds a great deal to the hardship of the African people.Western governments seem to have grasped Adam Smith's defense of free trade, but not Ricardo's more suffisticated view. Smith should that if I was good at carpentry but not fishing, whilst you were better at fishing but not as good as me at carpentry, then free trade would benefit us both. Ricardo went further. He showed that if I was better at carpentry than fishing, but better than you at both, it would still be to our mutual good to trade, because then if I let you do the fishing, even though you are worse at it than me, I could devote my time to carpentry which I am better at than you. Analogously, then, countries should allow free trade even in things that they are good at, instead of imposing tariffs on things that they can produce themselves.

But it is precisely these areas that the west imposes its tariffs the most. In the big rounds of free trade negotiations tariffs and quotas for the western world's export products have been reduced, but in the areas of most importance to the developing world, textiles and agricultural produce, liberalisation has not appeared. The tariff reductions of the Uraguay Round were smallest for the least developed countries. Asia and Latin America gained a little, but Africa gained nothing at all. Today western duties on export commodities from the developing world are 30% above average. Develping countries are able to export things that we can't supply ourselves, but our governments prevent them from "putting us out of business" by doing things we can do, only doing it cheaper and better. For instance, the western world has low tariffs on cotton, but high tariffs on textiles and machinery - "we may not be able to grow the cotton, so you can sell that to us, but we can damn well weave it ourselves, thank you very much," seems to be the message, ignoring Ricardo's law of comparitive advantage and ingnoring the fact that western consumers may prefer being able to choose foreign textiles. Duties on processed products from the developing world are no less than four times higher than on corresponding goods imported from industrialise nations. Textile tariffs imposed by the western world average 12% of the value of the goods.

The most shocking protectionism on behalf of the rich countries is in the area of agriculture - one of the areas that a free Africa would have the most potential. Most of the affluent countries are determined to maintain a large-scale agricultural industry of their own, even if there were no comparitive advantage involved. So they subsidise their own farmers and impose trade barriers to shut out those of other countries.

The EU's Common Agricultural Policy involves quotas on foodstuffs and tariffs of about 100% on, for example, sugar and dairy produce. The intention is to shut out processed goods that could compete with European ones, thereby using state intervention to protect the market shares of the big businesses in Europe producing them. This is evident from the fact that coffee and cocoa, two things Europeans cannot produce themselves, can slip through with very little customs mark up. Meanwhile, EU tariffs on meat are several hundred percent!

But the EU's state capitalist mistreatment of the producers of the developing world does not just stop there. Almost half the EU budget goes on subsidising production and transportation for EU farmers. These grants are paid according to acreage or head of livestock, meaning that it is mainly a subsidisation of the wealthiest farmers and of the largest scale operations - the foremost recipients being the British royal family!. These grants give rise to huge surpluses that have to be disposed on. On way that this is done is to actually pay farmers not to produce - this whilst it is also penalising productive foreign farmers and causing poverty amongst Africa's peasants! Worse still, though, through export subsidies it dumps this surplus on world markets, so that poor countries cannot produce. This means that the CAP not only forbids Third World farmers from selling in Europe, it also knocks them down in their own countries. It is estimated that the CAP causes the developing countries a welfare loss in the region of 20 billion dollars annually, which is twice Kenya's entire GDP.

It is hard to quantify the loss which developing countries suffer due to protectionism by western economies, but people have tried. UNCTAD, the United Nations Trade and Development Programme, says that with greater access to the markets of affluent countries, exports from the developing countries would grow by something like 700 billion dollars annually. The British Labour government's white paper on globalisation issues says that a 50 percent reduction of import duties in industrialised nations would lead to a growth of prosperity in developing countries of something like 150 billion dollars. This is three times as much as global development aid. One study, showing that the world economy would gain about 70 billion dollars from a 40 per cent reduction in tariffs, said that some 75% of these gains would be harvested by developing countries.

Evidence that the poverty in Africa is caused by too much socialism - socialism for the rich - and too little free market capitalism can be gleaned by comparing the above to the exceptions in sub-Saharan Africa. Cattle farmers in Botswana were quick to realise that it was in their interest to campaign for more open markets, and this resulted large parts of Botswana's economy becoming exposed to competition by the end of the 1970s. Through its association with the EU, Botswana was also able to secure for its exports exemption from the EU's duties and quotas.. Between 1970 and 1990 Botswana has experienced annual levels of more than 10% growth.

Mauritius is another example. This country reduced military spending, strengthened protection for property rights, reduced taxes, developed a free exchange market and increased competition, and now has growth rates of 5%. Today everyone has access to clean water, and education and health care are expanding.

Ghana is another example. It liberalised its markets and reduced taxes during the 1990s. In particular, agriculture has been deregulated, and tariffs, price controls and subsidies have been abolished. Production consequently has risen fast, above all benefitting the cocoa farmers, but also because they are now able to invest and buy repairs, and goods and services, everyone capable of assisting in this respect has benefitted. Extreme poverty in Ghana fell during the 1990s from 35.7 to 29.4 percent of the population.

Uganda is another example where the economy has been liberalised the fastest in the past decade of so. Trade has been liberated, price controls abolished, taxes lowered and inflation reduced, whilst steps have been taken towards protecting property rights and deregulating financial markets. This, coupled with extensive development assisstance, has lead to an annual growth of more than 5% and a diminishing in inequality. In only six years, extreme poverty in Uganda fell from 55.6 to 44 percent. It is also the first country where, due to a relatively high degree of openness and the information work of independent organisations, the spread of HIV/AIDS in towns and cities has begin to diminish.

All this shows that poverty and starvation experienced in Sub-Saharan Africa is not the result of the spread of radical laissez faire ideas, proliferated by greedy corporate shills eager to hold off the benevolent hand of state control to tame their exploitative imperialism. On the contrary, poverty in Africa is a result of too little laissez faire and too much state intervention, and this is precisely how the rich elites want it, and it has come with their backing. Both within Africa - through land grabs, theft of agricultural supluses, and licensing of enterprises, and outside Africa - through the creation of trade barriers to protect the market shares of European and American big business from foreign competition - it has been the rich elites that have championed state intervention. At this, not capitalism, has been the cause of poverty in Africa.

Monday, June 13, 2005

More on State Monopoly Capitalism

You may remember that a while back I promised regular reports on state-corporate exploitation. This I have so far labelled corporate fascism, after the economic policies of fascist states, or "state monopoly capitalism".

Well, a while back I debated this issue with a chap over at Liberty Forum. This guy, calling himself Heretic, accused me and libertarians in general of ignoring history and relying solely on theory, and so living in our own deluded world, theorising about this and that and ignoring the real world. Indeed, this guy is one of those who thinks that theories prove nothing, only history does, and thus thinks that libertarian anarchism is impossible since it hasn't happened. Of course, you, my much more sensible reader, know that history is useless and meaningless without theory, especially economic history without economic theory, since otherwise all we would have is a list of events that happened without any explaination as to why they have happened. And as for the possibility of anarchism, well, dear reader, I know you are probably wise enough to know that "X cannot happen" does not follow logically from "X has not happened"!

But so far as ignoring history is concerned, this chap claimed

The so called Free Market has only one inevitable course, towards a concentration of power and the control of government by the monopolists and oligopolists. It is inevitable, that's how they became monopolies in the first place.

There are two factors which "free marketers" ignore, the natue of man towards power and the social nature of man.

There is only one truly free market, sans a government protection, and that is in labor. It is the only self renewing resource in which supply exceeds demand. Marx knew this, and that is why in his "On the Question of Free Trade" he advocates for a free market.

Inevitably it will lead to deprivation, dissatisfaction, even hunger and provide the spark for a revolution. His partner Engels also advocated a free market in labor, because the profits of his textile mill depended on the cheapest cotton and wool he could obtain, and he wrote a couple of letters to that effect.

Marx wrote scathing letters to Southern Papers contra slavery, not out of humanitarian concerns, but economic ones (for his friend Engels).

Free the slaves, Marx wrote, and then hire them back at market wages, and you will reduce your cost of production.,thus producing cheaper cotton.

I fail to understand how you can reconcile your knowledge of 19th Century history, with the rise to power of the monopolists and robber barons, and the plight of the working man in the 19th and early 20th Century.

There seems to be a disconnect here.

On the one hand there is theory (or shall we call it belief or religion) on the other hand there are facts (reality) and the two don't reconcile.

My response, here is, IMHO, a damn fine piece on the historical development of state monopoly capitalism in the US, though generally unoriginal and possibly down right plagiarised (!), that I will reproduce it for my dear readers' pleasure in its entirety (OK, stop groaning!). My only worry is that my claim that the dominance of big business is illusory is misconstrued. My point was to show that, just like at the end of the nineteenth century, and just like with the railroads, a high degree of competition exists, despite state supported cartelisation and funding, because it is not the natural tendency of free markets to form monopolies, and the US has a relatively freer economy than other countries. I did not intend to contradict the implication of state monopoly capitalism, that monopolisation in the economy occurs because of state intervention, by saying that there is no monopolisation.

The so called Free Market has only one inevitable course, towards a concentration of power and the control of government by the monopolists and oligopolists. It is inevitable, that's how they became monopolies in the first place.

It most certainly is not inevitable. A monopoly exists, according to Websters, when a businness has

exclusive control of a commodity or service in a given market, or control that makes possible the fixing of prices and the virtual elimination of free competition.

Such a state of affairs cannot occur on a free market. It is a theoretical impossiblility, and the history of the robber barons proves this.

As for your "inevitable concentration" of business in fewer and fewer hands, even if that were indication of monopoly (which it isn't), that is not occurring even now. Between 1980 and 1993 America's 500 biggest firms saw their share of the nation's total employment fall from 16 to 11.3%. The most important indicater of the weight of 500 biggest firms in the US is their sales in relation to total GDP. Between '80 and '93 this figure fell from 59.3 to 36.1, a fall of almost a half in only thirteen years. The proportion of the population working for companies that employ over 250 people in those years also fell from 37 to 39 per cent, and the average personnel strength fell from 16.5 to 14.8 persons. Half the firms operating globally today employ less than 250 people.

Of the companies that apperared on the 1980 list of America's 500 biggest companies one-third had gone by 1990, and another forty per cent had gone in the next five years.

The "dominance" of big business is largely, then, illusory. Sure, the biggest brands stick in our minds, and sure, big mergers are easily seen, but what we see easily often obsures the rest of the picture, and we also forget that big brands are joined by others. Few people remember that Nokia was a small Finnish tyre and boot company a few years ago, and Starbucks, that bastion of globalisation and target for so many objections, where were they ten years ago. New companies achieve dominance, old ones fall, and the cycle goes on.

There are two factors which "free marketers" ignore, the natue of man towards power and the social nature of man.

Can you tell me which free-marketeer has ignored the nature of man towards power and the social nature of man, and in what way? As it stands, this is merely an assertion.

There is only one truly free market, sans a government protection, and that is in labor. It is the only self renewing resource in which supply exceeds demand

That doesn't make much sense. surely if supply exceeds demand, there would be profit made in employing workers, which would attract the demand. The market would clear.

However, you are correct. Spot on. Bang to rights! A free market is only permitted in labour. It is only amongst workers that a free market is permitted. Has it not occurred to you that this is how capitalists want it? They want it so that it is only amongst workers that free competition is permitted, whilst amongst themselves it is not? That they may actively oppose free competition betweens themselves so that they can exploit labour from a position of monopolistic bargaining?

I fail to understand how you can reconcile your knowledge of 19th Century history, with the rise to power of the monopolists and robber barons, and the plight of the working man in the 19th and early 20th Century.

It is precisely because of my knowledge of the nineteenth century and the robber barrons that I have faith in the free market. The robber barons failed. The merger movement, aimed at trying to increase prices, failed. The attempts at forming cartels failed as the higher prices attracted competitors or gave members incentive to break quotas or "Chisel." This is what happened in the railway industry, as Gabriel Kolko (Railroads and Regulation, 1877-1916) showed. It is generally thought that the railroads in the late nineteenth century had almost unlimited monopoly power. In actual fact, though, Kolko showed that long distance transprtation was highly competitive, freight riates were declining, and the number of new railways were increasing until after the end of the century. One line might have a monopoly for sure distances, but a shipper operating between cities had a choice of a many alternative routes - there were twenty between Atlanta and St Louis, for instance (as there were three between Manchester and London). It is frequently said that the railroad rebates were evidence of monopoly. In reality, though, they were the opposite; they were discounts that major shippers were able to get from one railroad by threatening to ship via a competitor.

To be sure, Rail executives often got together to try to fix the rates, just as Adam Smith said that its is seldom that business people can meet without eventually trying to work out some conspiracy against the public. But most of these conspiracies broke down, often in only a few months. Either the parties to the agreement surreptitiously cut rates (often by misclassifying freight or by offering secret rebates) in order to steal customers from each other, or some outside railroad took advantage of the high rates and moved in. JP Morgan is a classic example. He committed his enormous resources and reputation to attempting to cartelise the industry, and yet failed. For example, in 1889 he formed the Interstate Commerce Railway Association to control rates among the western railroads. By March a rate war was going on, and by June the situation was back to how it was before he intervened.

However, by this time a new factor had entered the situation. In 1887 the federal government, backed by much of the railroad industry, created the Interstate Commerce Commission. The ICC's original powers were quite weak, which meant that Morgan's attempts to use it to help enforce his 1889 agreement he failed. However, during the next 31 years, its powers steadily grew, first allowing it to prohibit rebates. Rebates, remember, were the means by which competition kept railroad executives from making monopoly profits - Kolko estimates that the rebates were costing railroads 10 percent of their gross income). Finally, it got the power to set rates.

The people with the greatest interest in what the ICC did were the railroad industry, and consequently they dominated it, in what is now called "regulatory capture", and used it to achieve the monopoly pricing that they had been unable to achieve on the free market. This pattern was clear as early as 1889, when one of the original appointees to the ICC, Aldace Walker, resigned to become the head of Morgan's Interstate Commerce Railway Association. He ended up as the chairman of the board of the Atchinson, Topeka, and Santa Fe. The ICC has served as a cartelising agency for the railroads right up to the present, and has further increased its powers to cover other forms of transportation and so to prevent them, where possible, from undercutting the railroads.

In his history of Rockefeller's attempts to monopolise the oil industry, "Predatory Price Cutting: The Standard Oil (N.J.) Case" (Journal of Law and Economics 1, 1958) John S. McGee showed how cartelisation failed Rockefeller, too. McGee cites Rockefeller's description of an unsuccessful attempt in 1872 to control the production of oil and to drive up it's price:

The high price of oil resulted, as it had always done before and will always do so long as oil comes out of the ground, in increasing the production, and they got too much oil. We could not find a market for it.
... of course, any who were not in this association were undertaking to produce all they possibly could; and as to those who were in the association, many of them men of honor and high standing, the temptation was very great to get a little more oil than they had promised associates or us would come. It seemed difficult to prevent the oil coming at that price.

Attempts at price cutting to secure monopoly also failed. If a monopoly controls 99 percent of a market and I control the remaining one percent it is said that the monopoly could easily drive me out. But this isn't true. If there is no question of the "naturalness" of the monopoly (as there wouldn't be if it was a conspiracy to get a monopoly) then the big company is no more efficient than I am. Consequently if it cut prices, it would be losing just as much money per unit sold - or, in short, even though its resources are 99 times as large as mine, it is losing money 99 times as fast as I am. But it faces worse than this. In order to force me to keep prices down, it must be prepared to sell to everyone that wants to buy at the new price. Otherwise unsupplied customers would come to me and buy at the old price. However, at the new low price there will be more customers, and so the monopolist must expand production, using even more of his resources. If the resource is easily stored, the anticipation of future price rises once the price war is over will cause demand to rise further still.

Meanwhile, I face a number of options. I can continue to produce at full capacity and make a loss, losing one dollar for every hundred or more lost by the monopolist. Or I can close down some plants, decrease production and simply wait for the monopoly to stop wasting its money.

This is the basic reason that Rockefeller was unable to secure a monopoly by price cutting. However, there is another method of price cutting that is more subtle. This is where a monopolist tries to under cut me in the regions in which I am operating, and tries to make up the losses in other regions by raising prices there. The trouble is that the high prices in the other regions attract competitors there, too, which undercut the monopolist in those regions.

Rockefeller did not try to use price cutting tactics to build Standard Oil, but he did threaten to use them, threatening to cut prices and start price wars in order to force competitors to keep production down and their prices up. Howeverm the competitors understood the logic of the situation better than leter historians, as McGee shows by quoting the response of one competitor, the manager of the Cornplanter Refining Company to such a threat: "Well, I says, 'Mr. Moffet, I am very glad you put it that way, because the only way you can get it [the business] is to cut the market [reduce prices], and if you cut the market I will cut you for 200 miles around, and I will make you sell the stuff,' and I says, 'I don't want a bigger picnic than that; sell it if you want to,' and I bid him good day and left."

The threat never appeared. In fact, it seems from McGee's evidence that price cutting more often than not was started by the small independent firms trying to cut into Standard's market, and many of them were very successful. Cornplanter's capital grew, in just twenty years, from $10,000 to $45,000. As McGee says, commenting on the evidence presented against Standard in the 1911 antitrust case: "It is interesting that most of the ex-Standard employees who testified about Standard's deadly predatory tactics entered the oil business when they left the Standard. They also prospered."

One strategy that Rockefeller did try to use was to buy out his competitors. This is usually cheaper than trying to spend a fortune trying to drive them out. Cheap, that is, in the short run. The trouble was that people realised that they could build a refinery, threaten to drive down prices, and then sell to Rockefeller at a whopping profit. David P. Reighard apparently made a sizable fortune selling three consecutive refineries to Rockefeller. The trouble was that there was a limit to the number of refineries that Rockefeller could use.

Rockefeller failed, in the free market. But now what he aimed to achieve has been accomplished precisely because the market is not free. Through federal import quoats and state restrictions on production federal and state governments keep prices high and production low.

Standard Oil and US steel, immediately after their formation, began a process of eroding market share. The merger movement was a failure as the cartels lost their market shares to smaller, more efficient competitors.

This is why Kolko says that "Ironically, contrary to the consensus of historians, it was not the existence that caused the federal government to intervene in the economy, but the lack of it."

A really good recent history of this period and up to the modern day, in forming the state monopoly capitalism that now exists in the US can be found here

However, if that 36 page article is too long for you, try the short version in this magazine here

Then there is Joseph Stromberg, here.

Unfortunately, Heretic's only response was rather idiotic and proved that he didn't read my post. He quoted me saying "It most certainly is not inevitable. A monopoly exists, according to Websters, when a businness has 'exclusive control of a commodity or service in a given market, or control that makes possible the fixing of prices and the virtual elimination of free competition.' Such a state of affairs cannot occur on a free market. It is a theoretical impossiblility, and the history of the robber barons proves this." But his only response was

Theory again as juxtaposed to reality and human nature. I sigh.
The history of the robber barons is that they accumulated their wealth in the absence of government regulation and control, then once they had it, they used (bought) government to give them protection.

I don't know where a truly free market has ever existed, except in some primitive tribal societies, and then social custom set limits on the free market.

It's vexacious to try and argue religion and ideology it is arguing with a utopian ideal and not with reality, and human nature.

It is again, an assertion that I ignore history made in response to a post full of history!!!!!! Moreover, the "robber barons" did not accumulate their power in absence of state regulation and control - railroads were subsidised and given land grants by governments, for instance - but they did accumulate it under circumstances that were relatively free of regulation and control, compared to later. But what they did not have (so much of) was monopolistic power or wealth. Exploitation cannot occur in absence of monopoly. If monopoly did not exist, employees who thought they were not being paid enough, or were getting shoddy conditions, could simply work elsewhere, and consumers unhappy with prices or quality could shop elsewhere. It is only when they can't do this that businesses and corporations gain threatening degrees of power... and the facts are that towards the end on the nineteenth century the general trend, inspite of tariffs, rail subsidies, etc. was towards greater competition.

As shown above all the private attempts at cartelising and monopolising various industries and sectors of the economy failed. Businesses wanted cartelisation and monopolisation, as you would expect - of course, MacDonalds would rather that it was the sole supply of burgers! Price wars forced them to reduce prices, competition prevented them from charging cutomers more, and from reducing supply - as is all shown above. It was state intervention that enabled them to accomplish the cartelisation of American industry, and that is why big business welcomed state intervention. As Gabriel Kolko wrote, in The Triumph of Conservatism (and by conservatism he means a movement to secure existing power structures from change - a change that would have occurred in perpetuity were free competition to prevail), regarding the Federal Trade Commission,

The provisions of the new laws attacking unfair competitors and price discrimination meant that the government could now make it possible for many trade associations to stabilize, for the first time, prices within their industries, and to make effective oligopoly a new phase of the economy.

The FTC and Clayton Acts cucceded in doing what the trusts had failed to do: They allowed a handful of firms to stabilise their share of the market and to maintain an oligopoly structure between them. As Kolko continues:

It was during the war [the First World War] that effective, working oligoply and price and market agreements became operational in the dominant sectors of the American economy. The rapid diffusion of power in the economy and relatively easy entry virtually ceased. Despite the cessation of important new legislative enactments, the unity of business and the federal government continued throughout the 1920s and thereafter, using the foundations laid in the Progressive Era to stabilize and consolidate conditions within various industries. And, on the same progressive foundations and exploiting the experience with the war agencies, Herbet Hoover and Franklin Roosevelt later formulated programmes for saving American capitalism. The principle of utilising the federal government to stabilize the economy, established in the context of modern industrialism during the Progressive Era, became the basis of political capitalism in its many later ramifications.

It was big business, then, which primarily befenfitted from the growth of state intervention in the early twentieth century, and big business that primarily backed it. For instance, in the meat packing industry, the Meat Inspection Act (a piece of legislation that began the stepping stones towards the creation of the Food and Drug Administration - FDA), was primarily backed by big meat packers. In the 1880s a series of scandals involving tainted meat led to American producers being shut out of European markets. The big producers, then, turned to the US government to conduct inspections on exported meat. By carrying out this function through the state they managed, then, to remove quality inspection as a competitive issue between producers and gained from the government a seal of approval at the public expense. The problem with this early form of meat inspection was that only the largest packers were involved in the export trade, and so mandatory inspection gave advantage to the smaller firms that supplied only the domestic markets. The main motive behind Roosevelt's Meat Inspection Act was to bring the smaller firms into the inspection regime and so end this competitive advantage.

This sort of regulation is in effect a compulsory cartelisation fo the industry. It has the same effect as would have been achieved if the different firms in the idustry had got together and promised not to compete against each other in the area of offering a good quality product anymore, only the regulation has the further effect that producers cannot leave the cartel and still operate in the industry, or excede quotas, and new producers cannot enter the industry without entering the cartel - all of which in a free economy would lead to the destruction of the cartel. And so, this ensures, (a) that there is only one standard available - the government approved standard - and if this standard is not the best, or indeed, if it is too more rigourous than necessary, nobody may choose differently, and (b) that companies can charge monopoly prices free of fear that a new competitor, attracted by these high prices, may enter the industry and under cut them.

And if this root to providing big business with monopoly power it would not be able to achieve is bad enough in the US, it is even worse in other countries, and is amongst the principle sources of poverty in many developing countries. For instance, licensing is a form of state intervention that ensures are compulsory cartelisation of an industry by restricting free entry, and forbidding people from operating in the industry without meeting the terms of the license. Licensing authorities can therefore be used by the regulated industry to shut out competitors and to charge monopoly prices (recently in the UK backing for licensing of providing various forms of cosmetic surgery, specifically using botox, came largely from the cosmetics industry itself). But this is even worse in the Third World. For instance, getting a legal license for a factroy with two sewing machines in the shanty towns of Lima occupied 289 six-hour days of travelling to the authorities, queuing up to see the right people, filling in forms and waiting for an answer, added to which the process cost $1,231 dollars, more than thirty times the minimum monthly wage. Obviously to rich or well connected people, these obstacles mean little. But to the very poor they make carrying out business legally impossible, and so ensure that the rich can effectively cartelise the economy.

The problem, then, is not too much capitalism, but too little, - too much state capitalism, and not enough free market capitalism - and that is exactly as the capitalists want it. The growth of the regulatory state has not been a struggle against the evils of big business on behalf of the oppressed. It has been a struggle to protect big business and to ensure oppression.

Corporate fascism and National ID concerns

By way of Kevin Carson's blog, I came across an excellent post on Claire Wolff's blog about Coporate fascism:

"free-market" ideas are being used and twisted by the same politicians and bureaucrats who would once have marshalled behind the banner of some -ism. Now we have "free-markets" in the form of statist monstrosities like NAFTA and the WTO. And who would have thought, all those years ago when Reason magazine was extolling the virtues of "privatization," that privatization would mean such cruel insanities as private prison companies lobbying the federal government to give them more, more, more, more? Or private contractors delegated by the IRS to go out and collect taxes? Or "private" corporations, founded and funded by government, running government programs like AmeriCorps?

It was better, in some ways, when the "-ismists" were more open about their plans to control everything and everybody. Now, their motives are exactly the same, but their free-market rhetoric twists our minds into a Mobius strip of endless propanda.

If I still sometimes wonder how Rand or Von Mises withstood the days of socialism, I also wonder how today's freedom lovers endure an era in which everything we once touted as a solution to big government is being twisted by governments into an excuse for more centralized power and greater oppression.

Somehow, I won't feel one bit better about national ID if Oracle is given a "private" contract to develop its databases. Or if the Department of Homeland Security is someday turned into the "Corporation for Homeland Security" with a board of directors drawn from Microsoft, Boeing, Amtrak, and the CIA.

This is great stuff. Especially about the minimum wage. I checked through the rest of her recent blog entries, and came up with loads that I only reproduce in full here because once they are put together we can see great concerns emerging over the idea of a national ID that have implications for all of us:

Wolfe follows the first blog entry with another:

EARLIER TODAY, I WAS SPEAKING OF ECONOMIC FASCISM. Well, HP is just as happy as FedEx to partner with government to enslave people.

Hewlett-Packard plans to launch a product on Friday that helps governments check the digital identity of citizens.

The technology, called the HP National Identity System, is designed to be used in conjunction with a number of Microsoft products, including its .Net line of server, database and middleware programs. The companies plan to jointly develop, market and offer training for the authentication system.

Looks as if they're trying it out with ex-communist countries before trying it out on our ex-free country.

Why would states be interested in such a thing? (duh?!!!), well, here's one possibility, from another entry:

THE STATES MAY BE GETTING CLOSER to achieving their long, leering dream of taxing the Internet. A coalition of 43 governments says they could have a system in place by October to get "their" $16 billion cut of the Net take.

Never seems to occur to them that 1) it isn't "theirs" and 2) they're planning to take away a lot of the incentive for Net-buying.

But, of course, we know that a National ID will strengthen our security against ID fraud and against theft of our ID's. Just look how the beneficiaries of state capitalism manage existing forms of government ID, in another post:


New York-based Citigroup said the data were stored on computer tapes, and lost while UPS, the world's biggest package carrier, was shipping them to an Experian credit bureau in Texas.

The tapes, which also contained Social Security numbers, covered CitiFinancial Branch Network customers and about 50,000 customers with closed accounts from CitiFinancial Retail Services. Customers of CitiFinancial Auto and CitiFinancial Mortgage are unaffected.

Citigroup on Saturday mailed a letter to customers about the problem. It said it has received no reports of unauthorized activity, and said there is "little risk" of the accounts being compromised.

Most fascinating of all, CitiGroup claims the tapes were being moved using "an enhanced security procedure" worked out with UPS. But:

Citigroup said its missing tapes were shipped from Weehawken, New Jersey on May 2. It said it first learned of a possible problem on May 20 when Experian called to request a tracking number.

An enhanced security procedure in which priceless data on individuals can be missing for up to 18 days without anybody being aware there's a problem??? Criminy, that sounds more like government security!

Also worth noting: It appears that all this customer data was put at risk in the first place solely because CitiGroup was selling it to a third party.

So, we can trust the state and its allies to guard our liberty!


Gay pride has hit the streets of Tel Aviv. Of course, as usual, not everybody is happy about this:

While thousands were celebrating Gay Pride, Shas Chairman Eli Yishai published an announcement calling the event "a disgrace." He said that, at such a violent time, these parades do nothing but "provoke the public."

"When there is a murder almost every day, a group of people come and steal hours of municipal police work hours, for an event that is mostly a disgrace for humanity." Shas officials said a few hours before the Sabbath that the party would instruct its representatives in Tel Aviv's city council to see whether the parade involves desecration of the Sabbath by an official body, like the municipality.

Oh no! God forbid that the police actually spend time protecting people! It is simply awful to expect police to have to provide security!

It is a triumph for liberty when people can parade for whatever issue without fear, thanks to adequate security, whether the vast majority like that they do it or not! Its not just gay marches - I would say the same thing if the KKK were secure in their ability to march down the streets of Harlem.

Wednesday, June 08, 2005


Ok, folks – are you feeling ignored? Does it look like I’ve been neglecting you, as I promised not to do? Well, the truth is that I have moved house. I am now in the Basford area of Nottingham, and the new house had no broadband hook up for my modem, so I have had to leave you all hanging. Sorry, guys!

Now I am back, and I would like to kick things off with some questions about the minimum wage. I mean, there are plenty of things about the minimum wage that don’t make sense, but here are my points:

1. Why doesn’t everybody earn minimum wage and no more? After all, the logic of the argument for minimum wages was basically that evil businesses, unless prevented from doing so by the benevolent intervention of our rulers, would bid wages lower and lower in perpetuity, until they were barely enough to live on. Surely, then, if this were true, employers must now bid wages down to the legislated minimum. But I know people who earn more than the minimum. I’m sure that the average income is far above minimum wage. So why is this? The answer is that this “bidding down” iron-law-of-wages crap is wrong – it entirely ignores the demand for labour, and labour’s productivity.

2. Why do people who support minimum wages also support petrol taxes and the such? People who usually defend the minimum wages also favour high taxes on polluting petrol (lower taxes on diesel and unleaded), to deter people from buying such petrol. Or taxes on tobacco or alcohol to deter people from smoking or drinking, for another example. The presumption is, surely, that by imposing the tax, the price of the good rises, without demand rising, putting people off buying so much of it. Or in other words, the defense of the “green tax” on petrol is that if you artificially raise prices beyond the market price, consumption falls. And yet they defend the minimum wage, on the grounds that they think the market price for labour is too low and ought to be raised? Their own logic implies that this would lead to unemployment!

3. How come these defenders of minimum wages have any money? They tell us that minimum wages won’t cause unemployment, they won’t result in people buying less labour, but on a behaviourist level, that claim is illogical. I bet these people don’t spend their money on the most expensive towels, or spaghetti, or whatever, they can get when they don’t have to. If Sainsbury’s were to suddenly put their prices up on bread, people would buy less off it. The same goes for labour.

4. Why would anybody ever want to be trapped on a desert island with these people? Defenders of the minimum wage often defend themselves against the above type of argument by saying that buying labour is not analogous to buying bread. When one buys bread, one does so knowing that there are alternatives one can spend one’s money on were the bread to be considered expensive. This, it is argued, is not the case with labour, since all commodities need to have been produced by a worker at some stage. One cannot avoid consuming labour as one can avoid consuming bread. But this isn’t true. There is an alternative to consuming labour, and that is not consuming anything. Save your money. The principle is the same as being trapped on a desert island or in a life boat. Whenever we see such things in movies, we see the characters impose rationing systems, and basically start consuming their meagre supplies much more slowly. By artificially raising the price of labour consumers of labour are put in a similar situation as the survivors on a desert island – labour becomes, effectively, more scarce for them. So they consume it more slowly. They buy less of it. They save more instead. The result is lower growth, a fall in the supply of goods, and higher unemployment.