Showing posts with label free trade. Show all posts
Showing posts with label free trade. Show all posts

Tuesday, September 12, 2023

Where have the supporters of capitalism gone?

 

Cartoon by Peter Nicholson from “The Australian” newspaper: www.nicholsoncartoons.com.au

Some erstwhile supporters of capitalism probably don’t realize that they have gone missing. They still support private ownership of property and businesses, and may claim to see merit in the profit motive. However, they overlook that capitalism also involves “prices, production, and the distribution of goods that are determined mainly by competition in a free market”.

The quoted words are from the Merriam-Webster definition of capitalism. Use of a definition from an American dictionary seems appropriate because the supporters of capitalism who have gone missing seem to me to be mainly Americans. That is unfortunate because Americans were once the world’s strongest supporters of capitalism.

In Australia, most of the people I hear talking about capitalism seem to use it as a term of disparagement. The people who support capitalism talk about free enterprise and economic freedom.

I have the impression that it is fairly common outside of America for supporters of capitalism to avoid using the word because it is commonly viewed as a term of disparagement. That may stem from the word’s origins. When I was growing up, someone told me that Karl Marx had invented the word. That is not correct. Marx rarely used the word. He preferred to describe capitalism as “the capitalist mode of production”. Nevertheless, even in America the term was apparently considered to be a socialist expression until well into the 20th century.

In the latter half of the 20th century, the strongest supporters of capitalism had no qualms about using the word. Milton Friedman used the word in the title of a book, Capitalism and Freedom. Friedman made it clear that he was writing about “competitive capitalism – the organisation of the bulk of economic activity through private enterprise operating in a free market”. Ayn Rand used the word in the title of a book, Capitalism: The Unknown Ideal. She defined capitalism as “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned”.


Where have America’s supporters of capitalism gone? Johan Norberg prompted me to think about that question as I was reading his latest book,
The Capitalist Manifesto: Why the Global Free Market Will Save the World. This book is a follow-up to In Defence of Global Capitalism, which Norberg wrote about 20 years ago. Globalization has now become a dirty word to many erstwhile supporters of capitalism, but Norberg remains a strong defender of global capitalism.


Who opposes the free market?

One of the most interesting contributions of Norberg’s new book is his account of the changing opposition to the ideal of a global free market. Norberg wrote In Defence of Global Capitalism to counter the arguments of left-wing activists who mistakenly believed that free trade, foreign investment, and multinational corporations were making the world’s poor even poorer. George Monbiot, Oxfam, Bono etc. eventually began to see some merit in free trade, but opposition then migrated to economic nationalists on the conservative side of the political spectrum.

Norberg suggests that the opponents of globalization share an underlying misconception that it is a zero-sum game – someone’s gain is another one’s loss:

“The worldview is the same, the roles are just reversed – twenty years ago free trade was considered bad because we exploited them, now it is considered bad because they exploit us.”

Norberg seems to assume that most readers will already understand why free trade is a positive-sum game – beneficial to both importers and exporters. He uses colourful illustrations to reinforce the point:

“Free trade allows the farmer to grow a new mobile phone in his wheat field, the textile worker can sew a new motorbike and the author can (if lucky) write a holiday trip to Tuscany.”

The author argues that free enterprise is primarily about “opening the dams of human creativity – to let everyone participate and test their ideas and see if they work”.

The opposition of economic nationalists to free trade is associated with the narrative that during the early years of the 21st century, cheap imports from China caused deindustrialization and wage stagnation in the United States.  Norberg’s most important contribution seems to me to be in challenging that narrative. He makes the point that the loss of jobs in manufacturing is attributable largely to automation rather than import competition. He suggests that the slow-down in wages growth in the US dates from the mid-1970s, reflecting a necessary correction of cost levels because wages had previous been growing faster than productivity. The Rust Belt apparently lost more jobs in the decades before globalization reached the US, than it has in recent decades. The share of manufacturing jobs in the US declined more rapidly prior to 2001, when China was admitted to the World Trade Organisation (WTO), than it has in the decades since then.

 Fear of China

Economic nationalists suggest that the involvement of China in international supply chains has been particularly problematic because of the theft of technology. Norberg points out that China has been by no means unique in that respect. The US itself apparently once had a policy of smuggling inventions and bribing European artisans to reveal their secrets. There is evidence that the Chinese government has a relatively good track record in following WTO rulings relating to disputes about intellectual property and government subsidies.

Norberg acknowledges the potential for Chinese investment in digital and physical infrastructure to pose a security threat because the Chinese government views Chinese companies as its agents. He points out that this does not mean that the US and its allies were wrong to encourage China to open up to the outside world. He suggests that if China had not opened up, it is much more likely that the Chinese people would have generally perceived Westerners as irreconcilable opponents. He fears that use of trade barriers to isolate China could strengthen the most reactionary and nationalist forces in China.    

Leviathan’s helpers

Where have the capitalists gone? Many business owners and executives now seem to spend less time on conventional entrepreneurial activities than on seeking to ingratiate themselves with politicians and bureaucrats who are engaged in active industrial policy.  

The chapter in The Capitalist Manifesto entitled “Picking Losers” should be of particular interest to Jim Chalmers, Australia’s Treasurer. In his article in The Monthly (Feb 2023) Chalmers wrote:

“As the influential economist Mariana Mazzucato has explored in her work, markets built in partnership through the efforts of business, labour and government are still the best mechanism we have to efficiently and effectively direct resources.”  

Johan Norberg has quite a lot to say about Mariana Mazzucato’s na├»ve views. I will not attempt to provide a summary here because it might spoil the fun for readers. However, I particularly liked this sentence:

 “Governments are bad at picking winners, but losers are good at picking governments.”

That observation seems particularly relevant to Australia at present.

Concluding remarks

In focusing on reasons why support for capitalism has declined, I have failed to mention many of the virtues of capitalism discussed in The Capitalist Manifesto. For example, I was particularly interested in what Johan Norberg had to say about the relationship between capitalism and various aspects of happiness, in his chapter on “the meaning of life”.

I began by noting that many supporters of capitalism are reluctant to use the word because socialists have historically used it as a term of disparagement. I commend Johan Norberg for writing a capitalist manifesto. In doing that he is following in the footsteps of great advocates of economic freedom who had no qualms in talking about the virtues of capitalism.

In this book, Norberg has provided an interesting account of how many erstwhile supporters of capitalism have come to oppose global free markets. The most important contribution of the book, in my view, is the challenge it offers to the narrative that cheap imports from China have caused deindustrialization and wage stagnation in the United States.


Wednesday, June 7, 2023

To what extent do international differences in economic freedom reflect people's values?

 


This is a companion piece to the preceding post in which I considered the extent to which international differences in personal freedom reflect people’s values.

The extent to which international differences in economic freedom reflect different values is of interest because it has bearing on the extent of popular support likely to be given to policy proposals involving expansion or restriction of economic freedom. If people feel that existing economic policy regimes are aligned with their personal values, they are less likely to support radical change.

The accompanying graph suggests the existence of a positive relationship between an index of facilitating values and economic freedom. As suggested in the label of the horizontal axis, the index of facilitating values reflects the priority that people in different countries place on autonomy, and the extent of interpersonal trust in different countries.

Indexes

I am not aware of any other index of values facilitating economic freedom similar to the one I constructed in preparing the graph, even though there has been a substantial amount of previous research undertaken on cultural values supporting economic growth and institutional change. (Nicholas Moellman and Danko Tarabar have referred to some relevant literature in their article, ‘Economic Freedom Reform: does culture matter?’, Journal of Institutional Economics (2022), 18, 139-157.)

The priority people place on autonomy seems likely to be important in facilitating economic freedom because respect for individual autonomy implies respect for individuals engaged in commerce, particularly innovators. Trust of strangers seems likely to be important in facilitating economic freedom because it reduces the tribal instinct to seek to use the powers of the state to advance the interests of group members at the expense of other groups.

I have used Christian Welzel’s autonomy index to measure autonomy. This index uses three items in the World Values Survey (WVS) which ask respondents their views about desirable child qualities. Autonomy is considered to be valued more highly by those who independence and imagination as desirable child qualities but do not consider obedience as such a quality. (See: Christian Welzel, Freedom Rising, 2013). I used an updated version of the index based on the latest round of the WVS (2017-2022).

Welzel’s generalized trust index was used to measure interpersonal trust. This index gives higher weight to trust of strangers than to trust of family. I reconstructed the index for the latest round of the WVS by combining items covering close trust (trust of family, neighbours, and people you know personally), unspecified trust (whether most people can be trusted) and remote trust (trust of people you meet for the first time, people of another religion and people of another nationality). Unspecified trust was given double the weight of close trust, and remote trust was given three times the weight of close trust.

In constructing the facilitating values index, autonomy was allocated 75% of the weight and generalized trust was allocated 25%. Those weights were chosen on the basis of regression analysis using the autonomy and generalized trust indexes as explanatory variables to explain economic freedom. (Researchers seeking further information about the methodology used in constructing this index are welcome to contact me.)

 The Fraser Institute’s economic freedom index incorporates a large number of indicators relating to size of government, legal systems and property rights, sound money, freedom of international trade and regulation.

Discussion

My focus is on the outlier data points in the accompanying graph, and particularly on those countries which have substantially lower or higher economic freedom than might be predicted on the basis of values facilitating economic freedom.

One of the first things readers may notice in the graph is that values facilitating economic freedom are shown to be higher in China than in the U.S. and Australia. That may seem surprising if Geert Hofstede’s analysis, or your knowledge of cultural heritage, has led you to expect Chinese people to be much less individualistic than Westerners. If you need to be persuaded that many Chinese people have an individualistic perception of human flourishing, you might like to read an article I wrote on that topic in 2021.

While you are thinking about China, you might like to compare economic freedom in that country with that in Singapore, Hong Kong, and Taiwan. The most obvious reason why the latter jurisdictions have greater economic freedom is because they have adopted market-friendly ideologies.

Similarly, adoption of market-friendly ideologies explains why Albania has substantially greater economic freedom than Iran and Libya, and why Chile has greater economic freedom than Argentina and Venezuela.

Conclusion

The existence of values facilitating economic freedom helps to explain why some countries have higher economic freedom than others. However, it seems that a substantial part of international differences in economic freedom can be explained more directly in terms of prevailing government ideologies which either support or oppose free markets.


Monday, April 10, 2023

Can cottage industries exist in a machine age?


 J C Kumarappa posed that question his book, Economy of Permanence, which was first published in 1945. He argued that in the final analysis “values and valuation” would determine the direction to be taken. He viewed the choice between cottage industry and large-scale production as an ethical choice as to which type of economy would be preferable. He associated cottage industry with “permanence and non-violence”, and large-scale production with “transience and violence”.


Kumarappa has been described as an ecological economist. He was a follower of Mahatma Gandhi, who wrote a foreword to his book.

Some of Kumarappa’s views seem to have been largely a product of the context in which he lived, but others resonate more broadly. Similar views have been taken up by many affluent consumers in high-income countries. In what follows, I will discuss first why Kumarappa associated large-scale production with violence before considering why he associated it with transience.

Violence

Kumarappa recognizes the potential for specialization and market transactions to be mutually beneficial for the people involved. On that basis, readers might expect him to view wealth accumulation via specialization, trade, and market competition to be a peaceful process.

However, Kumarappa argues that large-scale production prompted industrialized countries to hold other countries in political subjection to obtain materials. He also suggests that large-scale production “is the root cause of wars”. He claims that machines must make full use of productive capacity, rather meet market demand. That results in surplus production. Wars are started to capture markets.

I see several problems with that line of reasoning, but I will only focus on the most obvious one here. Kumarappa seems to assume that manufacturers have control of armies that can be used to ensure access to raw materials and markets. That seems to me to be a strange assumption to make, but I can understand why an Indian economist might see things differently in the light of the history of British colonial rule.

Transience

Kumarappa argues that an economy based on large-scale production is built on the “quicksands” of “profit, price, purchasing power, and foreign trade”. He suggests that material standards of value and personal feelings of consumers cannot have “any degree of permanence” because people change and are perishable. For permanence to be achieved, the standard of value must be objective and controlled by ideals that have enduring qualities. He claims that civilization had endured in China and India because it was based on altruistic and objective values.

The value that Kumarappa places on permanence may require explanation because Hinduism, the dominant religion in India, shares with Buddhism the doctrine that everything is in a constant state of change. Kumarappa was a Christian, but I don’t think that explains as much as his reverence for what he describes as “the secret of nature’s permanency”.  He was referring to ecological factors which “function in close cooperation to maintain the continuity of life”.

Kumarappa was particularly concerned about the impact that the products of large-scale production were having on traditional village life. He argues:

“We are often led away by low money prices ignoring the great gashes in our economic and social organisation made by such short-sighted choice of ours.  … Money value blinds the vision to a long range social view, so that the wielder of the axe fells the branch on which he is standing”.

Kumarappa argues that moral values are attached to every article sold in the market. We should not ignore such values and say “business is business”. Accordingly, anyone who enters into a commercial transaction has a grave responsibility to ensure that she does not become party to circumstances that she would not consciously support. He believed that the consumer is only able to bring her scale of values into play when goods are made locally.

Different views of progress

Kumarappa had a very different view of economic growth than is presented in my book, Freedom, Progress, and Human Flourishing. It may be worthwhile to try to pinpoint the reasons for this.

I don’t think Kumarappa would have any problems with my definition of progress as the growth of opportunities to obtain the basic goods of a flourishing human. He would probably agree, more or less, with my list of the basic goods – wise and well-informed self-direction, health and longevity, positive relationships with others, living in harmony with nature, and psychological well-being.

Kumarappa would probably begin to object at the point where I assert that economic growth counts as progress to the extent that people aspire to have the goods that it offers. He might suggest that people who aspire to have those goods are mistaken because they could flourish to a greater extent by maintaining a simple lifestyle. The more powerful argument he would offer is the one presented above - that the products of new technology are disruptive to existing economic and social organisation.

I would respond by referring to what Deirdre McCloskey has referred to as the bourgeois deal. People in industrialised countries have been willing to accept the possibility that the introduction of new technologies might disrupt their lives because they have good reasons to expect that they, and future generations, are likely to benefit from the expansion of opportunities that it provides.

If that line of argument had been presented to J C Kumarappa in 1945 I imagine he would have viewed it as “pie in the sky”. I am less sure that he would hold the same view today.

Cottage industry

I don’t know much about the economic health of cottage industry in Inda today, but it does continue to exist. The photo shown at the top of this article was taken at Kalra’s Cottage Industry in Agra, when I visited there last year. (By the way, the service offered was excellent. The hand-knotted floor rug I purchased was delivered to my home in Australia without any problems, and in perfect condition.)

My point is that as their material standard of living rises, many people are willing to pay more for high quality products of cottage industries than for mass produced items. Many people also become increasingly concerned about such things as the levels of remuneration of workers who produce the products that they buy and potential environmental damage of production methods. People tend to pay greater attention to such concerns when they feel that they can more readily afford to do so.


Monday, November 21, 2022

Does voting just encourage them?

 

A couple of weeks ago the thought struck me that it was about time I wrote something about the personal ethics of voting. That turned out to be more difficult than I had anticipated.

At first, I thought that I should argue that it is unethical to vote because politics is a dirty business. As a person who often espouses principles of libertarianism and decentralism (see the preceding post on this blog) I see voting as akin to online shopping with known fraudsters – you know that the package of goods they deliver will never be the same as the one you thought you were buying. You should avoid shopping with known fraudsters, and you should avoid voting because whoever you vote for a politician will be elected.

Then I thought of some problems with that analogy. What happens if you really need the goods that the politicians are advertising? Who will mend the potholes in your road if you don’t vote for a politician who promises to get it done? Perhaps you might tell me that you and your neighbours could organise a working bee and do it yourself. Good idea!

However, if you don’t vote, who will restrain government spending? I expect that the more cynical among you will respond that no-one will restrain government spending, irrespective of whether you vote, or who you vote for.


When my reasoning took me to that point, I couldn’t immediately think of an appropriate response. That was when I decided that to bring clarity to my mind I should read again the book, “Don’t Vote – It just encourages the bastards, by the late, great P J O’Rourke.  My discussion of the book provides only a small sample of the humor and wisdom in it. Despite having been written over 12 years ago, the book contains insightful comments about people who are still on the political stage in America, including Donald Trump. However, that is somewhat tangential to the focus of this article.

You might think that this book would make a strong case against voting, but the old saying about not judging a book by its cover does seems to apply in this instance. O’Rourke suggests that voting does have a purpose: “We vote to throw the bastards out”.  The problem, as I see it, is that when enough voters manage to persuade each other to vote to throw politicians out of office, that doesn’t establish a regime of peaceful human flourishing without any interfering politicians. Voters throw out one lot of politicians by voting another lot into office.

One of the funniest parts of the book is a listing of the personality characteristics of people who are drawn to politics. The first item on the list is “A pervasive pattern of grandiosity”. After listing 9 other characteristics, O’Rourke acknowledges that he has just quoted from the American Psychiatric Association’s diagnostic criteria for narcissistic personality disorder.

Nevertheless, O’Rourke acknowledges that “individual politicians are, after all, individuals like the rest of us and should be judged individually”:

“It would be wrong—very tempting, but wrong—to think of them all as simply bastards”.

He elaborates:

“I’ve spent some time with politicians. I like politicians. I’m friends with politicians from both sides of the aisle. Politicians are fine until they stick their noses into things they don’t understand, such as most things. Then politicians turn into rachet-jawed purveyors of monkey doodle and baked wind.”

Unfortunately, I must agree. The politicians I have met personally have all been likeable. When you meet them, they seem to be pleasant people (perhaps in the same way that the scammers who seek my friendship on Facebook often seem pleasant). A few politicians I have met even had their hearts and heads in the right places. The one who comes to mind most readily is Bert Kelly, an Australian politician whom I have written about previously.

Sometimes when I see a politician performing on TV, I wonder how a nice person like her, or him, ended up like that – I mean, like a bad actor saying things they don't believe. The fact that their future political careers are at stake is no consolation.

Is there something inherently evil about politics? O’Rourke writes:

“Maybe politics is inherently evil. Maybe politics is so evil that anything we do for it, even attempting to supply it with morality, just feeds the beast. I trust this isn’t true but I can’t say the thought doesn’t trouble me.”

That thought troubles me, too.

In his discussion of morality in politics, O’Rourke introduces (on page 88) the Venn diagram, reproduced at the top of this article. He drew the two circles to intersect, implying that there can be such a thing as moral political behavior.

It seems to me to be appropriate to maintain some optimism about democratic political processes. They don’t do much to protect our liberty and pursuit of happiness, but not many of us would freely choose to live under any of the available alternative forms of government. Many people claimed that democracy could not exist as a permanent form of government because it would not take long for citizens to learn that they could vote themselves largesse out of the public treasury. Indeed, that is largely what democratic politics has been about for as long as it has existed. Yet democracy survives! Perhaps democracy’s secret of success has been the existence of sufficient voters and politicians who have been willing to stop playing politics when crises have become imminent.

I often wish that I could be apolitical, but O’Rourke has persuaded me that is not practicable:

“The democratic political process is like the process of our children going through adolescence. There’s not much we can do to improve it and there’s nothing we can do to stop it. We cannot, however, just declare ourselves to be apolitical any more than we can declare ourselves to be “aparental.” Here are the car keys, son. Dad’s stash is in the nightstand drawer. Why don’t you take my ATM card while you’re at it? See you when you’re thirty.”

It certainly appears that there is not much that we, as individuals, can do to change the outcomes of the political process. The chance that your vote will be decisive is miniscule. But people do talk about politics and influence one another about how they will cast their votes. Paradoxically, even those of us who would like to be apolitical can make a difference if we decide that we don’t like the direction that politics is taking and choose to vote.

Before concluding, I should offer a personal explanation about the relevance of the personal ethics of voting to me, as a person who lives in a country where voting is compulsory. It is possible to choose not to vote in Australia without displaying a great deal of courage. It is possible to attend a polling place, chat with your neighbours, eat a “democracy sausage”, exchange greetings with people offering “how to vote” literature, have your name ticked off on the voting roll, be handed voting papers, and still not cast a valid vote. In a secret ballot, no-one knows what you write on the voting papers before you put them into the ballot boxes.

Conclusion

When I began writing this article, I was not sure whether I would end up persuading myself to vote, or to have nothing to do with the political process. P J O’Rourke helped me to persuade myself that there is such a thing as moral political behavior.

Democratic politics is certainly a dirty business. It doesn’t do much to protect liberty or the pursuit of happiness, but most of us would choose to put up with democratic immorality rather than to live under any of the currently available alternative forms of governance. Paradoxically, the survival of democracies may be attributable to the willingness of sufficient numbers of voters and politicians to refrain from playing politics – to stop raiding the public treasury - when crises become imminent.

Although the chances of an individual vote being decisive are miniscule, individuals do influence one another in how they cast their votes. Individuals who don’t like the way politics is heading are more likely to improve outcomes if they choose to vote and encourage other like-minded people to do likewise, rather than choosing to refrain from having anything to do with the political process.

Tuesday, September 13, 2022

What happened to creative capitalism?

 


The question I have posed above strikes me as being delightfully ambiguous. It could be asking what happened to bring to an end the era in which creative capitalism brought about high rates of productivity growth. Alternatively, it could be asking what happened to the concept of “creative capitalism” that Bill Gates presented to the World Economic Forum (WEF) in 2008.

My focus here is on the second interpretation, but I will end up discussing what has happened to the creativity of capitalism in the more traditional sense.

Why am I interested in the particular form of corporate social responsibility (CSR) that Bill Gates referred to as “creative capitalism”? I don’t hear the Gates concept being much talked about these days, but I think that variants of this form of CSR have become more common over the last decade or so. It is worth considering whether Gates’ approach to CSR is changing corporate sectors in ways that may directly hamper the traditional creativity of capitalism, or indirectly hamper it via impacts on economic policies pursued by governments.


That is why I decided that the time had come to read Creative Capitalism, a book edited by Michael Kinsley, which was published in 2008. The book consists mainly of comments by eminent economists on the “creative capitalism” concept that Bill Gates presented to the WEF. I should confess at this point that deciding to read the book didn’t require me to judge that it might be worth buying. A copy was given to me last year by a friend who was downsizing his library. The book was sitting in my “unread” pile for many months waiting for me to show some interest. I am now glad I read it!

In the next section I will outline Gates’ concept and briefly discuss the different reactions of economists writing 14 years ago. That will be followed by consideration of possible consequences of changes in the nature of capitalism that seem to stem from Gates’ concept and similar ideas.

Gates’ concept

Bill Gates advocated a new approach to capitalism in which businesses would give more attention to recognition and reputation. As he put it:

Recognition enhances a company’s reputation and appeals to customers; above all it attracts good people to the organisation. As such, recognition triggers a market-based reward for good behavior.”

Gates advanced this view in the context of considering how self-interest could be harnessed to provide more rapid improvement in the well-being of poor people. However, pursuit of recognition seems to have become a strong motivator for the environmental and social objectives that are increasingly espoused by corporates. Gates does not mention the potential for pursuit of recognition for good behavior to have a positive influence on investors, but that also seems to have emerged as an important factor in recent years.

My review of the contributions of commentators is highly selective. I just focus here on what I see as the main points that were raised.

Some of the commentators suggested that entrepreneurs with philanthropic objectives might do better to do what Gates did, rather than to follow the approach he advocated in his speech to the WEF. Like some others before him, Gates pursued profits until he become extraordinarily wealthy and then established a foundation to pursue philanthropic objectives. An argument in support of that approach is that the pursuit of multiple “bottom lines” by companies adds to the difficulty of measuring their performance to ensure that executives can be held accountable for outcomes. 

Several of the commentators referred to Milton Friedman’s view, in Capitalism and Freedom, that CSR is a “fundamentally subversive doctrine” because, in a free society, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (p 133).

However, others pointed out that Gates’ proposal is consistent with a free society because he was suggesting that corporates can obtain a market-based reward for choosing to pursue non-pecuniary objectives of employees and consumers. Similarly, it is consistent with a free society for companies to seek to pursue non-pecuniary objectives of the shareholders who own them.

Consequences

It is likely that an increasing tendency for corporates to pursue non-pecuniary objectives would have a negative impact on measured productivity growth. However, that may be largely a problem in the measurement of productivity. Measures of productivity growth are biased to the extent that output indicators do not incorporate non-pecuniary goods that contribute human flourishing. If corporates are efficient vehicles for the pursuit of the non-pecuniary objectives of their shareholders, employees, and customers, it seems reasonable to suppose that pursuit of those objectives would contribute to the flourishing of the people concerned.

“The unknown ideal”

What happens if a company is not an efficient vehicle for the pursuit of the non-pecuniary objectives of its shareholders, employees, and customers?

In considering this question it is important to recognize that corporate sectors consist of large numbers of individual firms which compete for labor, capital, and customers. Individual firms are free to give different weight to different objectives. Some may see their only role as profit maximization, and may even seek recognition by asserting that they see that as a social responsibility. Others may seek a reputation for social responsibility by undertaking marketing exercises, without changing their practices. At the other extreme, some companies may devote themselves largely to pursuit of one or more non-pecuniary objectives, providing only minimal financial returns to shareholders.

It is customary for economists to assert that the market is capable of weeding out firms that are following inefficient strategies. Applying the usual market test, it appears reasonable to suppose that if individual companies pursuing the non-pecuniary objectives of workers, consumers, and shareholders are able to survive, the strategies they are following must pass the market’s efficiency test.

The Hayek quote at the top of this article is followed by his assertion that the argument for liberty rests on “the belief that it will, on balance, release more forces for the good than for the bad” (Constitution of Liberty, p 31). In considering how best to describe the spontaneous order of a free society, Hayek later suggested that capitalism “is an appropriate name at most for the partial realization of such a system in a certain historical phase, but always misleading because it suggests a system which mainly benefits the capitalists, while in fact it is a system which imposes upon enterprise a discipline under which the managers chafe and which each endeavours to escape” (“Law, Legislation, and Liberty”, V1, p 62)

The corporatist quagmire

Unfortunately, in the real world at present, the ability of the market to weed out inefficient firms and the strategies they adopt is greatly hindered by government intervention and expectations of future government intervention. If firms believe that pursuit of certain goals will be rewarded by governments, they have an incentive to establish reputations for pursuing those goals. Firms also have an incentive to seek government assistance as a reward for good behavior. The increasing prevalence of such interactions has led to the development of corporatist, rent-seeking cultures that have contributed to a long-term decline in rates of productivity growth in high-income countries.

It is also important to note that, in the realm of politics, what some people view as good behavior is often viewed in a different light by others. For example, political opinions differ on whether or not it is good for pension funds to take account of environmental policies in their allocation of funds. Investors are often uncertain about which view will prevail in the political arena. Such economic policy uncertainty adds to the normal commercial risks of investment. An example which comes readily to mind is the impact of policy uncertainty on future investment in gas-fired electricity generation in industrialized countries. Normal commercial considerations might suggest that is likely to be a profitable investment to meet demand for electricity when the wind is not blowing and the sun is not shining, but investors have to contend with the possibility that further regulatory interventions to discourage use of fossil fuels will render such investment unprofitable. It is reasonable to predict that blackouts will be more common in jurisdictions where such policy uncertainty prevails.

Political ideologies of governments also seem to be changing in ways that make it more difficult for markets to weed out firms adopting inefficient strategies. Over the last decade or so, the progressive side of politics has encouraged corporates to establish reputations for “woke progressivism”. That seems to have induced political conservatives to become increasingly disenchanted with corporates. That disenchantment has added to the antagonism associated with the increased tendency of many conservatives to espouse economic nationalism and populist views opposed to the corporate sector’s interest in free trade, international capital mobility, and technological progress.

As politics comes to play an increasing role in the investment decisions of businesses, economic growth rates of industrialized countries are likely to decline. Since governments find it difficult to disappoint the expectations of voters, government spending is unlikely to be constrained to a correspond extent. Major economic crises seem likely to become more common. (I have discussed these issues more fully in Chapter 6 of Freedom, Progress, and Human Flourishing.)  

The obvious solution

Immediately after the passage in which Milton Friedman suggested that the social responsibility of business was to serve the interests of stockholders, he suggested that the social responsibility of union leaders is to serve the interests of their members. He then went on to write:

It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith … “led by an invisible hand to promote an end which was no part of his intention. …” (Capitalism and Freedom, p 133).

Unfortunately, it seems likely that major economic crises will need to be endured before governments of industrialized countries once again see merit in confining themselves to core responsibilities in the manner that Adam Smith suggested.

Conclusion

Companies are increasingly choosing to adopt strategies to improve their reputations with employees, customers, and investors who have interests in social and environmental issues. That would not pose a problem in the context of the spontaneous order of a free society. Pursuit of multiple objectives may add to problems in holding executives accountable for an individual firm’s performance, but free markets are capable of weeding out firms that follow inefficient strategies.

Unfortunately, however, industrialized countries are now corporatist quagmires in which the ability of markets to weed out firms that adopt inefficient strategies is greatly hindered by government intervention and expectations of future government intervention. The obvious solution is to reduce government intervention in markets, but major economic crises will probably need to be endured before that happens.

Wednesday, August 10, 2022

How should Bill Carmichael's transparency project be pursued now?

 


Unfortunately, few readers of this blog will know anything about Bill Carmichael or his transparency project. My main purpose here is therefore to explain who he was and why the question I have posed above is worth considering.

W.B. (Bill) Carmichael died recently at the age of 93. In his obituary,  Gary Banks, former chair of the Australian Productivity Commission, described Bill aptly as “an unsung hero” of the Australian Public Service (APS).

In my experience, most members of the APS who are working on economic policy like to claim that they are contributing to the well-being of the public at large. However, I find it difficult to accept such claims unless the people concerned can demonstrate that they are actively seeking to either undo mistakes that governments have made, or to discourage governments from making more mistakes.

Bill Carmichael made a huge contribution in helping to undo mistakes that Australian governments made over many decades in insulating much of the economy from international competition. His efforts in support of trade liberalization have helped Australians to enjoy greater benefits from trade and greater productivity growth than would otherwise have been possible.

Alf Rattigan’s right-hand man

Bill’s contribution to trade liberalization was largely behind the scenes, helping Alf Rattigan, the former chairman of the Tariff Board, to pursue his reform efforts. Rattigan argued successfully that tariff reform was required because industries that had been given high levels of government assistance to compete with imports were inherently less efficient users of resources than those requiring lower levels of assistance or none at all.

As Gary Banks’ obituary indicates, Bill played an important role in developing strategies, writing the key speeches that Alf Rattigan delivered, dealing with difficult bureaucrats, and engaging with economic journalists who were highly influential in informing politicians and the public about the costs of protection and the benefits of international competition. Bill’s contribution reached its pinnacle in the early 1970s when the Industries Assistance Commission (IAC) was established with an economy-wide mandate to ensure greater transparency to processes for provision of government assistance to all industries.

Bill eventually became chairman of the IAC. However, in my view, his most important contribution was made in helping to establish the organisation and ensure that it had access to the professional economic expertise it required to undertake research and produce quality reports.

Bill’s transparency project

Bill Carmichael’s interest in the transparency of trade policy did not end after he retired from the IAC in 1988. My reference to Bill’s transparency project relates specifically to the efforts he made during his retirement to bring greater transparency to trade negotiations. These efforts were made in collaboration with Greg Cutbush, Malcolm Bosworth, and other economists. The best way to describe that project is to quote some passages from an article in which Bill suggested that Australians are being misled about our trade negotiations and agreements. The article, entitled ‘Trade Policy Lessons from Australia’,  was published by East Asia Forum in 2016.

Bill wrote:

The goal of trade policy is not limited to increasing export opportunities. Nor is it just about improving trade balances. Rather trade policy is about taking opportunities to improve the economy’s productive base. When assessing a nation’s experience with bilateral trade agreements, this is the test that should be applied.

In each bilateral agreement Australia has completed to date, projections of the potential gains for Australia, based on unimpeded access to all markets of the other country involved, were released prior to negotiations. These studies did not, and could not, project what was actually achieved in the ensuing negotiations. The quite modest outcomes for Australia from those negotiations meant the projected gains conveyed nothing about what was eventually achieved. Yet the projections were still quoted to support the agreements after they were signed, as though they reflected actual outcomes.

This approach to accounting for the outcome of trade agreements has meant that Australia has missed opportunities for productivity gains. So how, given Australia’s recent experiences, can trade policy and negotiations be better conducted in future?

Australia cannot change how it negotiated its agreements with the United States, Japan, South Korea and China. But policymakers can refine their approach to future negotiations. Australia’s trade policy should be guided by a model based on its conduct in the Uruguay Round of trade negotiations. The Uruguay Round confirmed that the domestic decisions needed to secure gains from unilateral liberalisation and those required to secure the full gains available from negotiations have converged.

The negotiations in the Uruguay Round took place at a time when former prime ministers Bob Hawke and Paul Keating were reducing Australia’s barriers to trade unilaterally. Their productivity-enhancing reforms were subsequently offered and accepted in the Uruguay negotiations as Australia’s contribution to global trade reform. Consequently, Australia secured all the gains available from trade negotiations: the major gains in productivity from reducing the barriers protecting less competitive industries, as well as securing greater access to external markets.

This was the kind of win–win outcome negotiators should seek from all trade agreements. It made a substantial contribution to the prosperity Australia has since enjoyed. 

In future trade negotiations, the Productivity Commission — Australia’s independent policy review institution — could provide a basis for market-opening offers by conducting a public inquiry and reporting to government before negotiations get underway.”

In a subsequent paper, publicly endorsed by a group of trade economists, Bill argued:

“If we are to close the gap between trade diplomacy and economic reality, we need to respect three lessons from experience: first, a major part of our gains from trade agreements depends on what we take to the negotiating table, not what we hope to take away from it ; second, liberalising through trade negotiations cannot be pursued simply as an extension of foreign policy ; and third, … future bilateral agreements should be subject to cost-benefit analysis before ratification.”

How should Bill’s project be pursued?

I raise this question without much optimism that greater transparency of trade policy can be achieved in the short term. There is no more reason to be optimistic that the Department of Foreign Affairs and Trade will suddenly become receptive to ideas that challenge its claims about the benefits of trade agreements it has negotiated than there was to be optimistic that its predecessor, the Department of Trade and Industry, would be receptive in the 1960s to the ideas of Rattigan and Carmichael which challenged the protectionist orthodoxy of that department. Added to this, it is difficult to ignore signs that protectionist sentiment is on the rise again in Australia in the wake of the Covid 19 pandemic and fears that a further deterioration in international relations could lead to disruption of international shipping.

Nevertheless, as Bill might say, none of that should stop us from pursuing longer-term goals.  I hope that some people reading this will feel motivated to think constructively about how Bill Carmichael’s transparency project could be pursued as a longer-term exercise in institutional reform.

Sunday, June 26, 2022

How did a trading company come to rule India?

 


Spencer went on to suggest that trade would have been more successful in the absence of the privileges that the British government had conferred on the East India Company (EIC):

“Insane longing for empire would never have burdened the Company with the enormous debt which at present paralyzes it. The energy that has been expended in aggressive wars would have been employed in developing the resources of the country. Unenervated by monopolies, trade would have been much more successful.”  

Prior to my recent visit to India I was aware that classical liberals like Herbert Spencer were critical of the East India Company. Since my visit I have become an expert on all matters pertaining to Indian history. Just joking!

I can only claim to be able to sketch the outlines of the story of how the EIC ended up ruling India. I think the story is worth telling as a case study of the unintended consequences of government intervention in international trade.

Spencer was correct in identifying the importance of the EIC’s links to the British government as an important determinant of its behavior, but the context in which it operated also needs to be taken into account.  The most important element of context seems to me to the rivalry between European powers to obtain advantage in trade with India.

Portugal came first.

Perhaps you can recall from school history lessons that Vasco da Gama sailed to India around the Cape of Good Hope in 1498. This was the culmination of voyages of discovery by Portuguese sailors, including the important contribution of Bartolomeu Diaz, who had rounded the Cape some years earlier.


The Portuguese government was heavily involved in this exploration, and in what followed. In his book, The Portuguese in India, M.N. Pearson relates how the king, D. Manuel, invited da Gama to command the expedition when the latter happened to wander through the council chamber where the king was reading documents.

After da Gama’s voyage, the Portuguese court debated whether they should use force to seek a monopoly in the Indian Ocean or be peaceful traders. They chose force. Their aim was to try to monopolize the supply of spices to Europe and to control and tax other Asian trade. There was, of course, a great deal of trade in the Indian Ocean prior to Portuguese intervention, much of it controlled by Muslims (from India as well as the Middle East).

The Portuguese built forts in India to protect their trading activities. Some local rulers saw advantage in giving the Portuguese permission to establish forts, but they often used force. Goa was conquered in 1510. The Portuguese obtained permission to build a fort at Diu in 1535 (and had ceded to them the islands that today form Mumbai) because the sultan of Gujarat, Bahadur Shar, wanted Portuguese help after being defeated by the Mughal emperor, Humayon. The Portuguese obtained Daman from the sultan in 1559 and immediately began construction of the fort at Moti Daman. Building of St Jerome fort (my photo below) commenced in 1614, but was not completed until 1672.


The Dutch eclipsed the Portuguese early in the 17th century.

The Portuguese were unable to prevent competition from the Dutch because the latter were “better financed, better armed, and more numerous”. The Dutch blockaded Goa from 1638 to 1644 and again from 1656 to 1663.

The Dutch East India Company was founded by the Dutch government in 1602, not long after the English formed the EIC. Both organisations were granted trade monopolies, and combined private investment and the powers of the state in a similar manner.

In the early 18th century there was fierce rivalry between the Dutch and English over the spice trade in Indonesia. That ended with the English quietly withdrawing from most of their interests in Indonesia to focus elsewhere, including India.

The transformation of British activities in India

In the 17th century, the EIC established trading posts in Surat, Madras, Bombay and Calcutta with permission from local authorities. The French India Company offered increasing competition during the latter half of the 17th century and into the 18th century.

The initial objectives of both the EIC and the French were commercial, but their conflicts in Europe spilled over into India. The British sought to fortify Fort William in Calcutta against potential attack from the French. In 1756, the French encouraged the nawab of Bengal to attack Fort William. After the fall of Fort William, the surviving British soldiers and Indian sepoys were imprisoned overnight in a dungeon where many died from suffocation and heat exhaustion. The prison became known as the Black Hole of Calcutta. The number of fatalities is disputed, but the incident seems to have provided impetus for the EIC to seek to wield greater political power in India to protect its commercial interests.

My photo of the Black Hole monument in the grounds of St John’s church in Kolkata.

 

EIC forces led by Robert Clive (Clive of India) retook Calcutta in 1757 and went on to defeat the nawab and his French supporters at Plassey. Clive’s victory was aided by a secret agreement with Bengal aristocrats which resulted in a large portion of the nawab's army being led away from the battlefield. The person responsible for this treachery, Mir Jafar, was rewarded by being installed as nawab. Clive rewarded himself and EIC forces from the Bengal Treasury.

A few years later, as governor of Bengal, Clive arranged for the EIC to collect land tax revenues in Bengal by appointing a deputy nawab for this purpose. The conquest of other parts of India was planned and directed from Calcutta. Amartya Sen has noted:

“The profits made by the East India Company from its economic operations in Bengal financed, to a great extent, the wars that the British waged across India in the period of their colonial expansion.”

Consequences and responses

The worst consequences of EIC rule became evident during the Bengal famine of 1770. The company was apparently more concerned to maintain land tax revenue than to relieve to the suffering of peasants.  Its policies contributed to the massive loss of life during the famine. Adam Smith presumably had that in mind when he suggested in Wealth of Nations:

“No other sovereigns ever were, or, from the nature of things, ever could be so perfectly indifferent about the happiness or misery of their subjects, the improvement or waste of their dominions, the glory or disgrace of their administration; as, from irresistible moral causes, the greater part of the proprietors of such a mercantile company are, and necessarily must be.” (V.i.e 26)

By reducing the agricultural labor available to generate taxable income, the famine caused the EIC to experience a subsequent loss of revenue. The British government provided financial relief to the company but arranged to supervise it. Regulation of the EIC was further increased in 1784, when British prime minister William Pitt the Younger, legislated for joint government of British India by the EIC and the government, with the government holding the ultimate authority.

The British government seems to have been engaged in an ongoing balancing act to placate both supporters of the EIC, including investors and former employees, and its critics, including prominent individuals like Edmund Burke and Adam Smith.  

Pitt’s India Act stated that to pursue schemes of conquest and extension of dominion in India are “measures repugnant to the wish, the honour and the policy of this nation”. Perhaps that was an honest statement of the British government’s policy objective, but it is doubtful that it had any impact on the extension of British dominion in India.

Fortune seekers

During the 18th century, India was seen as offering opportunities for young British men to obtain a fortune, become well-connected, and to marry well.

Lachlan Macquarie, who (in my opinion) ultimately become one of the best of Australia’s colonial governors, expressed views, while a young army officer serving in India, that may have been fairly typical.


In his biography of Macquarie, M. H. Ellis notes that in 1788 Pitt and his followers had cramped the style of young army officers in India by reducing their allowances. Macquarie recorded in his diary: “ … our golden dreams, and the flattering prospects we had formed to ourselves in Britain, of soon making our fortunes in the East, must now all vanish into smoke; and we must content ourselves, with merely being able to exist without running into debt” (p 18).

Macquarie’s hopes for a change in fortune rested on being called to active service. He had his wish during the third Anglo-Mysore war. The war ended after the 1792 Siege of Seringapatam led to the signing of a Treaty in which Tipu Sultan surrendered half of his kingdom to the EIC and its allies. Macquarie noted that news of the cessation of hostilities “damped the spirits of every one who wished the downfall of the Tyrant and hoped to have the satisfaction in a few days more, of storming his capital”. The storming of Tipu’s capital would presumably have offered the prospect of looting, but Governor-General Cornwallis managed to maintain the morale of his troops by announcing payment of a “handsome gratuity in lieu of prize money”.   (Ellis, p 39)

India’s civil wars

Disunity within India was another important element of the context in which the EIC ended up ruling India. British colonial expansion occurred at a time when the power of the Mughal empire was declining, with much of its territory falling under the control of the Marathas. In the south of India, the rulers of Mysore and Travancore were also powerful. The EIC sided with different rulers in different locations at different times. For example, at the time of the Third Anglo-Mysore War, referred to above, the Marathas were allies of the EIC. That war occurred because Tipu, an ally of France, had invaded the nearby state of Travancore, which was a British ally.

Why did EIC rule end?

In 1813 the EIC lost its monopoly over British trade with India. The opening of access to competing traders seems to have been partly attributable to growth of the free trade lobby in Britain.  

In 1833, the EIC was reduced to the status of a managing agency for the British government of India. The government took over the company’s debts and obligations, which were to be serviced and paid from tax revenue raised in India.

EIC rule of India finally ended following the Indian Rebellion of 1857, which is now also referred to as the First War of Independence. I took this photo at an Indian airport.

 


Colonial rule was formally transferred to the Crown in the person of Queen Victoria in 1858. The British government took over the Indian possessions, administrative powers and machinery, and the armed forces of the EIC.

In my view, EIC rule ended because the company had a hopeless business model. The company was obviously successful in conducting wars in India, and some employees of the company made fortunes as a consequence. But the company’s attempts to service debts incurred by imposing taxes on the people of India were inherently problematic. Such taxes made it inevitable that the company would incur high ongoing costs to put down rebellions. The EIC’s conquest of Bengal raised expectations that colonial rule might be a profitable activity for the company, but it became incapable of surviving without government financial backing only a few years later.

Was a better option possible?

 John Stuart Mill - in his role as a spin doctor employed by the EIC rather than an eminent philosopher - opened his last ditch defence of the EIC by pointing out that at the same time as the company acquired a “magnificent empire in the East” for Britain “a succession of administrations under the control of Parliament were losing to the Crown of Great Britain another great empire on the opposite side of the Atlantic”. (Mill is quoted more fully by Richard Reeves in John Stuart Mill, Victorian Firebrand, p 258.)

Mill was obviously attempting to present a persuasive case to British politicians at a time when most of them perceived “empire” to be a desirable objective.

These days, people who want to defend the empire-building activities of the EIC in India are more likely to suggest that the institutional legacy of British rule, including a united India (if you overlook the tragedy of partition) would otherwise not have been possible. Amartya Sen has pointed out the weakness of that argument:

“Certainly, when Clive’s East India Company defeated the nawab of Bengal in 1757, there was no single power ruling over all of India. Yet it is a great leap from the proximate story of Britain imposing a single united regime on India (as did actually occur) to the huge claim that only the British could have created a united India out of a set of disparate states.

That way of looking at Indian history would go firmly against the reality of the large domestic empires that had characterised India throughout the millennia. …”

Summing up

The East India Company came to rule India as an unintended consequence of British government intervention seeking trading advantages over other European powers. This intervention occurred against the background of previous involvement in Indian trade by Portuguese and Dutch governments, and in the context of intense rivalry with the French government’s trading company.

The East India Company’s schemes of conquest and dominion were made possible by disunity within India, which provided it with opportunistic allies. However, the company’s business model of taxing subjugated Indians was not capable of generating sufficient revenue to service debts incurred in subjugating them and maintaining order. Rather than let the company fail, the British government became increasingly involved in directing its activities, and ultimately displaced it.  

Friday, August 9, 2019

How could the great philosopher of human flourishing endorse slavery?


Aristotle (384-322 BCE) was the great philosopher of human flourishing. He argued that although health, wealth, honour, pleasure etc. may be sought for themselves, we choose them also for the sake of living well. Living well involves making use of the vital functions that make us human. Many of the vital functions of humans, including nutrition, reproduction and movement, are the same as those of other animals. However, humans also have the capacity to use reason to guide themselves and exercise appropriate moderation in their behaviour. Parents and fellow citizens may help us to acquire good habits, but we are individually responsible for exercising the practical wisdom that we require to flourish.


It would be reasonable to expect that a person who held such views would be opposed to slavery on the grounds that slaves can only use reason to guide their actions within the limits imposed by their owners. So, how could Aristotle endorse slavery?

Julia Annas explains in The Morality of Happiness that Aristotle saw slavery to be natural. His appeal to nature has two aspects. The first is his claim that slavery has a natural basis in differences between types of people. According to Aristotle, there are “natural slaves” whose “state is such that their function is the use of their body, and this is the best they can do”. On that basis he argues that “it is better for them to be ruled”. He also suggests that the benefits owners obtain from use of slaves “differs only a little” from those obtained from use of domesticated animals. Aristotle saw the relationship of subordination between owner and slave as an example of a general pattern, also encompassing the relations between men and women (p 152).

The second aspect of Aristotle’s appeal to nature was based on his observation that slavery was widespread and should therefore be considered natural.  (p 153).

Julia Annas suggests that Aristotle’s defence of slavery fails even in terms of his own view of what is natural. Aristotle distinguishes between natural behaviour, governed by internal sources of change, and forced behaviour, brought about by external factors that overrule the internal sources of change. Even if we were to accept Aristotle’s claim that some people are natural slaves, that cannot explain the functioning of actual slavery which is based on the use of force.  Again, Aristotle’s observation that slavery was a “near universal social institution” did not justify his inference that it is natural in the sense of not resting on force. Annas comments:
The usual may be natural with plants and animals, but the complexity of human nature allows the usual to be something that is forcibly repressed, unjust and in every way frustrating to normal human capacities” (p 155).

How could Aristotle not see this? Perhaps he perceived that some people are natural slaves because he couldn’t imagine the slaves he knew as free citizens. Many of us have a somewhat similar problem today is assessing the potential of individuals to accept more responsibility than they have at present. There seems to be a common cognitive bias that leads us to identify people with their current roles. We don’t know what people are capable of until we see them in a different role.

Aristotle’s perception that it was natural to make slaves of defeated enemies can possibly be explained as the biased perception of a slave owner, but his loose definition of circumstances in which external force is involved left him scope to take a biased view. He was able to disregard the use of force at the heart of the system of conquest and slavery by identifying the whole system as a natural system.

Similarly, Aristotle’s loose definition of circumstances in which external force is involved enabled him to condemn the profit motive and the market economy. In this instance he identified the natural system as the primitive system of directly producing what meets one’s needs, and only using exchange as much as required to satisfy unmet needs and get rid of unusable surplus. That enabled him to identify the market economy as an external force that disrupted a natural system.

Aristotle’s view of what is natural would have been less prone to bias if it had been based on the natural rights of individuals, and hence the naturalness of mutually beneficial voluntary cooperation and exchange among individuals. That would have made it much more difficult for him to condone any use of force (coercion) that constrains individual flourishing.

However, we shouldn’t judge Aristotle too harshly for his wobbly views about what is natural. It is worth remembering, that a more coherent view of natural law didn’t prevent eminent philosophers who lived much later from also endorsing slavery. For example, Thomas Aquinas, who lived over 1500 years after Aristotle, also endorsed slavery despite holding the view that the first precept of the natural law is to do good and avoid evil.

A question worth exploring further is the extent to which Aristotle’s views on the potential for individual human flourishing played a role in the eventual recognition of the natural rights of individuals, via Aquinas’ endorsement of those views in his natural law theory of morality.