Sunday, 6 December 2009

Globalisation or localisation?


Ricardo showed how comparative advantage means everyone benefits from free trade. The case is solid: and there is the case for globalisation. Done. Or is it?

There is a remarkable book review by a fellow called Sean Gabb, which changed the way I look at the issue. It’s a review of a book called “Organization Theory” by Kevin Carson.

The most important issue here, and it really is hugely important, is that what we have in the UK and indeed the West in general, is not a market economy, in the sense that economists envision one. Indeed it never has been anything like it. We are not an economy with a government tacked onto it. We are a society with government, both national and international, running all the way through it like layers of sclerotic fat run through a cirrhotic liver. Indeed, as Gerald Celente is fond of pointing out, the merger of state and corporate powers is called fascism.

One way of examining this issue is to look at the massive corporations we have now and ask why they are so big, and if they would be this way in the absence of a state. Would we have Tesco, Walmart, and giant pharmaceutical companies, for instance?

The answer is no. And the above book and review explain why.

The standard justification given for the proliferation of large firms is from Ronald Coase, who argued that they lower transactions costs. Larger firms generate economies of scale.

According to this analysis, firms grow large so far as their lower internal transaction costs make them more efficient than their smaller competitors. And there is an obvious temptation to regard size in a market economy as evidence of greater efficiency. Against this analysis and its conclusions, Mr Carson argues that the point at which internal transaction costs become equal to the costs of transactions via the market has been artificially raised by state intervention. There are few objective benefits in size. Lowest long run average cost is often achieved by rather small scale production methods. There is little evidence that large factories are more efficient than small factories. There is little evidence that large firms are more innovative than small firms. Anyone who looks inside a large firm will see information and management and resource allocation problems similar to those described by Hayek and von Mises in their work on socialist calculation.

If large firms predominate, it is not because they are the outcome of free market forces. Rather, they are called into being by systematic distortions of the market that amount to a subsidy on size. These distortions include the following:

First, there is subsidised transport and communication infrastructure. According to Mr Carson,

[i]t’s… important to remember that whatever reductions in unit production cost results from internal economies of large-scale production is to some extent offset by the dis-economies of large-scale distribution.[p.34]

The British and American railway networks, for example, were built in the nineteenth century by private companies. However, investment was only made profitable by compulsory purchase laws, or actual grants of land. Without this help, the returns on investment – never very exciting in any event – would in at least most cases have been negative.

As Mr Carson says,

If production on the scale promoted by infrastructure subsidies were actually efficient enough to compensate for real distribution costs, the manufacturers would have presented enough effective demand for such long-distance shipping at actual costs to pay for it without government intervention. …[a]n apparent ‘efficiency’ that presents a positive ledger balance only by shifting and concealing real costs, is really no ‘efficiency’ at all. Costs can be shifted, but they cannot be destroyed.[p.69]

The same can be said of every communications network from national post offices to the Internet. They widen markets at far less than full cost to those who benefit from it.
Second, there are patents and copyrights.
Intellectual property rights are essentially artificial property rights. They do not derive from scarcity, but from the creation of scarcity. They are essentially grants of monopoly privilege. They can only be created by the State. They can only be enforced by limiting what people can do with physical objects they have bought.
The claim that rights to intellectual property encourage the creation of intellectual property is unfounded. There is much evidence that firms would continue to develop new products in the absence of patent protection.

Third, regulations:
A regulation, in essence, is a state-enforced cartel in which the members agree to cease competition in a particular area of quality or safety, and instead agree on a uniform standard which they establish through the state. And unlike private cartels, which are unstable, no member can seek an advantage by defecting.[p.80]
Fourth, incorporation laws:
while the firm has unlimited liability, the liability of its owners is limited to the extent of their investment. This privilege alone allows incorporated firms to raise large amounts of capital on the financial markets. Yet, while the shareholders theoretically own them, such firms in practice are the property of their managers, who feel none of the moral responsibility that comes with ownership.
Unless unlucky or badly run, incorporated firms can last forever, and can grow bigger and bigger and more bureaucratic in their organisation.

Until they don’t. Hi Enron, Worldcom, Lehman Brothers... and y’know, the rest. Rest in Pieces.

By these and other means, Mr Carson says, size of business organisation has been systematically encouraged by the State. Now, those who gain from such enlargement have not been passive or accidental beneficiaries... The world in which we live has been deliberately shaped over the past few hundred years or more by plutocratic elites that have wanted stable markets and docile workers and suppliers. These elites comprise the managerial and rentier classes, politicians and bureaucrats, and the various intellectuals who propagate the ideologies that justify the ruling class as a whole.

Quite so.

The growth of large firms as the dominant business unit has required the virtual conscription of millions of people into hierarchical structures, with the suppression – or at least the discouragement – of their individuality. Apart from regular cash payments, the reward for an almost military deference to authority has been promises of job security and paid holidays and pensions and healthcare. In America, this was made into a cartelised cost on big business. In England and most other countries, it was directly assumed by the State.

And here’s the payoff:

We do not live in anything approaching a market order. The state of affairs in which we live is best described as a kinder, gentler feudalism. Those at the top possess fabulous, almost risk free wealth. Nearly everyone else is attached, in extended patterns of fealty, to large organisations – big business firms, state bureaucracies, welfare services, and the like.

The reason all this is so important is that so many conservatives, libertarians, etc who should be on board with this get it wrong, with disastrous effects:

The Chicago libertarians for the most part seem to define a free market as little more than “Tesco/Walmart minus the State”. They readily accept that there are groups benefiting from state action, but do not accept the existence of a “ruling class”. And they deny that big business forms part of a system that is inherently exploitative.

So, to look a little further:
While irrefutable, however, the theory of comparative cost is usually argued on the assumption of zero transport costs. Once these are taken into account, extended foreign trade may become far less profitable. Richard Cobden once observed that British agriculture was already protected by the high cost of shipping corn from Russia. What has happened since then is the growth of a vast international transport system built or subsidised by the taxpayers. This has brought down transport costs paid at the point of use and enabled the growth of unnaturally large patterns of international trade.

I live in one of the main apple growing regions of England. Even in the autumn, I can go into my local supermarket and find apples on sale from South Africa, from Chile, and even from China. When I drive home every summer from Slovakia, I find myself stuck on the smaller German motorways behind lorries carrying food from Turkey. How much of this trade would make economic sense if price in the shops reflected the full cost of transport? How much would there be if the motorways had not been built by the State, with powers of compulsory purchase and with grants of immunity against tort for pollution? How much would there be if transport companies had to pay the full cost of the wear their lorries made on the roads? How much would there be if the costs of stabilising the Middle East were reflected in the price of commercial diesel?

Adam Smith pointed out that grapes could be grown in Scotland, but that the opportunity costs made this a foolish use of resources. Perhaps it is. But perhaps if the full costs of production and transport entered into price, might it not make better sense to grow our own exotic fruits – especially given our more advanced agricultural techniques? Does it make real economic sense to import every consumer good imaginable from China and the Far East?

... As said, many libertarians recognise that big business is inherently exploitative. But we have also assumed that it is reasonably productive within its own terms. It is not. As already mentioned, Mr Carson believes that large firms show many of the weaknesses long since indentified in centrally-planned economies. He says:

Individual human beings make optimal decisions only when they internalize the costs and benefits of their own decisions. The larger the organization, the more the authority to make decisions is separated both from the negative consequences and from the direct knowledge of the results. And in a hierarchy, the consequences of the irrational and misinformed decisions of those at the top are borne by the people who are actually doing the work. The direct producers, who know what’s going on and experience directly the consequences of decisions, have no direct control of those decisions.[p.193]

The results of this are an obsession at the top with targets that can be measured and an indifference to local understandings of how work may best be done. Profitability crises are managed by thinly-veiled attempts to make people work harder for less, by “downsizings” that cut measurable costs while destroying intangible patterns of human capital, greater incentives to management to restore profitability, and an interest in fad management theories that talk of “empowerment” and decentralised control, but are just shifts in legitimising ideology to jolly the workers along.

Ring any bells?

Every complaint about employers’ restrictions on their employees’ freedom of speech and association outside of work is met with the response: ‘Well, nobody’s forcing you to work there.’

Well, yes and no. We market anarchists do not propose the imposition of any external constraint on what terms an employer can set as a condition of employment. The question is not whether the state should permit employers to set such conditions, but what kind of a market allows it?

Just how godawful do the other ‘options’ have to be before somebody’s desperate enough to take a job, and hold onto it like grim death, under conditions of stagnant pay, where (thanks to downsizing and speedups) they’re doing their own work plus that of a former coworker?

But never mind those things. How do things get to the point where people are lined up to compete for jobs where they can be forbidden to associate with coworkers away from work, where even squalid, low-paying retail jobs can involve being on-call 24/7, where employees can’t attend political meetings without keeping an eye out for an informer, or can’t blog under their own names without living in fear that they’re a websearch away from termination?[pp.402-03]

This is brilliant stuff, and yet it all seems so obvious - which is part of its brilliance, and it partners very well with Bob Black's essay referenced in my first posting. Of course it’s slavery, or feudalism, pure and simple, but in a modern form. The surprising thing here is we are half in agreement with the Leftie lot:

The problem with all those patronising Labour apparatchiks and the scum in donkey jackets selling their newspapers outside Underground stations is their prescription. Their diagnosis that ordinary working people are exploited in a system that transfers wealth upwards is broadly correct.

But how would gutting this system really help the "exploited masses"?

...“[c]onsider” says Mr Carson,
the process of running a small, informal brew pub or restaurant out of your home, under a genuine free market regime. Buying a brewing kettle and a few small fermenting tanks for your basement, using a few tables in an extra room as a public restaurant area, etc., would require at most a bank loan for a few thousand dollars. And with that capital outlay, you could probably service the debt with the margin from a few customers a week. A modest level of business on evenings and weekends, probably drawn from among your existing circle of acquaintances, would enable you to initially shift some of your working hours from wage labor to work in the restaurant, with the possibility of gradually phasing out wage labor altogether or scaling back to part time, as you built up a customer base. In this and many other lines of business, the minimal entry costs and capital outlay mean that the minimum turnover required to pay the overhead and stay in business would be quite modest. In that case, a lot more people would be able to start small businesses for supplementary income and gradually shift some of their wage work to self employment, with minimal risk or sunk costs.[p.549]

This does not talk – as many libertarians do when considering small businesses – about something that might turn its owner into a millionaire. It talks instead about micro-businesses that will never make anyone rich, but will simply make their owners independent of a system that turns them into serfs and bribes them with welfare handouts into becoming electoral fodder for the farce that is plutocratic social democracy. However, all this is presently illegal. There are taxes and regulations that exclude this sort of micro-business. The benefit that libertarianism holds out to the Tesco checkout assistant is not lower taxes on her pitiful and already mostly untaxed salary, but the chance not to work for Tesco.

The problem, as is often the case with politics, is doublespeak. Globalisation can mean, on the one hand that commerce gets controlled by a bunch of global elites who want to socially engineer everyone but themselves. On the other hand, it could also mean that people are able, if they so wish, to trade with whoever they like whether they’re outside of the nation’s borders or not. I've no problem with the second definition. But
given the way the world is right now, I concede that globalisation is more likely to mean the former.

I guess free trade should never have been looked at in terms of nations anyway. All "genuine" trade has always taken place between individuals.

As Celente has often said, America was great when it was Mom and Pop, not Walmart. When it was Main Street, not Wall Street. He advocates not buying from China. Unfortunately, it is up to all of us to react to incentives which are  laid down. If governments subsidise the continued and unnecessary shipping of endless goods, what are we to do?

Still, it's all coming to an end. Governments around the world are broke, and we're going to return to a little localism. But when that happens, things will be so bad that we may just miss the days of globalism.

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