Nightcap

  1. Nationalization is as American as apple pie Thomas Hanna, Jacobin
  2. In China, every day is Kristallnacht Fred Hiatt, Washington Post
  3. How Mengzi bested the Golden Rule Eric Schwitzgebel, Aeon
  4. Countries are not anecdotes Scott Sumner, EconLog

Electricity in Quebec before Nationalization (1919 to 1939)

A few weeks ago, I mentioned that  I am generally skeptical of “accepted wisdom” on many topics. “Accepted wisdom” is a construction of a stylized fact by a party with intense preferences that is gradually able to remove nuances over time to solidify its preferred narrative. The example I gave a few weeks ago concerned antitrust laws. There are many more. One of those concerns a research agenda that I laid claim to in a recent article in Atlantic Economic Journal (co-authored with my dear friend Germain Belzile): the nationalization of electricity in Quebec.

My home province of Quebec is basically one giant network of rivers well-suited for the production of hydro-electricity – a potential that was noticed in the late 19th century and led to a rapid expansion of the network. Historians (and some economists) have depicted the early electrical industry in Quebec as a “trust” (a cartel) that gouged consumers and could only be resolved, as witnessed by the neighboring province of Ontario, by nationalization (which occurred in two waves – one in 1944 and one in 1962).

In the article I published with Belzile, I argue that this narration is largely incorrect. First, before nationalization prices in Quebec were falling and were low by North American standards (see figures below). Second, production was expanding rapidly. This is in spite of the fact that taxes imposed on the electrical industry grew rapidly over time from less than 10% of total expenditures to close to 30%.  Moreover, we point out that looking at residential prices is bound to yield bad comparisons (if we can call those made above as “bad”) if there is price discrimination. The industry price discriminated and offered incredibly low prices for industrial customers (large power) than in Ontario or anywhere else in Canada  (in spite of the taxes it was operating under and the fact that Ontario subsidized its own).

We also point out that there was a dynamics of interventionism problem. The neighboring province of Ontario (more populous and richer than Quebec) nationalized its industry and set prices well below the market level which is an implicit subsidy. However, at the subsidized rate, Ontario could not supply its own demand and had to buy at the market price in Quebec. Its over-equilibrium quantity of energy demanded was transferred on the freer Quebec market, thus increasing prices on that market.

We also argue that there was wide heterogeneity of rates in Quebec that relate to the structure of municipal regulation (the level at which electricity was regulated pre-1935). The price differences depended on the political games involving rent-seeking firms and politicians (best exemplified by the case of Quebec City). Cities with high prices were places where the electrical market was heavily politicized and franchises (i.e. the contracts fixing rate schedules over long periods of time to recoup capital investment) were short and subject to holdups.

This latter point is meant for us (me and Germain) to stake a claim on future research to document the nationalization and regulation process at the municipal level and see what the effects on prices and outputs were. In a certain way, I am trying to establish a research agenda extending the skepticism of “accepted wisdom” that has emerged with the economic history of antitrust in the United States to the case of electricity trusts in Quebec. This first article is, I believe, a promising start for such an inclusion.

 

Figure2Electricity

Figure4Electricity

 

The Re-Privatization of Security (World Peace edition)

Sean McFate, a political scientist at National Defense University in Washington, DC, has a fascinating article in Aeon about the reemergence of mercenary and quasi-mercenary security firms throughout the world. The whole article is fulfilling throughout, especially if you’re a well-read anarchist or a history buff, but I wanted to highlight this tangent:

With the fall of the South African apartheid regime, unemployed soldiers from special forces units such as the 32nd Battalion and the Koevoet (‘crowbar’ in Afrikaans) special police formed the first modern private military company, appropriately named Executive Outcomes. Unlike WatchGuard, Executive Outcomes was not a military enterpriser but a true mercenary firm, waging war for the highest bidder. It operated in Angola, Mozambique, Uganda and Kenya. It offered to help stop the genocide in Rwanda in 1994, but Kofi Annan – then head of UN peacekeeping – refused, claiming ‘the world may not be ready to privatise peace’. Annan’s was an expensive ideology, given the fact that 800,000 people died. By 1998, the company closed its doors, but the mercenary market for force surged.

Two aspects are important here, one said and one unsaid. First, the unsaid. If this mercenary outfit was “waging war for the highest bidder,” why did it offer to go in to Rwanda to stop the bloodshed? I think scholars assume the worst when it comes to stateless actors and warfare. Why has Anheuser-Busch begun shipping free cans of water into Flint, MI? Why does Wal-Mart donate billions of dollars to charity? When it comes to reputation, costs may sometimes not make sense to outside observers who don’t have a sufficient understanding of benefits. Why on earth would a corporation built solely to wage war for the highest bidder be interested in offering its services to a country that would not be able to afford its services? To ask the question is to answer it, of course, but understanding incentives using a costs-benefits framework requires more effort than you might suspect.

There is simply no logical coherence to the idea that, in a world where stateless mercenary firms are the prominent form of security, violence and lawlessness will reign supreme; nor is there any evidence whatsoever to suggest that “[m]ore mercenaries means more war, as they are incentivised to start and expand wars for profit, and turn to criminality between contracts.” Indeed, as McFate notes in his excellent article, the market for security is already becoming freer and while he ends his piece on a depressing note, lamenting this indisputable fact of the present-day world, I couldn’t help but remember the now-famous graph on battle death trends produced by political scientist Jay Ulfelder (using data from the Uppsala Conflict Data Program [UCDP]), which illustrates nicely the overall decline in deaths due to warfare violence around the world:

blog battle deaths
Notice that the most deadly conflicts are the ones involving states with armies that had been nationalized?

The always excellent Max Roser and his Our World in Data project has another graph worth highlighting, with this one using data from Steven Pinker’s The Better Angels of Our Nature… and the UCDP:

blog battle deaths pinker data

Now, two graphs showing that deaths from warfare have been in decline for half a century does not necessarily mean that a freer market in security services has led directly to this overwhelmingly good news. I am confident in claiming, though, that the freeing up of security services markets, combined with the steady presence of a few, still-powerful nationalized armies has led to a reduction in war-related deaths (and violent conflict in general). Both graphs illustrate well what happens when there are too many nationalized armies vying for power and prestige. (It is worth noting here that the main goal of diplomats and policymakers everywhere, no matter their ideological orientation or citizenship status, is still to avoid another world war.)

Second, the said. Annan’s refusal to decriminalize mercenary activities led directly to the 800,000 Rwandan deaths. How is this moral failing any better than when a mercenary firm breaks its contract and ends up killing a few dozen more people than it was supposed to? Again, the graphs are useful here: When conflict is nationalized, everybody suffers; when it is privatized, atrocities happen but not on the same scale we have seen with nationalized conflicts. It’s not even close. Annan’s short-sightedness reminds me of economist Scott Sumner’s 2012 summary of Hillary Clinton’s view of the War on Drugs:

[…] in response to a final question on drugs (from a Latin American reporter), she said drug legalization would do no good because drug dealers are really bad people, and they would simply do other crimes. No discussion of how America’s murder rate fell in half after alcohol was legalized in 1933.

Like drug use, the privatization of security services causes many people, well-educated or otherwise, to bristle at the notion without quite thinking through its logical implications. While ugly, mercenary firms are far more efficient and effective at quelling “bush wars” than are nationalized armies and, in turn, mercenary outfits are far less capable of sowing the type of destruction that nationalized armies routinely carry out.

I don’t think that a world with a few nationalized armies and an abundance of mercenary firms is necessarily the best option going forward, though. It is, however, a better option than most scholars and analysts give it credit for. In fact, it’s the best option at the moment, and while the status quo may sometimes be ugly, remember the graphs. Privatization of security services has contributed, at least in part, to a more peaceful and less violent world.

In order to move forward from this status quo it is best not lament the way things are going, but to acknowledge that things are the way they are for a reason, and then look for avenues to alter the status quo without falling back on a blanket policy like nationalizing security services again. The horrors of the World Wars should still be fresh in our minds, and the horrors of those wars were enabled and encouraged by nationalized security forces.

The best way to move forward is by looking at where these “bush wars” are taking place and begin thinking about ways to incorporate these regions into the global order (such as it is). This policy represents a departure from traditional post-war thinking about international relations, but it doesn’t make it radical or unfeasible. Indeed, there is a long tradition of republican thinking in Western thought pertaining to international relations. The West needs to start recognizing the legitimacy of secessionist sentiments in the post-colonial world, even if it means friction with Russia and China.

Washington and Brussels will have to endure charges of hypocrisy when it comes to ignoring the lobbying efforts of places like Tibet and Dagestan, but Biafra should have become a member state of the United Nations long ago. Baluchistan should have access independent of Pakistan and Iran to the IMF and World Bank. Two or three soccer teams from the region known as Kurdistan could easily be present in all major FIFA tournaments. Examples abound throughout the world. The West should also be open to recognizing arguments made by Russia and China for the independence of regions. There is no good reason why Western diplomats should ignore Moscow’s recognition of places like South Ossetia and Donetsk; doing so only hardens Russia’s stance on recognizing secession in parts of the world where its influence is limited or non-existent and forces the West into bed with unsavory post-socialist regimes.

The West needs to start being more inclusive when it comes to its own federal and republican institutions, too. Morocco, for example, should have had its 1987 application to join the European Union taken seriously (same goes for Turkey). The US federation needs to be actively courting polities like Puerto Rico, Coahuila, Alberta, and Micronesia to join the union. Both the EU and US are contracts designed to dampen violent conflict by fostering diplomatic, economic, and cultural intercourse between provincial polities. The reasoning behind exclusionary policies simply doesn’t answer why these republican, supranational organizations should not be actively recruiting neighboring or geopolitically useful administrative units into their representative systems.

Without this change in mindset the status quo will continue, which again if we remember the graphs is not all that bad, but something worse may happen: There could be a reversion to the blanket nationalization of security services that we saw during World Wars I and II.