Who are the protectionists in Africa?

Rwanda, a country that thankfully avoided “humanitarian” military intervention by Western powers during a nasty killing spree in the 90s, is leading the charge on free trade in Africa. Of the 54 countries on the African continent, 44 have signed the agreement, but the traditional economic giants of the continent – Nigeria and South Africa – have not. Surprisingly, Botswana, an example often cited by economists as an African success story, has not signed it either.

CNBC reports on why Nigeria has so far refused to join the agreement, citing a consultant who specializes in global trade:

There is a general sentiment among (labor unions and industry bodies) that Nigeria’s export capacity in non-oil sectors isn’t sufficiently robust yet to expose itself to external competition.

Unions and “buy local” capitalists: The scourge of prosperity and progress worldwide, but also not much of a surprise.

What will be interesting to see is where this bold experiment leads. How can 44 countries with poor institutions come together to form a free trade pact? I am hoping this will lead to more states in Africa. My logic goes something like this: stronger economic ties will hasten the demise of current African states’ superficial institutions, while allowing informal institutions to flourish. Because these informal institutions are better at solving coordination problems, they’ll eventually be recognized as states. Here’s how I put it back in 2012:

A better way of looking at it, and one that I have pointed out before, is to look at Europe realize that it shares roughly the same amount  of polities as does Africa (50-ish) despite being four times smaller. I bring up the comparison with Europe because in the Old World things like ethnicity still have a strong hold on how individuals identify themselves with their various social spheres. Rather than the 50-ish number of  polities in Africa that we have today, a better way of solving Africa’s problems would be to let the polities currently in place dissolve into 400 polities. Or 500. Then, I think, Africans would know peace and prosperity.

I’d add, today, that this would only be possible if the links built by this free trade pact endure. Economic integration is vital to the dissolution of Africa’s despotic states. (h/t Barry)

Nightcap

  1. Revisiting Bosnia Elliot Short, War is Boring
  2. Liberals and conservatives are wrong on guns Rick Weber, NOL
  3. Why doesn’t economics progress? Arnold Kling, askblog
  4. The Balance of the Federation: Canada 1870 to 2016 Livio di Matteo, Worthwhile Canadian Initiative

A free press, the Left, and the FBI

I taught for thirty years. That makes me an expert on verbal dishonesty. I can tell the difference between a student who let the dog eat his assignment and a student who made his dog eat his assignment.

And, I am saying this in connection to?

I am eager to read the Democrats’ and, perhaps, the FBI’s rejoinder to the memo they described as riddled with falsehoods and with omissions. I have some expectation that they will dig themselves in deeper when they try to make up for the omissions. You read it here first; please, give me credit.

The NYT and the Washington Post are on editorial record asking for prior censorship on the famous memo. It’s unheard of in times of peace. Two major leftist newspapers asked the government to violate the First Amendment, the very constitutional disposition that guarantees freedom of the press. The rank and file “liberals” I know and pay attention to in real life and on Facebook also fought transparency, in this case. Myself, and the conservatives I know, want the full sunlight on this and related matters.

I saw on CNN that House Representatives oppose releasing the Democrats’ rejoinder or version of the same memo. If that’s true (if), I am totally against this stance. I want to know everything; I don’t need babysitting of any kind.

Lunchtime Links

  1. Interview with a secessionist
  2. Ducking questions about capitalism
  3. The perverse seductiveness of Fernando Pessoa
  4. Yet in this simple task, a doffer in the USA doffed 6 times as much per hour as an adult Indian doffer.”
  5. Conflicted thoughts on women in medicine
  6. The Devil You Know vs The Market For Lemons (car problems)

Some Thoughts on State Capacity

State capacity is an important topic and the subject of much recent attention in both development economics and economic history. Together with Noel Johnson I’ve recently written a survey article on the topic (here). At the same time, many libertarians and classical liberals are uncomfortable with the concept (see here and here). I think these criticisms are useful but misplaced. Addressing them will hopefully move the debate forward in a useful fashion.

Here I will just focus one issue. This is the argument recently made by Alex Salter that state capacity is a black box. Alex notes correctly that we have a detailed and convincing theory for how markets can lead to economic growth (by directing resources to their most efficient use). In contrast, according to Alex:

“State capacity, by itself, addresses neither the information issue nor the incentive issue. While governance institutions obviously began centralizing at the beginning of the modern era, this is just a morphological description of what happened to institutions. On its own, that’s insufficient as a causal explanation”.

I think Alex and other critics are on the wrong track here. State capacity is not alternative explanation for economic growth to that offered by markets. The relevant question is what impeded market development before, say, 1700, and what enabled the growth of markets after around 1700. The evidence provided by a body of research suggests that prior to 1700 market development was impeded by political fragmentation both within and between states. Critics of the state capacity argument should engage with this literature.

A second claim Alex makes is that we lack a theory for why the more centralized states that arose after 1700 were less rent-seeking and predatory than their weaker and more internally fragmented predecessors. But in fact we have a fairly good understanding of many of the mechanisms responsible for the demise of the more costly forms of recent seeking that characterized medieval and early modern Europe. This understanding is based on the work of James Buchanan and Mancur Olson.

The basic argument is this. Medieval and early modern states were mostly devices for rent-extraction and rent-seeking. But this rent-extraction and rent-seeking was largely decentralized. They collected taxes through a variety of costly and inefficient means (such as selling monopolies). They then spent the tax revenue on costly wars.

Decentralized rent-extraction was costly and inefficient. For example, it is well known that weights and measures varied from place to place in preindustrial Europe. What is less well known is that there were institutional reasons for this, as each local lord wanted to use his own measures in order to extract more surplus from the peasants who were forced to grind their grain using his mill. Local cities similarly used their own systems of weights and measures in order to extract surplus from traveling merchants. This benefited each local lord and city authority but imposed a large deadweight loss on the economy at large.

The logic of internal tariffs was similar. Each local lord or city would choose their internal tariffs in order to maximize their own income. But we know from elementary microeconomics that in this setting each local authority will set these tariffs “too high” because they will not take into account the effect of their tax rate on the tax revenue of their neighbors who also set their tariffs too high.

When early modern European rulers invested in state capacity, they sought to abolish or restrict such internal tariffs, to impose uniform taxes, and to standardize weights and measures. This resulted in a reduction in deadweight loss as when the king set the tax rate he considered the tax revenue he gets from his entire realm, and internalized the negative externality mentioned above.  The reasoning is identical to that which states that a single combined monopolist may be preferable to an up-stream and down-stream monopolist. When it comes to a public bad (like rent-seeking) a monopolist is preferable to competition.

Rent-Seeking Rebels of 1776

Since yesterday was Independence Day, I thought I should share a recent piece of research I made available. A few months ago, I completed a working paper which has now been accepted as a book chapter regarding public choice theory insights for American economic history (of which I talked about before).  That paper simply argued that the American Revolutionary War that led to independence partly resulted from strings of rent-seeking actions (disclaimer: the title of the blog post was chosen to attract attention).

The first element of that string is that the Americans were given a relatively high level of autonomy over their own affairs. However, that autonomy did not come with full financial responsibility.  In fact, the American colonists were still net beneficiaries of imperial finance. As the long period of peace that lasted from 1713 to 1740 ended, the British started to spend increasingly larger sums for the defense of the colonies. This meant that the British were technically inciting (by subsidizing the defense) the colonists to take aggressive measures that may benefit them (i.e. raid instead of trade). Indeed, the benefits of any land seizure by conflict would large fall in their lap while the British ended up with the bill.

The second element is the French colony of Acadia (in modern day Nova Scotia and New Brunswick). I say “French”, but it wasn’t really under French rule. Until 1713, it was nominally under French rule but the colony of a few thousands was in effect a “stateless” society since the reach of the French state was non-existent (most of the colonial administration that took place in French North America was in the colony of Quebec). In any case, the French government cared very little for that colony.   After 1713, it became a British colony but again the rule was nominal and the British tolerated a conditional oath of loyalty (which was basically an oath of neutrality speaking to the limited ability of the crown to enforce its desires in the colony). However, it was probably one of the most prosperous colonies of the French crown and one where – and this is admitted by historians – the colonists were on the friendliest of terms with the Native Indians. Complex trading networks emerged which allowed the Acadians to acquire land rights from the native tribes in exchange for agricultural goods which would be harvested thanks to sophisticated irrigation systems.  These lands were incredibly rich and they caught the attention of American colonists who wanted to expel the French colonists who, to top it off, were friendly with the natives. This led to a drive to actually deport them. When deportation occurred in 1755 (half the French population was deported), the lands were largely seized by American settlers and British settlers in Nova Scotia. They got all the benefits. However, the crown paid for the military expenses (they were considerable) and it was done against the wishes of the imperial government as an initiative of the local governments of Massachusetts and Nova Scotia. This was clearly a rent-seeking action.

The third link is that in England, the governing coalitions included government creditors who had a strong incentives to control government spending especially given the constraints imposed by debt-financing the intermittent war with the French.  These creditors saw the combination of local autonomy and the lack of financial responsibility for that autonomy as a call to centralize management of the empire and avoid such problems in the future. This drive towards centralization was a key factor, according to historians like J.P. Greene,  in the initiation of the revolution. It was also a result of rent-seeking on the part of actors in England to protect their own interest.

As such, the history of the American revolution must rely in part on a public choice contribution in the form of rent-seeking which paints the revolution in a different (and less glorious) light.

On British Public Debt, the American Revolution and the Acadian Expulsion of 1755

I have a new working paper out there on the role of the Acadian expulsion of 1755 in fostering the American revolution.  Most Americans will not know about the expulsion of a large share of the French-speaking population (known as the Acadians) of the Maritimes provinces of Canada during the French and Indian Wars.

Basically, I argue that the policy of deportation was pushed by New England and Nova Scotia settlers who wanted the well-irrigated (thanks to an incredibly sophisticated – given the context of a capital-scarce frontier economy – dyking system) farms of the Acadians. Arguing that the French population under nominal British rule had only sworn an oath of neutrality, they represented a threat to British security, the settlers pushed hard for the expulsion. However, the deportation was not approved by London and was largely the result of colonial decisions rather than Imperial decisions. The problem was that the financial burden of the operation (equal to between 32% of 38% of the expenditures on North America – and that’s a conservative estimate) were borne by England, not the colonies.

This fits well, I argue, into a public choice framework. Rent-seeking settlers pushed for the adoption of a policy whose costs were spread over a large population (that of Britain) but whose benefits they were the sole reapers.

The problem is that this, as I have argued elsewhere, was a key moment in British Imperial history as it contributed to the idea that London had to end the era of “salutary neglect” in favor of a more active management of its colonies.  The attempt to centralize management of the British Empire, in order to best prioritize resources in a time of rising public debt and high expenditures level in the wars against the French, was a key factor in the initiation of the American Revolution.

Moreover, the response from Britain was itself a rent-seeking solution. As David Stasavage has documented, government creditors in England became well-embedded inside the British governmental structure in order to minimize default risks and better control expenses. These creditors were a crucial part of the coalition structure that led to the long Whig Supremacy over British politics (more than half a century). In that coalition, they lobbied for policies that advantaged them as creditors. The response to the Acadian expulsion debacle (for which London paid even though it did not approve it and considered the Acadian theatre of operation to be minor and inconsequential) should thus be seen also as a rent-seeking process.

As such, it means that there is a series of factors, well embedded inside broader public choice theory, that can contribute to an explanation of the initiation of the American Revolution. It is not by any means a complete explanation, but it offers a strong partial contribution that considers the incentives behind the ideas.

Again, the paper can be consulted here or here.

How dairy farmers unions in Canada are distorting the facts about supply management

Under heat recently as President Trump has criticized supply management in Canada and retaliated against it, the different provincial associations representing dairy farmers have moved on the offensive. To promote the virtues of this system meant to reduce production in order to prop up prices through the use of trade tariffs, production quotas and price controls (how can we call those virtues), these unions have produced numerous infographics to make their case. It is even part of what they dub their These-infographics-show-that-diary-prices-are-lower-in-Canada-than-elsewhere, that milk is still a cheap drink relative to other type of drinks and those prices, supposedly, increase more slowly than elsewhere. All of these graphics are dishonest and must be dismantled.

The most egregious of these infographics – present in the “lobby day kit” – shows the price of milk in Australia (1.55 CAD), Canada (1.45 CAD) and New Zealand (1.65 CAD). They are seemingly using 2014 prices. First of all, they use data that conflicts massively with the reports of Statistics Canada that suggest that milk prices hover between 2.33$ to 2.48$ per liter.  Their data is provided by AC Nielsen but no justification is presented as to why they are better than Statistics Canada. The truth is that it is not better. Participants in Nielsen surveys come from a self-selected pool of storeowners who wish to participate and are then selected by Nielsen to be part of the data collection. Then, they can record prices. It should be mentioned that not all regions of Canada are covered in the data. Although the Nielsen data does have some uses (especially with regards to market studies), it hardly measures up Statistics Canada when comes the time to evaluate price levels. This is because the government agency collects information from all regions and tries a broader sweep of retailers in order to create the consumer price index.

But an even larger problem is that, in their comparison of prices, they don’t mention that New Zealand taxes milk. In New Zealand, all food items are subjected to sales tax, which is not the case in Canada and Australia. Hence, when they compare retail prices, they are comparing prices that exclude taxes and prices that include taxes. One would like to find if they acknowledge this fact in the methodological mentions, but there are none!

Using prices available at Numbeo.com and Expatisan.com and the exchange rates made available by the Bank of Canada, we can correct for this problem of theirs. Simply changing prices source leads to a massively different result with regards to Australia whose milk prices are lower than in Canada. Secondly, once we adjust for the sales tax in New Zealand, we find that prices in New Zealand are lower than in Canada. In fact they are lower than in one of Canada’s cheapest market, Montreal (let alone Toronto or Vancouver).  So the infographic they show in order to lobby governments is a fabrication.

Table 1: The real price of milk

Using Numbeo.com (regular milk)
Unadjusted Adjusted for taxes
 Australia  $           1.59  $                 1.59
 New Zealand  $           2.26  $                 1.97
 Canada  $           1.99  $                 1.99
 Using Expatisan.com (whole milk)
 Unadjusted  Adjusted for taxes
 Sydney  $           1.82  $                 1.47
 Wellington  $           2.42  $                 2.10
 Montreal  $           2.87  $                 2.87

Source: Numbeo.com and Expatisan.com, consulted May 16th 2014 and the Bank of Canada’s currency converter. Note: using the Statistics Canada price would make Canada’s situation even worse by comparison.

This is part of a pattern of deceit since they also massage data for numerous other graphs that are presented to Canadians in efforts to convince them of the virtues of supply management. One other example is an infographic that presents a figure of nominal milk prices in Australia before and after the abolition of supply management. Given that prices seem more volatile after 2000 and that they increase more steeply, they try to make us believe that liberalization was a failure. This is not the case. Any sensible policy analyst would deflate nominal prices by the general price index to control for inflation. When one does just that using the data from the Australian Bureau of Statistics, one sees that real prices stabilized in the first ten years of deregulation after increasing roughly 15% in the decade prior. And since 2010, real prices have been falling constantly.

Other examples abound. In one instance, the Quebec union of dairy farmers circulated an infographic meant to show that nominal prices for dairy products increased faster in the United States than in Canada. Again, they omit inflation. Since 1990 (their own starting date), prices of dairy products have risen more slowly than inflation – indicating a decline in real prices. In Canada, the opposite occurred – inflation increased more slowly than dairy prices indicating an increase of the real price.

The debate around supply management is complicated. The policy course to adopt in order to improve agricultural productivity and lower prices for Canadians is hard to pinpoint. But whatever position one may hold, no one is well-served by statistical manipulations offered by the unions representing dairy farmers.

BC’s weekend reads

  1. Path-dependence of measuring real GDP?
  2. Technological creativity and the Great Enrichment (h/t Federico)
  3. The deadly serious accusation of being a “so-called judge”
  4. Why Congress isn’t reigning in Trump
  5. How did Germany and Austria’s elite musical institutions navigate the vicissitudes of early 20th-century European history? (review)
  6. Western nationalism and Eastern nationalism

Taxes, Free-riding, and Federation

Check out Adam Smith complaining about the rent-seeking that the UK’s North American colonies were practicing back in 1776:

The expence of the ordinary peace establishment of the colonies amounted, before the commencement of the present disturbances, to the pay of twenty regiments of foot; to the expence of the artillery, stores, and extraordinary provisions with which it was necessary to supply them; and to the expence of a very considerable naval force which was constantly kept up, in order to guard, from the smuggling vessels of other nations, the immense coast of North America, and that of our West Indian islands. The whole expence of this peace establishment was a charge upon the revenue of Great Britain, and was, at the same time, the smallest part of what the dominion of the colonies has cost the mother country. If we would know the amount of the whole, we must add to the annual expence of this peace establishment the interest of the sums which, in consequence of her considering her colonies as provinces subject to her dominion, Great Britain has upon different occasions laid out upon their defence. We must add to it, in particular, the whole expence of the late war, and a great part of that of the war which preceded it. The late war was altogether a colony quarrel, and the whole expence of it, in whatever part of the world it may have been laid out, whether in Germany or the East Indies, ought justly to be stated to the account of the colonies. It amounted to more than ninety millions sterling, including not only the new debt which was contracted, but the two shillings in the pound additional land tax, and the sums which were every year borrowed from the sinking fund.

This comes from Book 4, the third (and last) part (“Part Third”) of Chapter 7 in Smith’s famous book The Wealth of Nations (TWON). (Here is a great link to the whole chapter, courtesy of the Library of Economics and Liberty. I read the Bantam Classics version for my Honors seminar on Liberty in Western Political Thought, led by Andrew Sabl, who is currently a Visiting Professor at Yale, though I don’t have it with me so I can’t cite, let alone remember, the page numbers.)

Let me throw a little bit of historical context for this excerpt at you. Smith wrote TWON before the onset of the first Anglo-American war (TWON was published in 1776, which means it did not influence the American colonists in any way, shape, or form; think about the way information spread back in those days), and the war was largely the result of a quarrel between the UK and its North American colonies over taxation. The taxation, though, was needed in order to pay for a war (the Seven Years’ War) that the colonies had initially lobbied the British government to fight for them. The British colonies in North America had much more leeway than their French, Spanish, Portuguese, and Dutch counterparts, and a number of these colonies wanted to expand westward, into the Ohio Valley, where the French state had made claims that were recognized under international treaties.

To make a long story short: Several colonial factions picked a fight with the French and their Native American allies, and this little schoolyard brawl turned into a global war (with fighting in North America, India, Africa, South America, and East Asia) that saw the United Kingdom become the world’s preeminent imperial power and France lose almost all of its North American colonial possessions.* When the war was over, the British parliament wanted to tax the colonies to pay for their fair share of the war, and the colonists said “No taxation without representation!” Smith summed up the situation as thus:

In order to put Great Britain upon a footing of equality with her own colonies […] it seems necessary, upon the scheme of taxing them by parliamentary requisition, that parliament should have some means of rendering its requisitions immediately effectual, in case the colony assemblies should attempt to evade or reject them […] The parliament of Great Britain insists upon taxing the colonies; and they refuse to be taxed by a Parliament in which they are not represented.

This is quite the conundrum, and Smith put forth a proposal that I found quite novel when I first read it as an undergraduate. But before I get to his proposal, I want to make sure that everyone understands the situation here. The UK fought an expensive war at the behest of its colonies, and the colonies, once the war was over, refused to pay for it. Sound familiar? It should. Today the United States finds itself in this situation often (just replace the word “colonies” with “allies”).

Smith proposed the following deal instead of war or civil oppression (such as economic sanctions):

If to each colony […] Great Britain should allow such a number of representatives as suited the proportion of what is contributed to the public revenue of the empire, in consequence of its being subjected to the same taxes, and in compensation admitted to the same freedom of trade with its fellow-subjects at home. [Were British America] to send fifty or sixty new representatives to parliament, […] there is not the least probability that the British constitution would be hurt by the union of Great Britain with her colonies. That constitution, on the contrary, would be completed by it, and seems to be imperfect without it. The assembly which deliberates and decides concerning the affairs of every part of the empire, in order to be properly informed, ought certainly to have representatives from every part of it. That this union, however, could be easily effectuated, or that difficulties and great difficulties might not occur in the execution, I do not pretend. I have yet heard of none, however, which appear insurmountable. The principal perhaps arise, not from the nature of things, but from the prejudices and opinions of the people both on this and on the other side of the Atlantic. […]

Why didn’t the UK just federate with its North American colonies? Smith cited British fears of an unbalanced political constitution that the North American colonies might bring to such a union, and North American fears of being completely dominated by a faraway parliament were they to join such a federation. He countered both fears well, but check out what he predicted would happen if such a federation were to actually take place:

The distance of America from the seat of government […] would not be of very long continuance. Such has hitherto been the rapid progress of that country in wealth, population, and improvement, that in the course of little more than a century, perhaps, the produce of American [taxation] might exceed that of British taxation. The seat of the empire would then naturally remove itself to that part of the empire which contributed most to the general defence and support of the whole.

Interesting, right? Smith argued that the American colonies would become so rich and so populous that the capital of his proposed British federation would “naturally” move from London to somewhere in North America.

Smith was wrong in a general way, but correct in an even more general way. Let me explain.

Smith was wrong because the United States – once separated from the United Kingdom – evolved into the wealthiest, most innovative society the world has ever known. The reason for this is the aristocratic upper house of a legislative institution (“Senate”) that the 13 states had to create in order for all of them to join a federation. If Smith had had his way, the world would have never known the American Senate, and I doubt very much that the 13 colonies would have grown to become as innovative and wealthy as they are today without this vital institution of governance.

Smith was also wrong to make his argument for such a federation to be based on tax revenue rather than principled representation (though see Warren’s infamous post arguing for just such a proposal). The tax revenue argument might be more economically efficient, but it would not give polities seeking federal bonds the guarantee of some sort of equality (two representatives in the aristocratic chamber of the legislative assembly) that they would need to join such a federation. On these two points Smith’s argument was wrong, but what did he and other republicans and federalists get right?

To answer that I think it’s best to ask another question: What would happen if the UK and the US were to federate today?

The UK would be the poorest state in the union (as measured by GDP PPP per capita), if it were admitted as one state.

The stark difference in living standards doesn’t stop there, though. Suppose the SNP finally gets its way and Scotland leaves the UK. Even if England (intl$ 32,669), Wales (intl$ 25,947), and Northern Ireland (intl$ 27,573) were admitted into the US as three separate states, they would all be at the bottom of the living standards barrel. Were Scotland to go along with the other polities in the UK and federate with the US as a separate state, she would rank second-to-last (intl$ 33,791), just in front of Mississippi but behind Idaho. The rankings would look like this:

49. Idaho

50. Scotland

51. Mississippi

52. England

53. Northern Ireland

54. Wales

Smith’s argument suddenly looks a whole lot better, right? At least if you think living standards as they are measured by economists are a good way to gauge the overall health and wealth of a given society.

A federation is basically a huge, actual free trade zone (both capital and labor can move freely) coupled with a binding military pact and some institutions that allow factions to openly argue and contest for spoils that end up in a state’s treasury, but that’s not what the US has with any of its military allies or trading partners. What I find interesting is that the objections to federation between the UK and its North American colonies that Smith listed are essentially the same ones that crop up when such a federation is proposed between the US and its various allies and partners. The difference between now and then, though, is the Senate. Sending representatives based purely on population or tax revenue would most likely contribute to an unbalanced political constitution, but having two guaranteed representatives in a political body that’s heavily aristocratic and lightly democratic would surely guarantee an equality that all sides could eventually agree upon.

There is also an interesting cultural development to think about as well. The states in Western Europe and East Asia sans China have helped to develop a political culture that is more closely aligned with the one found in the US, Canada, and Australia/New Zealand, one where citizenship trumps ethnic identity. Identity based on citizenship is not as strong as the one found in the Anglo-Saxon world, and ethnic differences do pop up from time to time (largely due to linguistic differences), but the states of Western Europe and East Asia have taken many steps in the right direction to help eradicate the parochial tribalism that has long plagued European and Asian societies and replace it with citizenship. Take a look at the political constituencies of the following three countries:

blog-2013-elections-germany
Germany’s 2013 federal elections (source)
blog-2016-elections-south-korea
South Korea’s 2016 legislative election (source)
blog-2013-elections-italy
Italy’s 2013 legislative election (source)

They are largely based on a Left-Right divide rather than the ethnic ones we find in less economically-developed, less politically-integrated, post-colonial states. This Left-Right divide would fit in perfectly with the Madisonian constitution, as administrative units (i.e. Northern Ireland, Gangwon, Bavaria, or Trentino instead of the UK, South Korea, Germany, or Italy) could be added in a manner so as not to upset the balance between Left and Right currently found in the US. Political coalitions would wax and wane with time, of course, but if we want a world where the East Asians and Western Europeans pay their fair share, and where they are protected from Moscow and Beijing, then federation is as moderately radical as you can get.

Just ask Adam Smith.

From the Comments: The Contribution of American Allies to Pax Americana

Dr Stocker answers my concerns about free-riding and rent seeking with this gem:

Good points Brandon. On the rent seeking, I think you are broadly correct, but I would offer two qualifications. European nations/the EU often foot a lot of the bill/take on associated civilian tasks where America has taken military action, so that the US is not subsidising the defence and security needs of Europe quite as much as it might seem. So for example, in the Yugoslav breakup led to US military operations and a comparatively passive role for Europe, but a lot of the afterwork was taken on by Europe and there is no point in military intervention without work on building civil society to create long term security and stability. Going back a bit further to the first Gulf War/expulsion of Saddam from Kuwait, Germany and Japan did pay a lot towards the cost in return for not participating. Despite [this] they got a lot of abuse in the US Congress from politicians who don’t appear to understand that their non-intervention in the Gulf owed a lot to constitutions and attitudes which the US encouraged/imposed during post-World War II occupation. Recently, though European govts have been cautious in what they say in public about the Ukraine crisis and containing Putin, there is a growth in military spending and co-operation done in fairly quiet ways largely with the aim of deterring Putin from adventurism in the Baltic states. Just one example, Germany has recently taken 100 Leopard II tanks out of retirement and work is underway for the Leopard III. Moving to the Pacific, Japan is enhancing its military and weakening constitutional restrictions on the deployment of the military (imposed by the US in the post-war Constitution) in reaction to Chinese assertiveness.

While I think it is broadly correct that the US has been paying for a military burden which should be born by Europe and Japan, the situation is not as extreme as it often assumed in the US and as far as I can see is moving in a more balanced direction. In general while it is true that the US has a very impressive military machine with some impressive technology and officers, I think some Americans are a bit over confident about this. A lot of Americans, at least amongst those who take an interest in military kit, appear very convinced that the Abrams 2 is the best tank anywhere, I would suggest that in military capacity, for cost, the Leopard II is probably better (it certainly does much better in export markets) and even in absolute terms ignoring cost, the French Leclerc (which is extremely expensive) has a good claim to be the best tank around, and the Korean K2 is another strong but very expensive candidate. The Abrams is expensive, heavy, difficult to transport and difficult to keep in sufficient fuel, though it can certainly do a very good job. A lot of Americans appear to be incapable of thinking of France as anything other than a surrender monkey joke in military terms, which is really very far from the reality, as can be seen by the very strong role that France is now taking in northwest Africa against violent Islamist fundamentalists. The US military may well be able to have the same military capacity for lower cost if it moves away from the Abrams II model of a tank that is expensive to run and transport as well as build.

So broadly a correct point Brandon, but I think the situation is a bit better than is often understood in America and is moving in the right direction as Japan and Europe are getting used to the idea of taking responsibility for dealing with new threats from China, Putinist Russia and the hydra of Islamist fundamentalists.

A very good point, and an even better angle with which to view the world.

My only quibble is that the right direction American allies are moving can easily be changed without a more fundamental shift in institutional arrangements between us. Some sort of federal or confederal arrangement would go a long way toward addressing this issue, and would further deepen the economic and cultural ties between constitutional democracies.

Or am I just looking for problems where there are none, in order for my arguments to gain ground?

Radical Democracy

Going to its roots, democracy is kratos, rule, by demos, the people. Pure democracy is the rule by all the people, not just some of the people. The only way to implement absolute democracy is for each participant to voluntarily agree to the governance structure, and be able to exit when one no longer agrees.

Democracy can be divided into mass democracy versus “cellular” or small-group democracy. Mass democracy occurs when the voting group is so large that the people cannot individually know the candidates. In a small-group democracy, the voters are able to join meetings with candidates in groups small enough so that every person is able to fully participate. In a small group, a candidate may distribute literature at a low cost. Although money can play a role in a small group, the influence of moneyed interests is limited by the ability of other candidates and promoters of propositions to counter large spending with personal contacts. A small voting group solves the problem of having both free speech and the will of the people.

The German sociologist Max Weber, writing in the late 1800s and early 1900s, wrote that “bureaucracy inevitably accompanies modern mass democracy in contrast to the democratic self-government of small homogenous units.” Mass democracy cannot be pure, radical, and absolute. “The demos itself, in the sense of an inarticulate mass, never ‘governs’ larger associations.”

A mass democracy is governed by how the leaders are elected. The politicians must use the mass media to send their messages to the public in order to curry their votes. These messages have to be condensed and simple, as most of the public will not pay attention to detailed issue analysis. The messages are often negative attacks on opponents. And the messages have to be paid for, which generates an inherent demand for large amounts of campaign funds. While individuals do send contributions to parties and candidates, much of the financing comes from special interests such as corporations, labor unions, lawyers, and the financial and real estate industries.

Economists use the odd term “rent seeking” for the seeking of subsidies, privileges, and protection from competition. The classical economists recognized that land rent is a surplus. They generalized the concept to “economic rent,” any payment beyond what is needed for production. Subsidies to special interests are economic rents.

Governments today practice imposed representative mass democracy. The implied ideology is the moral supremacy of the majority in each particular issue. The majority imposes its will by force on the minority. As Weber stated in his essay “Politics as a Vocation,” “He who lets himself in for politics, that is, for power and force as a means, contracts with diabolical powers.”

Many people think that democracy is based on equality, since each person has an equal vote. But Weber wrote, “The propertyless masses especially are not served by a formal ‘equality before the law.’” The poor believe that justice requires compensation for their economic deprivation. But the political process determines how this is done, and “under the conditions of mass democracy, public opinion is communal and born of irrational ‘sentiments.’” The sentiments of the poor tend to seek a forced redistribution of wealth in their favor, since that is the superficial solution.

The radical alternative to imposed mass democracy is voluntary small-group voting. The political body is divided into tiny neighborhood cells, just as the human body is composed of small cells. The population of a neighborhood cell should be about 1000, small enough to know the candidates and meet personally to discuss issues. Citizens vote only for a neighborhood council.

Then a group of neighborhood councils, say about 20 or 30, elect, from their members, representatives to the next higher or broader council. The second-level council elects the next higher level legislature, and so on, all the way to the highest level parliament or Congress. That legislative body then elects the president.

Such cellular democracy can replace the mass democracies that prevail today, and that would be a major improvement, in extricating money from politics. But radical democracy also requires another change: replacing imposed democracy with voluntary democracy. The neighborhood cells would be voluntary contractual organizations.

In law, the written contract is required for major decisions, such as the purchase of real estate. The American political philosopher Lysander Spooner wrote in The Constitution of No Authority:

“It is a general principle of law and reason, that a written instrument binds no one until he has signed it… The laws holds, and reason declares, that if a written instrument is not signed, the presumption must be that the party to be bound by it, did not choose to sign it, or to bind himself by it…. Neither law nor reason requires or expects a man to agree to an instrument, until it is written; for until it is written, he cannot know its precise legal meaning. And when it is written, and he has had the opportunity to satisfy himself of its precise legal meaning, he is then expected to decide, and not before, whether he will agree to it or not.”

If a signed contract is needed for real estate transactions, how much more important is the political transaction of governance? If one joins a residential or condominium association, the law requires a display of the laws governing that association, and the new member must sign if he is to join. How much more important, then, is this principle for general governance? Radical democracy requires the signed consent of each member to the written contract.

The rule of all the people begins with the recognition of individual sovereignty, a contract among equal sovereigns for governance, and then implements small-group multi-level governance to let the people govern and minimize transfer-seeking by special interests.

Of course, even radical democracy does not guarantee liberty. A free society must have a constitution that protects individual liberty from the tyranny of the majority. But without genuine democracy, a constitution is an unsigned document that becomes manipulated to provide the appearance of equality and freedom. Behind it is the reality of imposed “diabolical powers,” the tyranny of both majorities and minorities.

(This article is also at http://www.progress.org)

The subsidies a…

The subsidies and protections that New Zealand governments once doled out so generously to both agricultural and manufacturing interests had consequences. The economic way of thinking enables one to discern these consequences more clearly and to predict the consequences of alternative policies. Doing so will often clarify the origin of the subsidies and protections, at least for anyone who believes that democratic legislators pay attention to the interests that are paying attention to them.

From Paul Heyne’s Are Economists Basically Immoral.

Fantastic phrasing of the issue of rent seeking. I think skeptics like to think the public choice theorists are cynical for assuming that political actors act in their self interest; this quote turns that view on its head.

Instituições e Cultura do Capitalismo de Compadres

Lá, em meu blog, um breve comentário sobre o novo índice da The Economist.

Another example of double-speak: This is what happens when Time Warner Cable is forced to compete

This is what happens when Time Warner Cable is forced to compete

Such a laughable headline when government regulations are what caused the cable/telecom monopolies in the first place.

“This report admits that in the days when cable was challenging airwave broadcasters, regulators “did not hesitate to grant exclusive franchises to cable operators”4. It speaks specifically of a long history of successful regulatory lobbying by the cable industry. This report claims that lobbying of regulators resulted in a variety of tactics to deter competition (p. 35). It claims that regulators protected and favored cable incumbents for years. Licensing policies have directly or effectively barred competition in many local markets (p. 44). Such practices are no longer official, but cable companies still succeed in enlisting the help of regulators to bar direct competition (p. 44). Incumbent cable companies have also gotten regulators to use “level playing field laws” to increase the costs of entering the cable market (p. 45). Cable companies have also saddled new competitors with disproportionate shares of subsidies for public education and government programming (p. 45). The cable industry has also succeeded in getting the FCC to quash new competitors with prices for leased access no competitor “could pay and remain commercially viable” (p. 47).”

Much like the drug law argument I talked about last week this is another example of people lauding governments for solving problems that the government itself is responsible for.  We need to look beyond the double-speak and identify the underlying issues at hand.  In this case government privilege granted to favored corporations.