Dec 092011
 

The Third Way

Wilhelm Röpke (1899-1966) is credited by many as one of the architects of the post-WWII German Economic Miracle, driven by the implementation of the Social Market Economy that is advocated by adherents of ORDO Liberalism, and associated with the Freiburg School of political economy.

(The term ORDO refers to an academic journal established in 1948 by the founders of the Social Market Economy movement in Europe following WWII.)

ORDO Liberals see a distinction between laissez-faire and Classical Liberalism that is very similar to what Karl Polanyi (1886-1964) describes in his book, The Great Transformation.

Essentially, laissez-faire is about means and Classical Liberalism is about ends, and there is no guarantee that laissez-faire will lead to Classical Liberalism. Evidence includes cartels, ‘old boy’ networks, cronyism, Unconscionable Contract, etc., all of which can exist under laissez-faire, but are very different from the ends that Classical Liberals advocate.

Some of the most repressive societies are those that have evolved in remote tribal villages, so far removed from formal government that it essentially does not exist.

On the other hand, the opposite of laissez-faire, statism, has led to unfathomable horrors including the twin extremes of National (‘right-wing’) Socialism and International (‘left-wing’) Socialism, the Khmer Rouge, and numerous Middle Eastern dictatorships, along with watered-down versions of in Cuba, Myanmar (Burma), Venezuela, Zimbabwe, et al., ad nauseam.

Statists see this not so much as a distinction between laissez-faire and Classical Liberalism, but as an inevitable consequence of laissez-faire, and they argue that government regulators and enforcers should achieve desired ends by whatever means are deemed acceptable.

In post-WWII Germany, the heavy hand of government was used to create a social safety net for the socioeconomic bottom-most while allowing market participants to allocate resources. So long as individuals employed means and achieved ends that were acceptable to government regulators, they were left to do as they wished. When someone in power determined that either the means or the ends were unacceptable, government agents stepped in to redirect the resources.

For the decade after the War, politicians and regulators steered the German economy down this middle way with some success, avoiding the excesses of command-&-control socialism at one extreme and the kind of anarchic chaos seen later in Russia following the fall of the Soviet Union at the other extreme. China’s rulers appear to be attempting to follow a similar path today.

If politicians and regulators are united in their belief that Classical Liberalism is the ultimate end, and that the constrained laissez-faire of the market is the most efficient means to achieve that end, with occasional intervention, then an ORDO Liberal policy regime can work.

There is, of course, no guarantee that subsequent generations of politicians and regulators will not err on the side of command-&-control, as happened in Germany in the last quarter of the 20th Century. Where individuals wield power, the danger always exists that they will use it in pursuit of personal agendas, even at the expense of the community as a whole.

Sovereignty without Sovereigns

Today, as we transition from capital/labor national economies to an integrated knowledge/service global economy, we face an altogether different set of challenges. The question today is not, “Will statutes and regulations be overly burdensome?” but “How can transnational firms and networks be hindered in forming cartels in the absence of a global statutory and regulatory authority?

In other words, the danger today is not that the agents of a national government might tax or regulate a firm or industry out of existence, but that the executives of transnational firms and networks will enter into contractual arrangements that create artificial monopolies or otherwise exploit their positions to the detriment of consumers.

Granted, Dominium is less of a concern than Imperium, but it is a concern, when it results in higher costs for those least able to afford them. At the extreme, executives gain a kind of sovereignty by being beyond the reach of any particular government other than the ones that they happen to be standing in.

An example of this is illustrated in a recent Bloomberg story, “U.S. Studies Derivatives That ‘Game’ Tax Rules” that describes some of the difficulties that US legislators and regulators are facing in their quest to control the executives of financial firms and the participants in derivatives markets.

A major part of the problem is the fact that all financial assets are either contracts or titles that derive their existence from individual agreements and social institutions. They can be transferred quasi-instantaneously; encoded, shredded, and stored transnationally; and accessed, reassembled, and decoded from any jurisdiction.

The only things preventing the establishment of a peer-to-peer asset exchange that exists purely on the Internet are inertia and convenience. The tools and designs have existed for more than a decade. As long as the cost of the status quo remains less than the benefit, individuals will resort to status quo organizations, but if legislators and regulators raise the cost of doing business conventionally much more, then transitioning to something else becomes a viable alternative.

Even in the absence of overt blundering, the relative benefits of technological innovations are growing at exponential rates, and the tipping over into a new order that is out of the reach of any national government probably will come no matter what politicians do in any particular jurisdiction.

In such a world, the idea of a Third Way becomes untenable, as no national regulator or enforcer will be strong enough to compel laissez-faire to lead to Classical Liberalism.

Where things will lead, like all else in the future, is unknowable, but it is not unimaginable. I will explore some possibilities in Part 2 of this essay.

Invest accordingly.

Prof. Evans

Dec 072011
 

Röpke on Imperium & Dominium

In addition to advocating the Social Market Economy, for which he is most famous, Wilhelm Röpke (1899-1966) distinguished between two types of colonialism that are of immense relevance to understanding the world today, as we transition from multiple capital/labor national economies to an integrated knowledge/service global economy.

Röpke referred to these as Imperium and Dominium. [warning: PDF] Imperium refers to political sovereignty, and it is projected at the point of a gun. Dominium refers to economic sovereignty, and it is projected at the point of a pen used to sign a contract.

Röpke recognized that both Imperium and Dominium are forms of domination, and that Imperium is by far the more violent of the two. In other words, if one were going to be dominated by a foreign power, one would be better off if that power were Nike and not the CIA. Still, one would be dominated, and one might be expected to chafe at that.

Historically, Imperium has been more potent than Dominium, e.g. the Roman, Ottoman, Spanish, British, etc. Empires. It was not until the 20th Century and the birth of the multinational corporation that Dominium began to emerge as a potent political force. As borders become increasingly meaningless today, corporate Dominium is supplanting government Imperium as the predominant means for projecting influence and power worldwide.

While agents of the US military drop bombs, executives of Chinese firms are buying controlling interests in the Panama Canal, Freeport (Bahamas), and other Western Hemisphere commercial infrastructure. In the long run, US taxpayers will tire of paying for adventures in nation building on their behalf, while one expects that the demand for global transportation will continue for the foreseeable future.

(And, make no mistake of it, the Americans might be flat-footed and incompetent imperialists, but they are master dominialists!)

As we have seen in the Middle East in 2011, when enough individuals realize that the real power is in transnational commerce, and that politicians and regulators govern at the pleasure of the people, their relationships with their rulers can change radically.

Colonialism

This is not to say that that future will be all roses, ice cream, and singing unicorns. Quite the contrary, colonialism and other forms of domination will persist, but in different forms from before.

One of the distinguishing characteristics of a colony is that it is a jurisdiction that exports raw materials and imports finished goods from the jurisdiction to which the raw materials were exported.

For example, historically, British weavers imported cotton and silk from India and exported finished cloth and apparel to India. In this way, the weavers were able to acquire raw materials at commodity prices and sell their output at significantly higher monopoly (one producer) or oligopoly (a small number of producers) prices.

Independence from British weavers was such an issue for Gandhi that he wove his own cloth as a sign of protest, and the spinning wheel became such an important symbol of Indian independence that it adorns the national flag of India.

Over the past century, the economic center of gravity has shifted away from agriculture to manufacturing to knowledge, and the nature of colonialism has changed.

Today, China, India, and Russia export large numbers of students and entrepreneurs — the raw materials of a knowledge economy — to North America and Western Europe, where they conduct research and produce commercial goods that find their way into textbooks, software, and other information goods that are then exported back to their homelands.

From this perspective, one can argue that colonialism never went away; it just changed industries. The raw material today is not fiber, grain, or rubber, but human capital.

As Röpke pointed out, today’s colonialism is not based on the imperialism of the past, which was imposed at the point of a gun in the employ of an East India Company; it is based on ‘dominialism’, which originates in commercial transactions.

While such distinctions have merit, and they appeal to academics and public intellectuals, from the perspective of the student in Shanghai, Bangalore, or Lahore… or São Paulo, or St. Petersburg, or Kiev, or La Paz, or pretty much anywhere outside of the G7 countries, such distinctions might ring hollow. Technically, it is true that one chooses to engage in transactions, but when those transactions relate to food, shelter, clothing, textbooks, and entertainment, the balance of economic power is tilted toward the supplier of the finished goods and away from the individual consumer.

Fading Power

The seat of global power is shifting from parliaments to boardrooms as corporations supplant governments, and today’s colonial masters of the people of the middle-income countries of the world are not France, the UK, or the USA, but Microsoft, Sony, and Wiley & Sons.

Whether this is ‘good’ or ‘bad’ or ‘right’ or ‘wrong’ is irrelevant. The fact is that the individuals in the middle-income countries outnumber the individuals in the G7 countries nearly 10:1, and they bear the brunt of Dominium. There was a time in India, when the British Empire seemed impervious… till Gandhi came along.

Today, Microsoft, Sony, and Wiley & Sons might seem impervious, but they enjoy their monopoly positions only so long as the people in the Middle Income countries do not realize that nothing stops them from being home to BookBoon, Khan Academy, or any of a multitude of other information services that requires effectively no capital investment.

As there is a cost for every benefit, and there’s no such thing as a free lunch, there is a benefit lurking with every cost, and chaos equals opportunity. The real game is not political but commercial. Currently, is being played in Silicon Valley, Manhattan, Mexico City, Miami, Shanghai, Singapore, and Bangalore.

Nothing stops it from being played in Accra, Addis Ababa, Dhaka, Kingston, Jakarta, Lahore, Montevideo, Tegucigalpa, or anywhere else.

Invest accordingly.

Prof. Evans

Dec 022011
 

MSNBC is running an article entitled “Nine Jobs That Humans May Lose to Robots” that lists nine professions that are becoming increasingly automated:

  • Astronauts
  • Babysitters
  • Drivers
  • Journalists
  • Lawyers and Paralegals
  • Pharmacists
  • Rescuers
  • Soldiers
  • Store Clerks

We can expect to see more articles like this as we continue the transition that began in the final decades of the 20th Century, from an economic order driven by capital and labor to one that is driven by knowledge and service, in which the capitalist no longer can be caricatured by a Dickensian factory owner, but instead by Scott Adams’s Dilbert, a highly talented employee with specialized skills, as Peter Drucker explains in his 1993 Post-Capitalist Society.

Today, nearly a quarter-century on, we can look back to see how accurate Drucker’s predictions were, as Massachusetts Institute of Technology economists, Erik Brynjolfsson and Andrew McAfee, do in their 2011 Race against the Machine, and except for the specific technologies that Drucker cites, he was spot-on.

If you can do your job from your sofa, then that sofa can be within walking distance of your employer’s headquarters, across town, or in Jakarta. If a robot, a piece of software, or someone in Jakarta can do your job, and you are in the Global North/West, then this would be a very good time to start thinking about a career change.

In general, you have two options:

Innovation and Entrepreneurship

There is no silver bullet here. All you can do is follow your heart and heed no one’s counsel but your own. The first few times out, you probably will fall flat on your face, but console yourself with the knowledge that 95% of science is wrong, meaning that most hypotheses are rejected during the experimentation phase. However, that 5% that works is where the frontiers of knowledge and experience are expanded.

Some platitudes might be useful, but feel free to replace them with your own:

  • Follow your heart, and the money will take care of itself.
  • Set aside 20% of what you spend on equipment, and six months’ rent, so that you can cover your bills during slow periods.
  • If you create texts, music, videos, software, etc., give your work away for free.
  • Network as if your life depended on it, and remember that it is a sad dog that wag its own tail.
  • Always be learning, and be prepared to change product lines or career tracks about once every five years.

If you won the lottery, what would you do with your day? You undoubtedly are not the only human alive who is driven by whatever your answer is. There is your business plan. Don’t draft revenue projections until you’ve made several sales; you cannot predict your cash flows, if you’ve never had any. And remember that innovation is what has not been done before. If the people around you think that your idea is ludicrous, then you’re probably onto something good; if others think that your plan makes sense, then the idea is already past its expiration date, and it is already part of the background noise.

You will make mistakes and have regrets. You’ll get knocked down; get up again, and don’t let anything keep you down.

Crafts

By ‘crafts’ I mean anything that must be done locally, including landscaping, plumbing, home repair, nursing, firefighting, automotive maintenance, etc. If the idea of an activity’s being outsourced overseas is absurd, then it is a craft.

You don’t have to be a hairdresser or manicurist; you can own the shop and hire hairdressers and manicurists. John D. Rockefeller famously said that he would prefer to have 1% of the money earned by 100 others than 100% that he had to earn himself.


Whichever route you choose, do not let yourself get lulled into the false security of a ‘job’. No such thing as a job exists, as is easy to see, if one considers that, if one normally works 40 hours per week, and then starts pulling ten hours of overtime per week, one does not report that one has 1.25 jobs; similarly, if one’s schedule were cut from 40 to 30 hours per week, one would not complain that one had 3/4ths of a job.

If you measure the value of your time in dollars per hour (or euros, or pesos, or yen, or yuan, or shekels, or lira, or dinar, or whatever), then you are saying that each hour of your time is as valuable as every other hour, which means that whatever you do to earn that money is ripe for automation.

If you earn $10 or $20 per hour driving a cash register, keep an eye open for self-checkout stations to be installed where you work. Ditto paralegals and bookkeepers, secretaries and executive assistants, etc.

The global economy is increasingly integrated, and borders are fading fictions. There is a cost for every benefit, and an opportunity hiding within every cost.

And… the machines are lurking… watching… biding their time… Make your peace with them.

Invest accordingly.

Prof. Evans