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.


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