Election Talk: Geert Wilders

Diverging from his usual policy, right-wing member of parliament Geert Wilders had an interview on Dutch television. The self-proclaimed right-wing broadcasting service Wij Nederland (We Netherlands, a.k.a. WNL), a broadcasting service for ‘normal, hard working and entrepreneurial’ Dutch citizens which aims to make Dutch television more representative of Dutch society, managed to get Geert Wilders in its morning show WNL op Zondag. Read more about it at: http://www.iminternational.nl/2017/02/17/election-talk-geert-wilders/

Why Nations Fail and How Poor Countries Develop Rich Countries

Leiden, Non. Ian. MMDCCLXX A.U.C.,

Recently the Guardian published about the massive flow of capital from less economically developed countries (LEDCs) to more economically developed countries (MEDCs), based on a report by Global Financial Integrity (GFI). This justifiably got a lot of attention, as it is  ironic, if not down right perverted, that capital is flowing from those countries who need it most to those countries who already have abundant capital stocks. In less economic terms, money which could be used to build roads, schools, businesses and sewerage in countries which painfully lack those is flowing to countries which already have those. However, the Guardian painted a very simplistic picture of this problem, which means they leave those most responsible for the poverty in LEDCs out of the picture. The article in the Guardian suggests that the West is responsible for this flow from developing to developed countries, and thereby also is to be blamed for the poverty in developing countries. However, the biggest plunderers and thieves in the world are not Western corporations, but the elites in developing countries, the dictators and their cronies, who get rich exploiting their own population. This aspect of why nations fail is crucial to eradicating poverty. As long as people in developing countries believe their poverty is due to evil Western capitalism, their corrupted elites do not have to worry about demands for more democracy and transparent governance. The fact that the Guardian is spreading and legitimizing neo-Marxist ideas is very unfortunate.

As said before, large sums of money are flowing from the developing world to the developed world. To start, developing countries have sent $4.2 trillion in interest payments to developed countries. As the Guardian puts it: ‘a direct cash transfer to big banks in New York and London’. It is this kind rhetoric which annoys me. Those developing countries willingly and knowingly agreed to take on debt, that means they had to pay interest, they knew that in advance. Those banks provided a service to those countries, why is this a problem? Yes, this is a large sum of money, but that is how borrowing money works. There is no reason to be particularly outraged about this. If developing countries or companies in those countries had invested this money wisely, they would no longer be developing countries by now (see Singapore, South Korea, Chile and Taiwan). Moreover, companies from developed countries made profits by investing in developing countries and repatriated these profits. Or, as the Guardian puts it: ‘Think of all the profits that BP extracts from Nigeria’s oil reserves, for example, or that Anglo-American pulls out of South Africa’s gold mines.’ Again there is a suggestion that it is problematic that developing countries sign deals with foreign companies. And again, there is no reason for outrage. The South African government was not forced to sign those contracts, and it retains a lot of money itself through those contracts. The largest flow of money consists of illicit capital flight, amounting to approximately $13trillion since 1980. In other words, tax evasion is a big problem (also for developed countries, by the way).

However, even if all this is shocking and perverted, we should not forget why so much capital is leaving the country. This probably due to a combination of two things. A lack of projects to safely invest in, and the capital leaving those countries predominantly consists of the ill-gotten gains of corruption and exploitation of the local elites. To start, in many of those countries there is a lack of projects which can be invested in. Without barriers to capital movement, capital flows to the place where the highest expected returns on that capital can be made. In non-economic terms, this means that people invest their money in those projects of which they expect the highest returns. Given two projects, one very risky but promising a high return, and one very safe, but with a low potential return, it is very well possible that the project which promises low but more secure returns is preferred by the investor. I think this is the reason that capital flows from developing countries to developed countries. Even if the money is much more needed in the developing world, which means there are far higher potential returns on investments in the developing world, in practice investors much rather invest in the developed world. It is much safer to invest in Estonia or Singapore than to invest in Mozambique or Nepal.

Then the question is why it is so unsafe to invest in developing countries. Why are there so few safe projects to invest in? The main answer has to do with how elites in developing countries rule. In developed countries we are used to governments which most of the time respect our property rights. The German or the Canadian government is very unlikely to steal our land, house, company, or money. Life in, for example, Ethiopia or Myanmar could not be more different: in most countries the government is a ‘stationary bandit’, elites orchestrate  the systematized plunder of their own country. What this does for people’s incentive to invest in their own skills or in businesses is not very hard to figure out. If you need to wait 200 days before you can start a business, you will not start a business. If you need to bribe 20 officials before you can get water to cool the machines in your factory, you do not have money left to invest in machines. If you get evicted from your land as soon as you have made it fertile, you will not try to improve your land. If you can only get contracts with companies and the government if you have personal contacts with people working in those companies and the government, those without the privilege of a network will never be able to sell their goods and services. If everything you build gets stolen by your own government, you stop building things. In short, those who want to invest in projects do not do so, because they fear that whatever they create will be expropriated by the government, while those that expropriate and engage in corruption send their money abroad.

Net Resource Transfers from LEDCs to MEDCs
capitalflight-e1480622572592Source: Global Financial Integrity, http://www.gfintegrity.org/press-release/new-report-on-unrecorded-capital-flight-finds-developing-countries-are-net-creditors-to-the-rest-of-the-world/

Looking at this graph, we see that the largest capital flows occurred after 1996. Companies from MEDCs have invested in LEDCs for a long time now, and tax evasion laws were even more lacks in the past than nowadays, so it seems unlikely that the major shift after 1996 is entirely due to those companies moving more resources from LEDCs to MEDCs. What seems more likely is that at least in part this shift has been caused by the elites of countries such as China, which became much richer, and whose elites suddenly had much more money to transfer abroad. Meanwhile, as globalization progressed, it became much easier for elites to transfer their money abroad, possibly also causing this large spike in transfers. Indeed the report mentions that $4.6trillion of the $16.3trillion transferred from LEDCs to MEDCs came from China alone. Moreover, the report by GFI notes that: “There is perhaps no greater driver of inequality within developing countries than the combination of illicit financial flows and offshore tax havens. These mechanisms and facilitating entities benefit the rich—we call them the “1 percent” for convenience—and harm the middle class and poor.” In other words, local elites benefit massively from those illicit financial flows and tax havens: they are moving their ill-gotten wealth abroad.

This is the ultimate tragedy behind the capital flight from LEDCs to MEDCs: LEDCs are very difficult and insecure places to invest in. They are LEDCs for a reason: they are plundered by their own elite. This has several implications. Firstly, the money flow from poor to rich countries is predominantly a consequence of the political-economic system in LEDCs. The outward capital flows are only partly a cause of the poverty in those countries, and predominantly a result of the same system which also causes the poverty in LEDCs. Secondly, even if capital was forced to stay in those countries, it would not achieve much. There is no actual demand for the capital, because nobody has an incentive to invest in projects. Thirdly, the longer the capital owned by individuals or companies who are not part of the elite stayed in those developing countries, the more likely it is to be stolen by the elite of that country to buy cars, or, indeed, to put it on their Swiss bank account. In other words, all the capital which is leaving those countries which has not been expropriated by the local elites yet, would probably be expropriated by the elite at a later point in time anyway, so this capital would do very little for the poor.

In short, while the flow of capital from LEDCs to MEDCs is ironic and perverted, it is simplistic to blame the developed world for what is happening. Most countries in history have had stationary bandits for a government. The fact that many countries still suffer from this, is predominantly not the fault of MEDCs, it is simply how most human societies have always worked. The suggestion that big mean corporations are exploiting those poor little developing countries is unnecessary and hides the bigger underlying problem. This frame is not present in the original GFI report, which is well aware of the importance of property rights. Moreover, the idea that we in the West could simply deliver justice to the developing world is a mirage. Democracy and rule of law need to be home grown to develop and to work, and the only way LEDCs will develop is if their own population demands representative and transparent governance. When the Guardian spreads and legitimizes the neo-Marxist idea that the core exploits the periphery and that this is the cause of the poverty in developing countries, it essentially spreads the propaganda which helps plundering elites to stay in power. The more citizens of LEDCs believe this propaganda, the less reason they have to hold their own corrupted elites accountable. The Guardian is effectively hurting the prospects of democracy and rule of law in developing countries by their simplistic moral outrage.

Bottom Line: LEDCs are poor because their elites plunder them. This means there are few safe investments in LEDCs, while much of the money that is sent abroad is the loot of the corruption and monopolization carried out by local elites. This is very problematic, but simply blaming the West is simplistic and harmful.

P.S. It is not entirely accidental that the Guardian published this a few days later. Again the Guardian promotes the idea that the West deliberately and actively tries to keep the rest poor.

Mr. Farage, go back to your country!

Yesterday Mr. Farage declared his intention to dissolve the European Union, now that he has successfully taken the UK out of the EU. Apparently Mr. Farage has appropriated the right to interfere in European domestic politic, a right he lost when the United Kingdom, at his instigation, decided to leave the EU. Seeing the UK is in the process of leaving this union, voluntarily created by its member states, he no longer has any say at all about Europe’s affairs. I would like to kindly ask him to ‘go back to his country’.
Let me be clear, the UK has every right to step out of the EU. I think it is incredibly foolish, but they are a sovereign country, they are allowed to be as foolish as they want. Moreover, their decision to leave the EU has not been a reason for any European leader to declare that Britain’s government ought to be dissolved. Such a statement would be absolutely ludicrous, and if necessary the UK would have resorted to violence to protect its sovereignty. This would have been absolutely justified, because the will of British parliament, representing the British people (and technically the Queen), is supreme within the UK.
Meanwhile, Farage does not respect the sovereignty of European countries. The EU is a government too, to the 27 member states left, and declaring the intention to interfere in the domestic politics of the European Union to dissolve the union is a blatant infringement of Europe’s sovereignty. Mr. Farage does not want to cooperate on many issues with Europe, but in his view neither are European countries allowed to cooperate as they see fit. As an outsider he now wants to ‘bring the wrecking ball’ to my, and if you are a fellow European, our government. I cannot see this as but an autocratic move, by a very dangerous man.
Of course you can agree with Mr. Farage that the EU needs to be abolished. If you are a European citizen you have every right to try to achieve that goal through peaceful and democratic means. Crucial to my objection to Mr. Farage’s meddling in European politics is that Mr. Farage has made himself an outsider, yet still wants to influence European politics to the degree that he wants to abolish Europe’s government. That goes far beyond what can be considered normal in a relation between two allied governments.
Obviously Mr. Farage does not represent the British government and therefore does not affect the actual relations between Europe and the UK. Yet, Mr. Farage’s statement is essentially a potential declaration of war. When one government declares its intention to bring down another government, we call that a declaration of war. Whether this intention is pursued by peaceful means or violent means can only determine the response, but is secondary to the fact that it is a declaration of war. If Farage ever becomes the prime minister of the UK, or if any future PM of the UK would take his stance on Europe, and indeed follows through on this intention to dissolve the EU, this cannot be interpreted as but a direct threat to Europe’s government. Imagine that the German government declared its intention to bring down the Austrian, Czechoslovakian and the Polish government, that would surely be a reason for war? Or if the North-Korean government declared its intention to bring down the South Korean government, would that not lead to conflict? Or if Palestinians declared their intention to abolish the state of Israel, would that not be a reason for political strife?
Therefore, Europe would have every moral right to give a very strong response to defend its sovereignty in a scenario in which a UK prime minister would aim to abolish the EU. If Mr. Farage would not use violence to dissolve the EU, as seems very likely, the EU should of course respond proportionally, for instance by boycotting the UK, preventing Britons from entering the EU, freezing all UK bank accounts, limiting access of British firms to the EU, nationalizing British firms, etc. That is what governments do when other governments threaten to ‘take the wrecking ball’ to them. That is the lunacy that Mr. Farage wants to bring to Europe as prime-minister, apparently, although I doubt he really thought his statement through.
We have already seen a very negative reaction to Mr. Farage’s meddling in other countries’ politics. Norbert Hofer, the far-right presidential candidate in Austria’s recent election, made it very clear what he thought of Mr. Farage’s attempts to change the election outcome in Austria: “I would ask him not to interfere in Austria’s internal affairs. It doesn’t fill me with joy when someone meddles from outside.” He even called it a ‘crass misjudgment’. We should expect to see more such reactions, if Mr. Farage continues to interfere in other countries’ domestic affairs. The more important the position he will have at that time, the stronger the reaction should be.
So, Mr. Farage, I ask you, who do you think you are that you have the right to meddle in Europe’s domestic affairs? I remember your outcry when the UK voluntarily implemented legislation it had every opportunity to influence in Brussels. You did not want to have anything to do with Europe, and that is your right. Nobody in Europe wants to force the UK to stay in the Union, because the UK’s sovereignty is widely respected. Yet, now you think you have the right to influence European domestic affairs? Do not dare to touch Europe’s government and sovereignty, you have forsworn that right when you took the UK out of the Union. You do not have the right to tell other countries how to arrange their government. You do not have the right to threaten Europe’s government with a ‘wrecking ball’. You have already plunged the UK into chaos, as you had every right to do, but you do not have the right to plunge the rest of the continent into a similar constitutional quagmire. It is of course ironic to say this to the champion of British xenophobia, but Mr. Farage, go back to your country.

Bottom Line: The UK has every right to leave the EU, but it has no right to still interfere in Europe’s domestic affairs to abolish Europe’s government. Mr. Farage wants to dissolve Europe’s government, therefore he is a dangerous lunatic, and an enemy to Europe.

Book Review: Frédéric Bastiat — Justice and Solidarity

Leiden, a.d. V Id. Oct. MMDCCLXIX A.U.C.,

Bastiat lived during the first half of the 19th century in France, a politically very unstable time for France, with many revolutions and regime changes. He was a classical-liberal, who also influenced libertarianism (in fact I would call him a libertarian avant la lettre). He also developed the notion of opportunity costs (if I buy ice cream, I cannot buy apple pie with that same money), that alone makes him a respectable economist. The 90 page copy of ‘Justice and Solidarity’ I borrowed from a friend in fact contains two essays, ‘Justice and Solidarity’, and ‘That Which Is Seen and That Which Is Not Seen’. I will discuss both, in the order in which they appear in the book.

Justice and Solidarity

Bastiat’s main point in this essay is that the state’s goal should be maintaining justice, while leaving solidarity to society. This to him is the biggest difference between the (liberal) ‘economists’ like him and the socialists, who think the government has the task to ensure solidarity between individuals. A state based on justice, to Bastiat, is a night watch state, in which the government only prevents injustice by protecting property and enforcing contracts. A solidary government would actively take measures to try to make its citizens happy.

He provides several arguments for why the state should only enforce justice. Firstly, solidarity cannot be mandated, because solidarity entails a voluntary sacrifice. If the government forces people to make sacrifices to each other, the voluntary aspect disappears, and so does solidarity. Therefore the government cannot provide solidarity in society. This play of words is not very convincing to me: if the government can save lives through redistributing some income, I do not care how ‘solidary’ that is, it is the lives saved I am interested in.

Moreover, Bastiat paints the world very black and white. Or the government tries to maintain justice, or the government tries to provide everyone with anything they want. This last assertion is based on a slippery slope argument, which lays the foundation for a straw man fallacy. It is simply untrue that governments try to do everything as soon as they accept certain tasks beyond upholding justice. In fact, social and liberal democracies with some form of a welfare state have effectively prevented communist revolts leading to governments which usurped society. Similarly, Bastiat argues that government spending will always end up benefiting the politically well connected, as politicians decide who receives government spending. This also is a dubious claim, although it is very much true that in many regimes government spending does benefit the well connected. So, while Bastiat’s argument against a government taking over all economic tasks is very much justified, his argument that therefore the government should not take on any ‘solidary’ tasks at all is not justified.

More convincing is Bastiat’s argument to be wary of a government which wants to take care of everything, or of too much. Bastiat’s arguments against the utopian views of the early socialists and the later Marxists and Communists clearly lay bare the naivety of those views. Firstly, if we ask ‘the State’ to take care of all of us, we are asking ourselves to take care of all of us. If the State does everything, it is in fact the population, or a share thereof, doing everything for itself and for others. We would be transferring resources from some of us, to others of us via the ‘greedy and wasteful’ hands of bureaucrats.

This means that any socialist system requires a general lack of selfishness. People will only work for each other without compensation if they are not selfish. This is a very unrealistic assumption, given the human tendency to be egotistic. So we need a system which incentivizes people to work as efficient as possible for each other. However, the government does not include a mechanism which forces everyone to work as efficient as possible in the way the free market does. This argument to me seems sufficient proof that the government cannot take care of all of us and of all our wishes. A sufficient many of us should be self-proficient, that is, capable of producing enough goods or services to survive, and if possible trade with others to use our comparative advantages. In general markets are better at this, so the government should not do everything.

Secondly, it is true that just because the government starts taxing citizens, and starts spending, we have no guarantee that this expenditure is directed to those who need it most. In fact, very often such expenditure has been directed to those who are politically connected, in fact leading to redistribution from the middle class to the upper class. Moreover, there is always the chance that bureaucrats take some of the resources for their own benefit.

However, Bastiat moves to the total opposite of the spectrum, by arguing that the government should do nothing but protecting property rights and maintaining public safety. He even calls government intervention plundering, which is a bit of an overreaction to me, just a bit. Meanwhile, his views about this libertarian utopia are extremely optimistic. He does not entertain the thought of market failure, and he ignores how a free market will maintain large inequalities if the starting position is one of large inequalities (exactly because large inequalities allow the rich to lobby unopposed).

So, this essay is interesting, but to me it fails to meet its goal. If the goal had been to convince that an all-encompassing government will fail, the essay would have been very convincing. However, the goal is to convince that any attempt by a government to do more than protect property rights and safety, and to enforce contracts will lead to failure, I am not convinced.

That Which Is Seen and That Which Is Not Seen

We cannot create something out of nothing, and neither can the State. This means that for every government intervention there are winners and losers. However, often it is very obvious who the winners are, while it is less obvious who the losers are. This means that for every government intervention we need to figure out who the winners and losers are. Only then we can make fair decisions about economic policy. Moreover, it means that we should never propose a government intervention because it will create jobs, or will increase Gross Domestic Product (GDP).

For instance, the government can decide to build a road. Roads are often very useful, in which case building that road can be the right decision for the government. However, building a road for the sake of employment and GDP, rather than to solve logistic problems, is incorrect. It is true that if the government spends $100.000 on the road, this feeds 2 workers building that road, and increases GDP with $100.000. That is what we see. What we do not see is that the government had to tax citizens first in order to get the $100.000. They could have spent this money on other products, such as three cars, part of their house, education for their children, etc. In other words, because of the government intervention we now have a road, but not three cars. If people would have preferred the three cars over the new road, society is now less well off than it could have been. Seeing how many people still seem to believe that government intervention comes at no price, I think Bastiat’s advise to look at what you see, but also to try to find out what you do not see is still very relevant.

Bottom Line: The book is interesting for those interested in economic history, for Bastiat was praised by Schumpeter and Hayek. The second essay is still quite relevant, however, the first essay did not convince me at all, although it gives an excellent overview of libertarian thinking.

A Painful Trade Off: the Active Organ Donation System and Bodily Integrity

Do you want to know about the advantages and concerns of the new “Active Organ Donation System”? Read all about it at:

A Painful Trade Off: the Active Organ Donation System and Bodily Integrity

The United Mars Company

Leiden, a.d. X Kal. Oct. MMDCCLXIX A.U.C.,

On the 27th of September Elon Musk, CEO of SpaceX and Tesla, announced his plans to colonize Mars. Besides having to solve countless technical issues before the mission can be a success, Musk should have a look at the social and organizational problems of going to Mars. This post will try to map some of the social and organizational problems (and possible solutions) that a private company, let’s call it the United Mars Company, will run into as it colonizes the red planet.

The current plan is that SpaceX cooperates with NASA. I am a bit skeptical about public-private cooperation, often we end up with the profit making of the private sector and the efficiency of the public sector, rather than the efficiency of the private sector and the ethics of the public sector. However, this is an extraordinary mission, calling for an extraordinary combination of resources, combined into the ‘United Mars Company’ (UMC). Yet, we need to make sure that SpaceX does not take UMC’s profits, while the government pays its bills. This in fact raises the first question: how will this enterprise become profitable? Apparently the main goal is to make sure humanity survives, but seeing how difficult it is to even solve the climate change problem, who is going to pay for this lofty goal, beyond Elon Musk himself?

While to some it may seem strange that a company is going to explore and colonize Mars, there are plenty of historical precedents of privately funded colonization. Notable examples are how the United East-India Company (VOC) conquered and ruled large stretches of Indonesia, Sri Lanka, Taiwan, India, and South Africa, and the East India Company which ruled supreme over India. Both were among the first multinationals and the first companies to issue stocks. Moreover, they had powers akin to sovereignty. They could wage war, write and enforce laws, negotiate treaties, strike coins and establish colonies. Ultimately they all ended similarly: the mother country decided that its colonies should not be ruled by a private company. We will come back to those companies several times in this post, as they present what most closely resembles a historical precedent to the colonization of another planet.

So what could UMC look like? What could a Martian society founded by a company look like? Firstly, this partly depends on the answer to a question which only time can answer, namely how expensive it will eventually be to go to Mars. Even though Musk’s ideas seem unlikely to succeed now, if he manages to profitably go to Mars, we should expect many other companies to obtain the know-how to compete with SpaceX. If China, Europe and India ever plan to go to Mars, it could be necessary for the US government to give UMC the American monopoly on going to Mars.

This is something that happened in all successful colonizing countries, unless colonization was government run. The costs of going to a far away colony were huge, while the risks were very high. With both domestic and foreign competition, the commercial enterprise of sending ships to the other side of the world was often not profitable. So, countries united their domestic trading companies into one national company (hence the name ‘United East-India Company’). This way competition within countries was reduced, ensuring profitability for their national companies. Moreover, there is also the dynamic of the zero-sum game in obtaining new areas for the company and for the mother country. Imperialism did not emerge from white people being evil, it was a game all sovereigns played, more or less successfully, at the expense of others. Seeing how empty Mars is now, it would not be strange if the superpowers of the 21st century will all want to be there first, because the first one to get there gets the biggest piece of the Martian pie. Seeing this dual logic of profitability and the imperialist zero-sum game, it seems likely that the US government will want to give UMC a monopolistic edge.

Secondly, the early colonizing multinationals always ran into principal-agent problems. It is very hard to control people who are several months away from you. As headquarters you basically do not know what they are up to, although modern communication methods will make this much easier. However, the governance problem is much bigger than that. How should the colony be run? How should conflicts of interest between the colony and UMC be solved? Musk wants the Martian colony to rule itself through direct democracy, rather than representative democracy. With regards to the size of the young colony, this makes a lot of sense. One hundred people can easily decide on their laws together. Yet, democracy and profitability for UMC may clash. What the Martian colony wants, and what is profitable for UMC may be completely different things.

Even if Elon Musk cares so much about the human species that he is willing to run a loss on the Martian colony because it chooses policies which harm UMC, it is unlikely that his shareholders, or his successors will be equally happy to lose money. Colonization of Mars will only succeed in the short term if it is profitable to investors, so if local democracy hampers profitability, as seems likely, democracy is not an option on the short term. So, while on the long term the American Martian colony should be ruling itself, on the short term the profits of UMC will have to determine policy on Mars for the colony to survive.

Yet, it will be necessary to have some democratically elected body of deliberation, if only because it will present a platform to rally around for democrats if the governor behaves as a tyrant. The founding constitution of a colony can have a long term impact on that colony through path dependency. If the government purely aims to extract resources from the government, as autocratic government are much more likely to do, this form of extractive governance can reinforce itself, and lead to a vicious cycle of autocracy and resource extraction.

So, there is a trade off to be made between how democratic the colony should be, and the unchecked authority UMC should have in order to ensure its profitability. This will simply have to be experimented with. If the colonists see that UMC’s profitability is necessary for their own survival, than their interests and UMC’s interests overlap, which allows for local democracy. Especially if UMC uses its monopolistic power to extract resources from the colonists, a powerful democratic council will be necessary. On the other hand, if the colonists do not subscribe to UMC’s need to be profitable, then the council should have less powers. In that case it will have to be very clear what the powers of the Martian congress vis a vis the powers of the UMC appointed governor will be. For instance, it could appoint judges to enforce the laws of the colony. It should at least have the right to advise and monitor the governor appointed by UMC on all issues. In any case, on the long term, the American colony on Mars should of course have a democratic government.

The development from small centrally controlled colony run by a company to large more decentralized colony run by a government will certainly be interesting to follow. In the beginning everyone on Mars will work for UMC, to found the colony, to make Mars livable, to prepare the colony for the arrival of more colonists, and to find natural resources which could be profitably sold to terrestrials. Again at this founding stage all efforts will be focused on the profitability of the enterprise.

Particularly, the small size of the colony will mean that cooperation between colonists is still relatively simple. The colony can be centrally led, as it is still clear to the central administrator how many goods and services are required when and where, and there will be few principal-agent problems on the planet itself: people know each other, so they can trust each other. Under these circumstances, as Coase’s ‘Nature of the Firm’ indicates, the cost of running a centralized organization will be lower than the transaction costs of using the market, because it means that only contracts need to be negotiated, after which people sell their labour to UMC, instead of having to negotiate and pay through the market for every single good and service each individual produces. So, a centralized system is the right system to ensure the survival of the colony.

However, as the size of the colony increases, and complexity increases exponentially, the organization of the colony will have to change entirely. Firstly the central administrator will lose 1. the capability to know what goods and services are necessary, and 2. the possibility to monitor his agents. This will have a profound impact on the efficiency of organizing everything centrally in the colony. This means that private goods and services should increasingly be produced by the market. Secondly,  public goods provision will become necessary once the colony is reaching a certain size. Public goods provision is not profitable, as individuals can shirk from paying for the public goods they use, so companies will not be likely to want to do this, so a government will be needed.

So, the central administration should leave the production of some goods and services to be done by the market, while other goods and services will have to be provided by a government, which can force people to pay their taxes, in order to overcome the collective action problem. Of course UMC could force people to pay taxes too, if it retains its sovereign rights. However, it is a truly creepy idea that a company aiming to make profits would be able to force individuals not working for that company to pay for its services and goods. No taxation without representation! However, will the central administration be willing to release its initially necessary autocratic powers? Will the Martian congress be able to organically increase its powers as the colony grows, and the public good of the colony and the interests of UMC start to diverge increasingly?

What about the long term political development of the colony? Whether the Martian colony will stay American on the middle long term will largely depend on how the demands for more democratic government will be met by the American government. In ‘Empire’, Niall Ferguson shows how the British responded entirely differently to demands for self-governance from the American colonies than to demands for self-governance from Canada. Initially the British saw self-governance (‘responsible government’) for the American colonies in the 1770s as a danger to the empire. However, after Lord Durham’s report from 1838, self-governance came to be seen as just, leading to the implementation of responsible governance in Canada in 1848. The USA was quick to kick the British out, while the Canadians had much closer ties with the UK until after WW II. So, if the USA sees the colonists’ demands as a threat to its transplanetary empire, it will try to suppress these demands, which will ultimately lead to the colony declaring its independence. If it sees their demands as just, and sides with them against UMC, the Martian colony could become part of the American federation or commonwealth for a very long time.

Musk has once more surprised everyone. Colonizing Mars will be an epic feat, and is indeed required for the long term survival of humanity. However, I do hope that Musk realizes that beyond the technical challenge, there lies a social challenge. Interestingly, constitutional design and corporate governance are very much the same in this scenario, and studying the colonizing companies of the 17th and 18th century will be very worthwhile to learn about how to arrange these kind of long-distance enterprises. I hope Musk will hire some historians, anthropologists, sociologists, and political scientists, and not just business administration experts and economists, to make sure that there is a well thought out plan about how to organize Martian society, and how it relates to the private-public partnership that creates it. Not too long ago, the US government and its allies embarked on a much simpler enterprise, the 2003 invasion of Iraq, and got hundreds of thousands of people killed by not thinking ahead about what to do with a liberated Iraq. Let’s hope that the difficulty of constitutional design is not underestimated again, so that if the Martian colony lasts for a thousand years, in freedom and prosperity, people will still say, this was their finest hour.

Bottom Line: Apart from the technical challenge of going to Mars, there is an equally large organizational challenge. We will have to combine the most advanced human knowledge on constitutional design, corporate governance, economics and psychology in order for this project to be successful. Historical private colonization could provide a blueprint.


Book Review: Luigi Zingales — A Capitalism for the People

Leiden, a.d. XVI Kal. Oct. MMDCCLXIX A.U.C.,
In ‘A Capitalism for the People’ University of Chicago economist Zingales draws attention to one of the major issues that has always confronted human development and prosperity, a problem which is particularly pressing right now: how to maintain a meritocratic, competitive free market capitalism. The book has two parts, in the first part Zingales gives an overview of how interests groups have lobbied the American government to change regulation and policy in their favour, and what impact this has had on the prosperity of American citizens. In the second part Zingales proposes solutions to this problem. (If you are also interested how lobbying led to crony capitalism in the Netherlands, ‘De Schaduw Elite’ is a very interesting book to read).

To start with the first half of the book, it is excellent. The core of this part of the book is to explain how in the USA cronyism is slowly replacing meritocracy, and how this negatively impacts economic growth and leads to an increase in inequality of wages and property. Particularly, Zingales argues that competitive free markets have three advantages: “Competition limits the possibility of earning extraordinary profits — and thus limits income inequality as well. Competition ensures that consumers enjoy the benefits of innovation. Competition creates a pressure towards efficiency and hence meritocracy, a system in which responsibilities are given to the people who can deliver the most and in which the rewards are then seen as the just prize.” In short, competitive free markets prevent excessive inequality, they benefit everyone and are ‘fair’.

However, while in theory such competitive free markets lead to wide spread prosperity (if coupled to a basic welfare state and widely available education), in the United States corporations increasingly manage to get political power, which they in turn use to protect themselves from competition. This leads to crony-capitalism, in which capital is still accumulated, but in which political connections determine who becomes rich, rather than hard work, good ideas, or even just plain luck. Capitalism without competition between companies is mostly a system which helps a small elite accrue massive amounts of money, and which does not help the vast majority of the population.

So what does crony-capitalism look like? There are several ways through which companies or sectors can influence government policy. Firstly, they can simply provide information about the sector, which is actually quite useful and not necessarily a bad thing. Secondly, companies and sectors can send lobbyists to politicians. Those lobbyists can financially support the campaign of a politician, or promise them the votes of the employees in that sector or company, in exchange for certain legislation to be passed or blocked. Nowadays members of the US Congress spend a lot of their time on making calls to raise funds, instead of actually passing legislation. Thirdly, former employees of certain sectors can start working in the regulatory body of their sector. So, former bankers start working for the Federal Reserve (the USA’s central bank), they help their former colleagues, and afterwards they can start working for banks again. Unfortunately, the number of lobbyists, the money spent by companies to hire lobbyists, and financial contributions to political campaigns have all sky rocketed over recent years. Moreover, instead of defensive lobbying, i.e. lobbying to prevent certain legislation that may hurt a company or sector from passing, there is increasingly more offensive lobbying, so lobbying for legislation which actively helps a company or sector at the expense of other companies, consumers or other sectors.

So, what does all this lobbying achieve? We can roughly discern three ways in which the government can help companies. Firstly, it can give them subsidies, thus directly transferring money from tax payers to those companies. A typical example is the bail outs banks received during several financial crises in the last few decades. Billions of tax payer’s dollars and euros have been transferred to shareholders and banker’s private accounts. Another example is how food processing company received 43% of its profits directly from subsidies in 1995. Yet another example is how Fannie Mae could borrow with implicit government backing, allowing them to borrow at lower interest rates. In 2003 this was equivalent to a subsidy of $13.1billion. Secondly, the government can give existing companies an unfair edge through regulation, which seems to protect the environment or consumers, but mostly bar new companies from entering the market. This allows oligopolization or monopolization of markets. In oligopolistic and monopolistic markets companies can charge higher prices for their products than they can charge in a free market. Thirdly, private-public partnerships are a big hole in which taxpayer’s money disappears. While being advocated as combining the efficiency of business with the social goals of the government, they often wind up with the social goals of the private sector, and the efficiency of the government. Again, Fannie Mae is a good example. It made a lot of profit paid for by taxpayers, it captured the main economists on housing research by financially backing the two main journals on this topic and by paying researchers long term stipends. Its chairmen made a lot of money, in the neighbourhood  of $100.000.000. In the end the taxpayer had to bail Fannie Mae out for $180billion.

We have seen the results of crony capitalism. The financial crisis of 2007-2008 and the subsequent decline in GDP and employment has been a direct result of crony-capitalism. Similarly, inequality has increased since the 1980’s, and while productivity keeps increasing, payment to employees has remained the same since 1970. Many people are stuck in a poverty trap, which also badly affects the lives of these people’s children, as they grow up with less opportunities than their more fortunate peers. In short, capitalism can be said to have failed to improve the lives of many people, even though it could do just that, under the right circumstances.

The second part of the book discusses solutions to the problems described in the first part of the book. First, and foremost, Zingales argues we need populism against a political economic elite which is trying to get an increasingly large share of the national pie. An anti-business sentiment helps against the excesses of lobbying. Particularly, Zingales distinguishes between a pro-market agenda and a pro-business agenda, the former wants free markets, the latter lobbies for companies. Populism indeed contains an anti-elite, maybe even somewhat angry connotation. But, we have every reason to be angry, seeing the economic situation the pro-business agenda has lead us to. It is especially this distinction that made me like this book so much. Often voters seem to have the choice between left wing interference by the government (tax everywhere, redistribution galore) and right wing interference by the government (bail outs, subsidies and privatization leading to monopolies). Zingales points out that beyond pro-business or socialism, we can also choose to have government interference which aims to bring about competitive markets, which aims to give everyone a fair chance, and which helps those who cannot sustain themselves through no fault of their own.

Moreover, we need fewer and simpler rules, which, firstly, are harder to target at special interests, and more likely to support the public good. Secondly, they also need fewer professionals to monitor, which means that regulatory capture is less likely. Thirdly, voters can more easily monitor simple rules, thus allowing voters to vote against politicians which excessively help special interests. Fourthly, simple rules are rough, which limits their use to the most important cases.

Furthermore, we need to teach graduates at business schools to respect free markets. While right now graduates often leave business schools with the idea that it is good to be a rational individual who behaves unethically to his own advantage (they have understood descriptive rational choice theory as prescriptive), they should be taught that free markets and ethical behaviour are required to make a society prosper. They should internalize those values.

Besides, we should ban all subsidies. While subsidies can seem to serve a lofty goal, such as promoting green energy, they are often ineffective at best, and completely misused at worst. We can better use Pigouvian taxes, which tax the producer of an externality (such as pollution). For instance, if we tax companies for polluting the air with CO2, those companies have an incentive to reduce their CO2 output. Moreover, products which use less CO2 to produce will become relatively cheaper, which would also have been the goal of a subsidy.

All in all this easily readable ( I do not think much prior knowledge of economics is needed, because Zingales explains all technical terms in laymen terms before using them) 257 pages book provides an excellent overview of how companies have taken over the US government to their own advantage, and what this has done to the US economy. However, it also provides an optimistic ending: if citizens become more active and knowledgeable about this, and forge a pro-market populism, which holds the political economic elite (the shadow elite, if you will) accountable, they can change the political economic system. Although I agree with Zingales more about his definition of the problem than all of his solutions, I think  A Capitalism for the People provides an excellent first step for such a pro-market populist agenda.

Bottom Line: This might be the best book I read in 2016 so far. It points at a core problem for both the quality of our democracies as well as the level of our prosperity. Crony-capitalism can lead to poverty and inequality, and we need a populist pro-market movement which fights the rigged system.