History Is Not A Closed Book: MARKET FAILURE or POLITICAL BIAS?

``If one rejects laissez faire on account of mans fallibility and moral weakness, one must for the same reason also reject every kind of government action.”- Ludwig von Mises, Planning for Freedom

Cramming results to mayhem, my apologies for the earlier unedited post.

Media Versus Reality

In our first History is not a closed book series March 12 to 16 (see Filipinos’ “Flawed” Culture? History Is Not A Closed Book) one of the issues we tackled on was the public’s common perception where a “virtuous” government would serve as the proverbial magic wand to save the Philippines from degeneration.

The assumption is, if we put in a saint-like leader, he/she will unshackle us from our poverty bondage and bring affluence to the nation. That is how public’s mindset is shaped by mainstream media in our society.

Part of the propaganda, circulating in the cyberspace, was to show countries with NO resources had attained their prominent status through “virtuous” leadership. The peculiar part was that the countries mentioned as examples are today’s thriving market economies where the domestic political leadership had opted to LEAVE the economic direction to the entrepreneurial “spirits” of their constituents instead of rigid central planning.

In other words, because governments OPTED to become LESS of an obstacle to the society’s economic development, LESS government became somewhat “virtuous”. But of course, less government was NOT indicated, virtuousness was. Such is selective presentation which unfortunately reveals of the political biases of the promoter. (see below The View from AT Kearney)

Where Morality is one’s expectations or perceptions of how government needs to be run, we DO NOT dispute that “virtuousness” is important. However, our contention is that government virtuousness can immensely be achieved ONCE ITS BUREAUCRACY CAN VASTLY BE TRIMMED TO THE BASICS and where GOVERNMENT ADOPTS A MARKET-ORIENTED PRACTICE OR A MARKET ECONOMY.

Once an economy depends on its politicians for direction or quasi-Central planning, it will all be “same dog with different a collar” affair. The more things change, the more they stay the same.

We can’t blame the public for buying up the blather that leadership musical chairs will result to economic recovery. It has been quite apparent that the public’s memory has been very short; we had 3 EDSA revolutions during the last 21 years yet still inhabit on the same wretched conditions; a mostly patron client (semi-feudal) system.

By watching media from an external view, one’s possible impression of the country is a perpetual chaos.

From the inside, having been inundated and constantly bombarded with day in and day out of scandals and intrigues, which is usually a common feature for showbiz, one’s perception is the need for an upheaval to restore some sense of stability. Hence, the persistent “coup” rumors. Even the recent Glorietta blast was imputed to be politically motivated.

While we sympathize with the public on their frustrations, we understand why they have been so desperate as to embrace any plausible rational, although illusionary, for the country’s emancipation from heretofore. Their problem appears to be the limited access to divergent information.

Recalling a recent splendid talk given by a youthful ex-mainstream media honcho who dealt on how technology changes affected the business sphere, he cited an example where media presentations and reality greatly differ. For instance, the Guimaras oil spill in 2006 impressed upon the general public that island had been a disaster zone. However, the emergent power of third generation media, seen through the eyes of the blogsphere or independent “resident” bloggers contested this perception which showed that the spill was insulated. So as traditional media painted the proverbial “mountain out of a molehill” picture, independent bloggers rebelled. Many, according to our speaker, responded in support of such bloggers.

As a result, the wired public has now started to get empowered with the option of having to choose from a diversity of opinions, and not been captive to mainstream thinking. In short, technology has begun to democratize information.

Yes while he likewise pointed out that with the growing worldwide technology diffusion, mainstream media’s role is seen to be gradually diminishing. Unfortunately, this country has been slow to pick up on such revolutionary trend (see below: The View From AT Kearney).

Our point is, for the public to become more empowered by information, it is a requisite for them to try to reach the far corners of the cyberworld and explore the rich availability of information. This should give them a more balanced view of the political economic sphere rather than swallowing hook line and sinker the controversy laden business motive/incentives of mainstream media.

Lastly, many today are talking of “virtuous” leadership possibly arising from the ranks of the church as a future head of the country. We won’t dispute the rights of these advocates, but one must be alerted that if the church ends up controlling the government machinery then such political system would be identified as a theocracy.

Some theocracies exist today as Iran, Saudi, the Vatican (wikepidia.org) and some in the past, e.g. Florence, Deseret, Montenegro. But in contrast to the public’s expectation of an economic Nirvana, theocracies have not been proven to be a guaranteed success, or otherwise such would have been a universal formula. So be careful of what you wish for.

Market Failure or Government Failure?

As we study the functionality of markets, we coincidentally come across observing the evolution of several political economic structures by different countries. Our observation has led us to suggest that market oriented economies have been a common feature of modernizing nations and could be applicable to us.

Recently, our suggestions had been criticized by a member of mainstream media. The critic’s main objection was that because market economies do not achieve equal distribution, they are thus pejoratively labeled such as “MARKET FAILURE”.

Our rebuttal to this is quite simple. The argument is basically a squid tactic, otherwise known as a NON CAUSA PRO CAUSA or false causes, operating under the LOGICAL fallacy of “Cum hoc ergo propter hoc”, or “with this, therefore because of this” or as we always say-correlation does not imply causation.

How? When somebody argues that a system is a failure, or attributes causation to it, because the BASIS OF REFERENCE is that of a correlation to perfection or in this case failed to achieve “equitable distribution” or otherwise economic UTOPIA, then obviously we recognize this to be extremely flawed.

Why? Because, there is simply NO PURE market economy. The fact that poverty or even Money exists signifies IMPERFECTION in this world. Money would not exist in a Perfect world, just ask the hardcore communist ideologue.

Why again? Because Money as medium of exchange represents inequality; under a normal scenario for instance, a baker is not a shoemaker and vice versa hence the uniqueness (inequality) of their jobs entails that their needs of a bread (by the shoemaker) and a pair of shoes (by the baker) be fulfilled via the exchange route based on the terms of exchange agreed upon by both parties. To fill the vacuum of needs money therefore becomes its means of exchange. Note: the above example represents real money, not inflated money for charitable purposes.

Hence, would it not be common sense to say that NO system can be a “total” success in this “imperfect” world?

We can turn the table and apply the same logic; since money and poverty still exists then all systems are hence FAILURES, including those advocated by the critic!

Obviously such blatantly fallacious statements reflect again on skewed biases instead of objective analysis.

Yes, our critic can further cite again “Market failure” as part of the “textbook” academia, but again textbooks are written from the perspective, and not exclusive of the biases, of its authors. Japan’s recent TEXTBOOK row with China is a recent example.

Moreover, textbook themes are usually grounded on what the authorities would like their constituents to learn. To suggest that a theory exists doesn’t extrapolate to outright acceptance or refutation of its universality, just ask Philosopher Karl Popper (Problem of Induction).

As an aside, academics can recite all sorts of “Market failures” mumbo-jumbo technicalities such as externalities, public good, monopoly, information asymmetry or path dependence but this does not again suggest that these are truisms. On the other hand, the laissez faire school of thought led by the Austrian School of Economics has a library rebutting all these.

In essence, while Market failure is a THEORETICAL argument, central planning failure is a FACT, evidenced by HISTORICAL examples of the collapse of the Stalinist USSR and the 180° turnaround from Mao Tse-tung’s China. So the argument that market fails lies on a tenuous ground compared to its obverse alternative, central planning.

Let us take the Philippine setting as one particular example, this excerpt from ADB’s March outlook, as we quoted earlier see History is Not A Closed Book: The View From IMF.

``In the 1950s, a sophisticated manufacturing sector emerged in the Philippines, supported by protection and a well-developed human capital base (Hill 2003). The problems for manufacturing began subsequently. A combination of factors appear to have played a part, including a period of costly and badly directed interventions, a tendency to focus on protecting rents rather than improving efficiency, poor physical infrastructure, and, to a lesser extent than in India, some problems with labor market regulation. High levels of corruption, disputed property rights and difficulties with contract enforcement have also played their part (ADB 2005). These facets of everyday economic life seem to reflect deeply embedded institutional difficulties including high concentration of wealth and a political system based on patron-client relations (World Bank 2005, p.3).”

Let me repeat the litany of misdeeds cited by ADB, curiously a MULTILATERAL institution owned by several governments…

costly and badly directed interventions,
focus on protecting rents,
some problems in labor market regulation,
high levels of corruption,
disputed property rights,
difficulties with contract enforcement,
institutional difficulties and
political system based on patron-client relations

Does this in any small way suggest that there is a so-called market prompted failure during the past 50 years???? Nada, zilch, zap.

As we have always argued, policies REFLECT on markets, instead of the other way around.

Incidentally, the protection of property rights and the enforcement of contracts serve as the cornerstone of ANY well functioning market economy.

By contrast, all of these signify or sum up to P-O-L-I-C-Y or G-O-V-E-R-N-M-E-N-T Failures!

Yet, behind the scenes these are the very same attributes we see intact today. Why do you think the intense obsession by the public to politics? Because economic opportunities are determined by the state and not through market forces! If you don’t have the right connections you can’t get things done…sounds familiar?

So despite all the leadership musical chairs the country had been through, we see same operating inefficiencies, which have led to persistently high costs and low levels of competitiveness hence the low investment levels. Is it any wonder why these persist to reflect on our continuing difficulties? Funny thing is we constantly carp about low investments yet insists to look on the other way.

And the unfortunate part is that markets always to get to be blamed even when they have been to a lesser degree, part of our heritage.

Market’s Social Dimensions and Unspecified Goals

By definition, a market economy, according to Wikipedia.org, “(also called a free market economy or a free enterprise economy) is an economic system in which the production and distribution of goods and services take place through the mechanism of free markets guided by a free price system.”

Since markets basically serve as mechanisms or platforms that allows for the people to conduct VOLUNTARY exchanges, as examples-buying from a fish vendor in the public market, or acquiring an insurance policy from an agent or obtaining a loan from a bank-it is thereby a social phenomenon and has no specifically stated goals for accomplishment.

To add, a free market system allows people accumulate capital and redeploy these to areas of production and services to which bests serves its consumers.

This is unlike a government where it has to face up with specific stated goals usually measured by economic or financial statistical yardsticks as GDP, per capita or etc.

Importantly, government functions to CONSUME private savings or CAPITAL with the purported aim to redistribute, no matter how inefficient or unequal-depending on which interest group gets to the blessings from the incumbent. These social programs eventually have a way of belatedly manifesting itself through the law of unintended consequences. Why do you think gold prices are rising?

As an example, the Philippine Stock Exchange has no specific function to equitably partition wealth or income compared to the Philippine government which has to contend with the demands of its fickle minded short term oriented voters.

One might say that such is an apples-to-oranges comparison but this is exactly the point, the economic direction of a market economy is driven by the aggregate actions of individuals partaking in a system of voluntary exchange or Adam Smith’s “invisible hands” with less participation from the government. The latter being mostly limited to protecting property rights and enforcing contracts.

So based on goals alone, there can hardly be a system “failure” when markets as a social phenomenon are simply avenues for exchanges…unless people stop acting as people.

Prices, in effect, act as a stimulus from which people conduct exchanges and allocate accordingly for their intended purposes. Governments fail when specific benchmarks are unmet.

Market Economies: Uncharitable and A Zero Sum Game?

Then there is the specious argument that markets function similarly to a zero-sum game or the law of the jungle, where the assumption is markets cannot move the economy forward because there would be so many losers in as much as there would be gainers.

Of course this is patently untrue, empirical evidences in our daily lives alone can disprove such assertion.

Maybe we have all seen the phenomenon called Cluster Effect, where same or similar businesses are located in one area healthily competing with one another other. Take Greenhills’ Cellphone Tiangge as an example.

Naturally, there would be losers as some store owners would find such dog-eat-dog competition to be so fierce that it would result to losses and eventual closures to the most inefficient stores. That’s where our critic’s sympathies lie with; the losses of some parties.

On the other hand, stiff competition has allowed the consumers to benefit from LOWER prices, so as with more diversified scope of services. Another, is that these network effects draw in more consumers to the area which effectively reduces their transaction costs (don’t have to scour from places to places), by the allowing them the privilege of having more options. Besides as competition lower prices of goods and services this should translate to more purchasing power. So how bad can that be?

In other words, losses by some have been more than offset by the gains of the general public or the consumers.

Notwithstanding, if such model had been defective outright, then we should see less and not more of these “cluster effects”, instead these privately initiated models appear to be sprouting everywhere!

As Murray Rothbard wrote in Man, Economy and State,

``The free market, in fact, is precisely the diametric opposite of the “jungle” society. The jungle is characterized by the war of all against all. One man gains only at the expense of another, by seizure of the latter’s property. With all on a subsistence level, there is a true struggle for survival, with the stronger force crushing the weaker. In the free market, on the other hand, one man gains only through serving another, though he may also retire into self-sufficient production at a primitive level if he so desires. It is precisely through the peaceful co-operation of the market that all men gain through the development of the division of labor and capital investment. To apply the principle of the “survival of the fittest” to both the jungle and the market is to ignore the basic question: Fitness for what? The “fit” in the jungle are those most adept at the exercise of brute force. The “fit” on the market are those most adept in the service of society. The jungle is a brutish place where some seize from others and all live at the starvation level; the market is a peaceful and productive place where all serve themselves and others at the same time and live at infinitely higher levels of consumption. On the market, the charitable can provide aid, a luxury that cannot exist in the jungle.”

Like the stock market, companies have value added components such as dividends and are notably distinct from the currency market, where when one goes down the other equally reacts in reverse (known as currency pairs). The sad part is that all markets get slapped with the same charges. As for the currency market, they can always serve as hedges.

And as Mr. Rothbard said, aside from the benefits of social cooperation through trade which paves way for advancement, charity can happen VOLUNTARILY coming from excess real savings. So it isn’t simply true that free market is a system for savages.

So if free markets can be charitable, can governments be as charitable as implied by some?

Again from Murray Rothbard, Man Economy and State (emphasis mine),

``The appeal to “charity” is a truly ironic one. First, it is hardly “charity” to take wealth by force and hand it over to someone else. Indeed, this is the direct opposite of charity, which can only be an unbought, voluntary act of grace. Compulsory confiscation can only deaden charitable desires completely, as the wealthier grumble that there is no point in giving to charity when the State has already taken on the task. This is another illustration of the truth that men can become more moral only through rational persuasion, not through violence, which will, in fact, have the opposite effect."

The unfortunate part is to look for all sorts justifications to discredit the markets in order to promote the welfare system which for all these years has been proven to be ineffective.

Yet, in contrast to the pleasantly sounding missions, government charity undertakings in most instances bear the insidious side effects of reducing our purchasing power unknown to many.

The View From AT Kearney

For clarity purposes the following are some empirical evidences from the international consulting firm AT Kearney which expounds on our missives:

Figure 2: AT Kearney: Tiny Countries Trade Big!

The public have been long made to believe that central planning “virtuousness” is the key to the successes or the affluences attributable to small countries with no resources. Instead, we suggested that the responsible factors had been the operating efficiency through open competition and trade, as shown in Figure 2.
Here we lengthily excerpted AT Kearney (ours emphasis)…

``If there is one big factor that many of the most globalized countries have in common, it’s their size: They’re tiny. Eight of the index’s top 10 countries have land areas smaller than the U.S. state of Indiana; and seven have fewer than 8 million citizens. Canada and the United States are the only large countries that consistently rank in the top 10.

``So, why do small countries rank so high? Because, when you’re a flyweight, globalizing is a matter of necessity. Countries such as Singapore and the Netherlands lack natural resources. Countries like Denmark and Ireland can’t rely on their limited domestic markets the way the United States can. To be globally competitive, these countries have no choice but to open up and attract trade and foreign investment, even if they’re famously aloof Switzerland.

``Indeed, economic integration is where these top-performing, tiny countries flex their muscle. All eight rank in the top 11 on the economic dimension of globalization, which incorporates trade and foreign direct investment. Hong Kong and Singapore, the top two performers in this category, leave other economies in the dust. Additionally, the World Bank placed all the high-ranking, small countries except Jordan in the top 25 out of 175 economies in ease of doing business. Jordan, though, ranks first on the index’s measure of political engagement, due to its participation in treaties and U.N. peacekeeping missions.

``And if you’re living in a small country, reaching out beyond your country’s borders may be the only way to find new opportunities.”

Oops! No central planning “virtuousness”, no philanthropy, but just plain “opening up to trade and attracting foreign investments”….all hallmarks of market economies…

Next, as we earlier mentioned, the perceptive resource person we recently listened to, dealt with how businesses models have been rapidly evolving across the globe due to the widespread adoption of technology changes. Again such outlook has been confirmed by AT Kearney as shown in Figure 3.

Figure 3: AT Kearney: Trafficking Information

Again AT Kearney on technology enabled integration,

``An advanced highway system is often credited for the rise of the Roman Empire; goods, soldiers, and tax revenues could move across great distances at remarkable speed for the age. But if all roads once led to Rome, today’s Internet superhighway leads to the world’s most open countries. More-globalized countries tend to have more international Internet bandwidth, a measure of the size of the “pipe” through which e-mail and Web pages cross borders.”

Unfortunately the Philippines is not included in the chart, but since an estimated 6% of the population is wired where only a small fraction of probably around 5% are into broadband connection or about .5% of the population (Businesswire; Sept. 11, 2006) we should be situated around the lowest spectrum.

The idea is, the more wired or connected a country or its population, the more chances of its being part of the economic integration or collaboration with other countries through trade….

Of course we expect that market critics to raise the issue of “digital divide” again. There always has to be an issue where government’s big hand should play a role or risk obsolescence.

But we believe that digital divide, even if it has a slow take up today in the country, will eventually pickup. AT Kearney believes it is one of the key weaknesses of ASEAN countries. If the issue is about affordability then technological advances will clearly compel prices to substantially fall.

Today, Walmart is said to offer $200 computers, comments Bill Bonner chief editor of the Daily Reckoning, (emphasis ours) ``Now every yahoo with $200 in his jeans can read what we write. This is a big step forward for society, too, say the commentators, because now we will have ‘digital equity,’ meaning everyone can have access to all the digital information, news and opinions they want. Of all the crackpot notions to come along in recent years, the idea of the ‘digital divide’ was among the looniest. If you didn’t have access to the Internet, they said, you would be left behind...doomed to live in poverty and obscurity all your life…”

Patricia Yim, managing director of IBM Singapore in 2005 wrote in YaleGlobal “The Blurring Digital Divide” (highlight mine), ``Put it all together. Modern telecommunication is spreading like wildfire - even to areas with little prior contact with the outside world. Falling hardware costs, grid computing and pay-as-you-go pricing options are reducing, if not eliminating, barriers to IT entry. The open source movement is being embraced by developing nations even more enthusiastically than in the West. And with a growing and increasingly well-trained cadre of indigenous IT professionals, the notion of a permanent structural digital divide is fast succumbing to a far rosier reality.”

Privately led technological breakthroughs have far accelerated more than regulations can keep up with. In the financial markets these were revealed through the credit implosion in the US of several securitized instruments as CDOs, CLOs, SIVs and etc.

Next, changes in demographic trends have been one important economic trend which we keep track of simply because these influence savings, investment and consumption patterns. Hence from such standpoint we define our investments criteria and position accordingly.

AT Kearney shows us how globalization affects this trend in Figure 4…

Figure 4: AT Kearney: Urban Outfitted

Again AT Kearney on Urban Outfitted,

``Cities can be a blessing or a curse. Millions leave their villages each year and head to bustling cities to find a better life. But urban centers can also be home to massive slums or sprawl, and the crime, disease, and poverty that come with it. It is generally true that the more urban a country, the more globalized it tends to be. Top-ranking Singapore is the best example; it is 100 percent urban, and its citizens are well educated and relatively affluent. Meanwhile, a less globalized society like Bangladesh is a quarter urban. In fact, less globalized countries often have faster-growing cities. And that is hardly good news. For example, in low-ranking Nigeria, the urban jungle grows by more than 2.5 million people each year. Dhaka, the capital of Bangladesh, was originally designed for a population of 1 million people; today that number stands at 12 million, and demographers predict that the city will be home to more than 23 million people by 2015. Pressures that great can push any city beyond its breaking point.”

Again the idea is, Urbanization works provided an economy is more “globalized”. And it becomes pernicious if such trend is not met with sufficient trade or investments. Naturally if we add the connectivity component, given today’s evolving platform where people can work REMOTE from urban Centers, these trends should slow, which is why we see More globalized countries with slower urban growth.

AT Kearney likewise gives us a profile of an Emerging “Baltic Tiger” in Estonia, which it describes,

``Milton Friedman would be at home in Estonia. That’s because the small former Soviet republic has put many of the late Nobel Prize-winning economist’s ideas to the test. The result? Estonia, having shaken itself free from its communist-era shackles, may now qualify as the first Baltic Tiger; it debuts this year at number 10 in the index.

``In keeping with Friedman’s free-market philosophy, the country’s government has moved aggressively to open itself up to the outside world. For all practical purposes, Estonia has no corporate income tax, and shareholder dividends are subject to a simple flat tax. Bureaucracy isn’t a problem, either; the government just steps aside to let investors do their thing. The World Bank ranks Estonia 17th among 175 economies in ease of doing business, and sixth in ease of trading across borders. Additionally, the government places no restrictions on foreign ownership of real estate, which has fueled a property investment boom among overseas buyers.

``Although the index ranks Estonia 21st in technological connectivity, the country seems poised to pounce higher. The country, dubbed by some as “E-Stonia,” has launched a large online government initiative and even declared Internet access a fundamental human right. In March, it held the world’s first general election that allowed e-voting over the Web.

``Former Prime Minister Mart Laar, who stepped down in 2002, is widely credited with introducing most of the policies that have helped his country roar ahead of the pack. But among his many awards and accolades, one seems particularly apt: the Cato Institute’s Milton Friedman Prize.”

Aside from debunking the allegations of “Zero sum game” and “uncharitable”, these examples from AT Kearney clearly show how market models can transform an economy for the better. Further, personality based politics or “virtuous politics” would greatly be reduced allowing people to focus on productively enhancing their competitive positions.

Finally, the United States had long been a chief proponent of market economies, where according to the US government, particularly the USINFO.State.gov through Mr. Michael Watts (emphasis ours),

``Yet for many, the fundamental principles and mechanisms of the alternative, a market economy, remain unfamiliar or misunderstood -- despite its demonstrable successes in diverse societies from Western Europe to North America and Asia. In part, this is because the market economy is not an ideology but a set of time-tested practices and institutions about how individuals and societies can live and prosper economically. Market economies are, by their very nature, decentralized, flexible, practical and changeable. The central fact about market economies is that there is no center. Indeed, one of the founding metaphors for the private marketplace is that of the "invisible hand."

``Market economies may be practical, but they also rest upon the fundamental principle of individual freedom: freedom as a consumer to choose among competing products and services; freedom as a producer to start or expand a business and share its risks and rewards; freedom as a worker to choose a job or career, join a labor union, or change employers.

``It is this assertion of freedom, of risk and opportunity, that joins together modern market economies and political democracy.

``Market economies are not without their inequities and abuses -- many of them serious -- but it is also undeniable that modern private enterprise and entrepreneurial spirit, coupled with political democracy, offers the best prospect for preserving freedom and providing the widest avenues for economic growth and prosperity for all.

Need we say more?