War on the Internet: China’s Censorship on New York Times’s Expose on Chinese Leader’s Wealth Fails

The New York Times published an expose on the Chinese leadership which had been met by swift response and censorship by Chinese authorities.

Nonetheless, the article continues to generate readership within China via the informal or shadow internet economy.

From the New York Times (bold mine)

A spokesman for China’s Foreign Ministry on Friday criticized a decision by The New York Times to publish a lengthy investigation into assets accumulated by the family of Prime Minister Wen Jiabao, saying that the article “smears China and has ulterior motives.”

Speaking at a regularly scheduled daily briefing in Beijing, the spokesman, Hong Lei, also said that the Chinese government’s decision to immediately block access to the English- and Chinese-language Web sites of The Times on Friday morning was taken “in accordance with laws and rules.”

China’s censors also moved with unusual swiftness on Friday to delete any social media postings alluding even tangentially to the article, which cited publicly available corporate documents in reporting that Mr. Wen’s family has controlled assets worth at least $2.7 billion.

Sina Weibo, a very popular microblogging service similar to Twitter and traded on the Nasdaq in New York, on Friday morning immediately deleted the unofficial account that had been used to promote the culture and arts coverage on the Chinese-language site of The Times and that had nearly 60,000 followers. The site’s official account had been blocked since the site began operations in late June.

Even the term “$2.7 billion” was blocked on Friday on Weibo. But users were still discussing the article by using deliberate mistakes like “2.7b.”

Despite the censorship, there were signs that the article was attracting attention. According to the company’s statistics, the number of page views and unique users of the Chinese-language site fell by only a third on Friday compared with the previous Friday, even though 85 percent of users are typically located in mainland China.

The investigative article was the site’s most popular, drawing nearly a third of page views, while the home page drew another third.

The continued strength of traffic to the site was a sign that many users were using virtual private networks, or V.P.N.’s, to effectively bypass servers in China and circumvent the country’s censors.

The controversial article can be seen here

Earlier, Bloomberg had been banned for a similar expose focused on another political leader

This serves as more proof that China’s largely statist regime or her practice of state capitalism, where nearly half of the enterprises remain state owned, have been tainted with favoritism, nepotism, corruption, cronyism and all sorts of economic windfall derived from the privileges of wielding political power.

And this is why policies in China have remained predisposed to Keynesianism despite its record of mounting failures and of the explosive growth of private enterprises. The latter of which has grown into a political force enough to challenge the status quo 

This also debunks the myth of selfless or virtuous leaders. Politicization of economic opportunities universally leads to immoral actions or conflicts of interests.

And importantly, the failure to censor the article in the entirety also exhibits the shadow internet economy thrives in China, which serves as further proof that internet remains a free market despite frenetic efforts of governments to control or regulate flow of information in order to protect the status quo.

Forces of decentralization (Information age or the Third Wave) have been gnawing at the foundations of the 20th century designed political establishment.

Chart of the Day: More Economic Freedom, Lesser Corruption

This striking chart from the Economist exhibits a tight correlation between economic freedom and corruption perceptions which illustrates a very important message: MORE economic freedom translates to LESSER Corruption.

The trend of  democratization of economic opportunities through lesser interventionism or reduced politicization of the markets has been mostly influenced by the snowballing forces of decentralization through globalization and information and technology driven information-digital age than through an implied dynamic of having more socially and economically “conscientious” autocracies.  

A large number of the “Most improved” in Doing Business rankings according to the World Bank (also from the same Economist article) have also been the most dynamic countries in terms of information and technology  development based on the data from the International Telecommunications Union.

Survey: China a Marxist Country with Blossoming Capitalist Sentiment

It appears that the average Chinese has been more accommodative to capitalism than Americans.

From Bloomberg, (bold mine)

Survey respondents in the officially Marxist country were slightly more supportive of capitalism than people polled in the U.S. Seventy-four percent of Chinese surveyed said they either completely or mostly agreed with the statement that most people are better off in a free-market economy, compared with 67 percent of Americans.

More proof that the ongoing political struggle in China has been about the emergence of the politics of entrepreneurship or economic freedom.

Signs of the Accession of Austrian Economics in China

In China, anti-Keynesianism via Austrian economics seems to be gaining foothold even in the academic world. (hat tip Prof. John Cochran at the Mises Blog) 

First the recognition of the Keynesian flopperoo.

From the Wall Street Journal 

Three years ago, Keynesianism was official policy. The 2008 financial crisis had Beijing gloating over the failure of the free-market "Washington Consensus" and touting the "China Model" of government intervention. Keynesianism fit the statist zeitgeist and Beijing then suffered an export slump, so the government allocated $3.5 trillion—or about 50% of gross domestic product—in bank loans and direct spending.

Mr. Zhang's academic colleagues were all praise for the "China Model," but in 2009 he was giving speeches entitled "Bury Keynesianism." Then a top administrator at Peking University, where he now teaches economics, he argued that since the financial crisis was caused by easy money, it couldn't be solved by the same. "The current economy is like a drug addict, and the prescription from the doctor is morphine, so the final result will be much worse," he said.

Next, recognition of the bubble (business cycle) phenomenon from the growing embrace of Austrian economics

He invoked the ideas of the late Nobel laureate Friedrich Hayek and the Austrian School of Economics to argue that if the economy weren't allowed to adjust on its own, China's minor bust would be followed by a bigger one. He also advocated doing away with existing distortions such as the monopolies enjoyed in many industries by state-owned enterprises.

Those were the days when China was fast becoming the world's second-largest economy (growth in one 2010 quarter crossed 11% on an annual basis), so the establishment was in no mood to listen. "When I criticized the central government's stimulus policy, many senior officials were not happy," Mr. Zhang says. It might not have helped that at last year's World Economic Forum in China he called the government's powerful National Development and Reform Commission "a bunch of smart people doing something really stupid."

Ultimately, Beijing's stimulus fed a false investment boom that stoked asset bubbles—then the morphine wore off while the government tightened. Officials claim the economy grew at 7.6% year-on-year between April and June this year. Skeptics think the real number is closer to 4%. (One London research house says 1%.) Meanwhile, industries dominated or favored by the state, such as steel or solar power, are idling from overcapacity. Countless sheets of copper are reportedly stacked in warehouses, blocking doorways and exemplifying Hayek's notion of "malinvestment."

In other words, the stimulus was a poster child for Mr. Zhang's Austrian theories. And the sheer size of the failure suddenly has people paying attention. "The Keynesian policy didn't deliver what it promised," he says, so "more and more people realize that . . . when the government makes investment [in] something that's useless, recession will come."

Mr. Zhang’s punchline deserving of the quote of the day:

"We human beings always seek happiness," says Mr. Zhang. "Now there are two ways. You make yourself happy by making other people unhappy—I call that the logic of robbery. The other way, you make yourself happy by making other people happy—that's the logic of the market. Which way do you prefer?"

Given the snowballing forces decentralization prompted for by globalization compounded by massive technological innovation that has deepened connectivity and diffusion of the knowledge revolution, these could yet be signs of the twilight of, or as Professor Gary North predicts, "dancing on the grave of" Keynesianism.

US States: High Debts and Labor Unionism

Some debt crisis stricken US states could be facing debt downgrades soon.

From Businessweek/Bloomberg,

The debt of 30 California cities, including Oakland, Fresno and Sacramento, has been placed under review for downgrades because of economic pressures in the state, Moody’s Investors Service said.

The examinations may affect $14.3 billion in lease-backed and general-obligation debt issued by the municipalities, the New York-based company said yesterday in a statement.

“California cities operate under more rigid revenue- raising constraints than cities in many other parts of the country,” Eric Hoffmann, who heads Moody’s California local government ratings team, said in a statement. “Combined with steeply rising costs, these constraints mean that these cities will likely recover more slowly than their peers nationally, even if the state’s economic recovery tracks the nation’s.”

Communities in California have struggled to stay afloat by cutting staff and services to make up for a drop in sales and property tax revenue in the wake of the recession. Stockton, San Bernardino and Mammoth Lakes have gone into bankruptcy court since June.

Moody’s said it identified the credits as part of a broader review started in August of 95 rated cities in California.

The general-obligation bond ratings of Los Angeles, now Aa3, fourth-highest,and San Francisco, Aa2, third-highest, are on review for upgrades, Moody’s said.

Such developments merely reminds us that the US remains highly fragile to lingering debt problems.

Also, the prospective downgrades reminds me of an article that I recently came across which associates high levels of debt with high levels of ‘forced’ unionization.

From DScoundrels.com (hat tip Charleston Voice)

After discovering that the Top 10 states with the highest tax rates were all Forced Union states, it comes as no surprise that the top states with the worst debt trouble are also Forced Union states. Back in January Forbes tallied up several factors to identify which states were in the worst debt trouble (50 being the worst). The ‘Debt Per Capita and Unfunded Pensions Per Capita’ number is how much is owed per person in the state. Forbes looked at the following:

The metrics we looked at for each state included unfunded pension liabilities, changes in tax revenue, credit agency ratings, debt as a percentage of Gross State Product, debt per capita, growth expectations for employment and the state economy, net migrations and a moocher ratio that compares government employees, pension burdens and Medicaid enrollees to private-sector employment.

Forced Union vs Right-to-Work States:

Of the top 15 states with the worst debt troubles every one listed is a Forced Union state other than Mississippi and Louisiana. These states are outliers because they have assumed larger debt due to rebuilding after the devastation of Hurricane Katrina. Of the top 15 states with the least debt troubles, all but 4 (New Hampshire, Montana, Colorado and Indiana) are Right-to-Work states. Note that in 2005 Governor Daniels of Indiana revokedthe collective bargaining rights of public sector unions.  It is also notable that the Forced Union states have a higher percentage of unionized government workers than the Right-to-Work states.

Read the rest here.

Due to the mass production and centralized organization structure which characterized the industrial age, labor unions used to represent highly influential vested groups. 

Chart from the conservative Heritage Foundation 

They still are politically influential but a lot less than what had been.

Proof of this is that some of President Obama’s policies have been conspicuously pro-union e.g. auto bailouts.

However due to globalization and the deepening of the information age, labor union trends have been on a decline worldwide.

Governments in the past has implemented inflationism to pacify US labor union groups.

As the great Ludwig von Mises narrated,

The very essence of the interventionist politicians' wisdom is to raise the price of labor either by government decree or by violent action on the part of labor unions. To raise wage rates above the height at which the unhampered market would determine them is considered a postulate of the eternal laws of morality as well as indispensable from the economic point of view. Whoever dares to challenge this ethical and economic dogma is scorned both as depraved and ignorant. Many of our contemporaries look upon people who are foolhardy enough "to cross a picket line" as primitive tribesmen looked upon those who violated the precepts of taboo conceptions. Millions are jubilant if such scabs receive their well-deserved punishment from the hands of the strikers while the police, the public attorneys, and the penal courts preserve a lofty neutrality…

Firmly committed to the principles of interventionism, governments try to check this undesired result of their interference by resorting to those measures which are nowadays called full-employment policy: unemployment doles, arbitration of labor disputes, public works by means of lavish public spending, inflation, and credit expansion. All these remedies are worse than the evil they are designed to remove.

I believe that a lot of the advocates for the mercantilist-inflationists dogma are those bearing a nostalgia for big labor union days.

Unfortunately for them, today’s political priorities have shifted. Governments, along with their central banks, have been supporting mostly the crony banking system (through asset prices) whom has served as key financier to welfare-warfare based political institutions.

Worse, the era of labor union, welfare-warfare and big government are being seriously challenged by growing forces of decentralization and by internal atrophy from unsustainable government spending-debt dynamics.

The Information Age and the Philippine Cybercrime Law

Amidst fiery protest by many Philippine cyberspace users, the newly enacted Cybercrime Prevention Act of 2012 RA 10175 took effect today (BBC). 

So far, according to Freedom House in 2012 the Philippines ranks 6th in the world in internet freedom.

I am pretty sure that the law will diminish the current state of internet freedom, regardless of the excuses given by politicians, and regardless of the relative standings of internet freedom in the world overtime. Although I expect some of the current activities to shift to the informal cyberspace.

Just read all the clauses containing the term “misleading” as punishable by law to understand the law’s arbitrariness. This simply means legalistic vagueness could be used to harass political opposition or anyone on the whims of the politicos.

As of this writing the government website hosting RA 10175 is down. This could be because of heavy traffic or could be down due to protest activities undertaken by hacktivists (Examiner)

As a side note, I am also quite delighted to see the passionate responses even by statists against internet censorship. It’s a bizarre world though, when curtailment of freedom involves them, the statists balk, resist and join the commotion, but when curtailment is applied only to others they cheer.

Nevertheless, here are the top 10 Countries who censor the internet most.

From 24/7 Wall Street based on Freedom House's ranking of internet freedom

1. Iran

2. Cuba

3. China

4. Syria

5. Uzbekistan

6. Ethiopia

7. Myanmar

8. Vietnam

9. Bahrain

10. Saudi Arabia

The next list is from the Committee to Protect Journalists 

The growing crusade by governments against the internet or internet censorship should be expected and constitutes resistance to change as forces of decentralization (internet) and centralization (governments) have been on a head-on collision course.

This essentially represents part of the volatile and turbulent transition process towards the deepening of the information age.

The lists of the 10 countries who apply internet censorship most reveals that despite governments’ acts to suppress free expression, the freedom of internet expression still thrives, albeit underground.

To give some examples

-China’s shadow or informal social media users continue to swell despite the government’s prohibition.

-Cuba’s repressive government has repeatedly failed to stop domestic political activist blogger who became an international sensation Yoani Maria Sánchez Cordero.

-There is the ongoing harassment against Wikileaks through  founder Julian Assange and the war against eponymous group Anonymous (who ironically appears to have taken up the cudgels of domestic cyber activists) for exposing on government malfeasances.

-Also the Iranian government’s attempt to convert her cyberspace into a national intranet has dramatically backfired where Iran’s government has been forced to retreat.

From Gizmodo,

After seriously flipping out, cutting of Iranian access to Google and basically herding all its citizens into a tiny little government-approved intra-net pen, the Iranian government has softened its Internet ban just a little bit and restored access to Gmail.

Though the outcry against censoring the Internet at large was loud, the backlash against cutting users off from Google services such as Gmail was particularly strong. Many Iranians (reportedly around half) resorted to using VPNs to get outside of the the intra-net bubble, creating millions of dollars in profit for local VPN firms. Even government officials railed against the lack of Gmail, and complained that local clients just weren't up to snuff.

Given that the penetration rate of internet users in the Philippines is nearly at 30% of the population (internetworldstats.com), from which the bulk comes from the elite and the middle class, it would not be surprising if a sustained uproar would end up with a political ‘compromise’ ala Iran.

Bottom line: Global governments including the Philippines will continue to do everything to try to control and regulate the flow of information in order to preserve the status quo. However and unfortunately for them, the free market in the internet, people’s newfound fondness with connectivity and the knowledge revolution will give them quite a challenge.

Yet there is no stopping the march towards the information age.

War on Internet: Despite Ban, Social Media Users in China Booms; Philippine Hackers Protests

As I have been pointing out, the information age, which essentially represents the snowballing forces of decentralization, particularly globalization and rapid technological advances, will dramatically change every aspect of our lives.

And governments operating from the political economic constructs of the 20th century, particularly the centralized top-down industrial age era political institutions has been fighting tooth and nail against such revolutionary changes that undermines the privileges of the incumbent the political class and their cronies.

Today’s centralization’s debt and welfare crisis have been in fact symptoms of the decadent top-down political institutions. Inflationism has thus been one of the measures of financial repressions that has been applied to achieve such an end.

Yet desperate attempts to preserve the status quo in favor of the current beneficiaries through more social controls has only transformed the internet into a major battlefront

Today’s war on the internet through serial attempts at censorship has apparently seen a backlash from civil society, whom has been waging a broad front online guerilla warfare.

Proof?

In China, banned social media websites continue to blossom.

From Bloomberg,

Facebook Inc. (FB) and Twitter Inc. have millions of users in China despite bans on the social networking services in the world’s largest Internet market, according to the results of a survey released today.

Facebook grew to 63.5 million users in China in the second quarter of this year, up from 7.9 million two years earlier, London-based researcher GlobalWebIndex said in a blog post today. Twitter users tripled to 35.5 million from 2009.

Sites blocked in China can be accessed via so-called proxy services, which connect users to servers outside the country so they can visit sites that are filtered. The workarounds have helped Facebook and Twitter compete with local sites including microblogging service Sina Weibo, said Tom Smith, founder of GlobalWebIndex.

“It only takes a little bit of desk research to discover that what is called the Great Firewall is actually much more porous than the Chinese government would like to admit,” Smith said in the blog post.

Despite their rapid growth, the two social networks are smaller than Qzone, a website operated by Tencent Holdings Ltd. (700), with 286.3 million users. Local rival Sina Weibo had 264.1 million users. Google+, the social network created by Google Inc. (GOOG) last year, had 106.9 million users. China has 513 million Internet users, according to the government-backed China Internet Network Information Center.

GlobalWebIndex asked 2,000 Chinese Internet users earlier this year which social sites they have created an account for, and which ones they used in the past month.

The quest for free market connectivity and the Hayekian knowledge revolution has been no different in the Philippines where attempts to censor social media has led to a concerted hacker attack on Philippine government offices

From another Bloomberg article, 

Hackers attacked websites of the Philippine central bank and at least two other government agencies last night to protest a law against cyber crime set to take effect next week.

The Cybercrime Prevention Act of 2012 “effectively ends the freedom of expression in the Philippines,” according to a statement posted on the central bank website by a group that called itself Anonymous Philippines. Websites of Metropolitan Waterworks & Sewerage System, the Pilipinas Anti-Piracy Team and the American Chamber of Commerce were also defaced, the Philippine Daily Inquirer reported today.

President Benigno Aquino signed the law on Sept. 12, which identifies, prevents and punishes Internet-based crimes such as hacking, identity theft and spamming. Provisions on online libel and the authority of the Department of Justice to block websites without a court order have been opposed in several petitions filed with the Supreme Court.

The law will “infringe on the Constitutional-guaranteed freedom of speech and expression,” Senator Teofisto Guingona, a member of Aquino’s party, said in a statement today. Guingona asked the Supreme Court to declare unconstitutional several provisions of the law to take effect Oct. 3.

As I previously wrote, 

The internet essentially provides the platform for the unceasing struggle to attain civil and economic liberties, through the effective neutralization of political manipulations of the people’s minds.

The chief proponent and inspiration of nonviolent resistance and civil disobedience, the great philosopher anarchist Étienne de La Boétie once wrote,

“Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything, but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or, rather, bring about, their own subjection, since by ceasing to submit they would put an end to their servitude. A people enslaves itself,  cuts its own throat, when, having a choice between being vassals and being free men, it deserts its liberties and takes on the yoke, gives consent to its own misery, or, rather, apparently welcomes it. If it cost the people anything to recover its freedom

Thus enslavement and freedom is a matter of people’s choice. And the state of knowledge or ignorance by every individual in a society determines that choice.

The more the diffusion of knowledge in a society, the balance of power shifts towards individual sovereignty at the expense of political entities.

And that’s why welfare warfare based governments have been averse to the internet, and that’s why political authorities will continue to wage an all out war of control of the internet.

It seems that my predictions are on a volatile path to realization.

Quote of the Day: Artificially Constructed Countries to Fall Apart

Syria – like almost all of the countries in Africa, the Middle East, and Asia – is an artificial construct put together, completely arbitrarily, by politicians in the boardrooms of Europe. In the case of Syria, it was assembled from some of the remnants of the Ottoman Empire by the Europeans after World War I. As in neighboring Lebanon and Iraq, it's got at least a dozen major religious/tribal/ethnic groups that are loyal mainly to themselves. The idea of a Syrian nation is a fantasy. It was inevitable that eventually Syria would fall apart – just as it was and is inevitable for most of the other artificially constructed countries to fall apart. This applies to the EU now as well, for similar reasons.

This is from investing guru and philosopher Doug Casey on Syria and US foreign policies.

I think such unfolding political dynamic fits the global trend towards decentralization. Yet the transition process will hardly be smooth considering that many entrenched power blocs benefit from the current order and will resist giving up on these privileges. However, change is not only inevitable but imminent.

To Fix the Culture of Secrecy, Reduce Government’s Role in Society

Internet sites as Wikileaks and Anonymous has gone on exposing much of government “secrets” through "leaks", thereby putting immense pressure on governments to become more “transparent”.

For some politicians and experts in the US, the way to deal with a “culture of leaks” translates to the management classification of information.

This from the CNN,

At the end of July, the Senate intelligence committee marked up legislation drafted in response to recent high-profile leaks of classified information. The committee's chairwoman, Dianne Feinstein, claims that the bill will address the "culture of leaks" in Washington. But the leaks are a symptom of the intelligence community's culture of secrecy -- and the bill would make that problem worse in a host of ways.

Any insider will tell you that the government classifies far too much information. Top military and national security officials estimate that between 50% and 90% of classified documents could safely be released. That adds up to a massive amount of unnecessary secrecy when one considers there were 92 million decisions to classify information in 2011 alone.

The WikiLeaks disclosures featured some vivid examples, such as a cable from an American diplomat who classified his description of a typical wedding in the province of Dagestan.

Put simply, officials who routinely see innocuous documents stamped "Secret" lose respect for the system, and that puts all secrets, the real ones as well as the purely nominal ones, at risk.

Excessive classification also means that even low-level or nonsensitive government positions often require clearances. One in every 50 American adults now has access to classified information, not a winning formula for keeping secrets.

The Senate bill, however, does nothing serious to address the problem of overclassification. Indeed, it perpetuates the fiction that all classified information poses a dire threat.

The bill strips intelligence community employees of their pensions if the Director of National Intelligence decides they leaked classified information, even if the information reveals only that Dagestani weddings last three days. It revokes the clearances of officials who disclose the existence of classified covert operations -- even if the operations, like the raid on Osama bin Laden's compound, are in the past and could not possibly be jeopardized by disclosure.

Worse, the Senate bill extends the shroud of secrecy to encompass even unclassified information. Intelligence officials already must submit any publications that discuss their work to their agencies for pre-publication review and approval; under the bill, they must submit "anticipated oral remarks" as well. On its face, the provision could require pre-publication review for dinner party conversations.

This is an example of how politics addresses symptoms rather than the disease.

In reality, the political institution called the government operates on the principle of mandated organized violence.

And much of these acts of violence and repression have been deliberately concealed from the public for reasons which works to the interests or benefits of the political authorities.

It is only when violence has been seen as popular or politically expedient, when these are made public, or when they are uncovered or exposed by media.

In short, the political nature of governments has been one of advancing the culture of secrecy or of scapegoatism. Transparency, thus, is nothing but a political jingoistic charade.

SM Oliva, formerly of the Mises Institute, has this highly relevant quote

“Transparency” is a buzzword associated with all sorts of good-government movements. But it’s something of a libertarian Trojan horse. No government can ever be transparent, for that would rob of it of its very substance. All monopoly government is predicated on the ability to actively mislead and misdirect the majority — the public — away from the truth, whether it’s political truth, economic truth, or personal truth. Even government attempts at transparency are themselves usually little more than misdirection by another name. One can be transparent in such a way as to satisfy most inquisitors while revealing nothing that compromises the basic pillars of the state.

Bottom line: Managing information classifications will hardly solve on the issue of the “culture of secrecy” the latter of which signifies on the essence of government. To attain government “transparency” extrapolates to the vast reduction or retrenchment of government’s role in society.

And another thing; the pressure by Wikileaks and by other social media outfits on governments reveals of the process of the slomo ungluing of centralized political structure. Centralized institutions have been feeling the heat from, and or have been fervently fighting against, the forces of decentralization.

Fiscally Pressured Governments go for Crony based Privatizations of ‘Public Goods’

Money pressured governments are looking to privatization of parts of politically sensitive functions such as security services.

The Telegraph reports,

Private companies will be running large parts of the UK's police service within five years, according to the world's biggest security firm.

David Taylor-Smith, the head of G4S for the UK and Africa, said he expected police forces across the country to sign up to similar deals to those on the table in the West Midlands and Surrey, which could result in private companies taking responsibility for duties ranging from investigating crimes to transporting suspects and managing intelligence.

The prediction comes as it emerged that 10 more police forces were considering outsourcing deals that would see services, such as running police cells and operating IT, run by private firms.

Privatization of government functions are akin to Public-Private Partnership (PPP) enterprises on political controlled or regulated sectors. They really NOT about free markets but about cronyism.

As I previously pointed out

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

In the US even Keynesian high priest, Paul Krugman, who I vehemently disagree with on most issues, resonates with our perspective over the issue of phony privatizations (in Krugman’s case he refers to New Jersey’s “new kind of privately run halfway house” prison systems).

From Paul Krugman (hat tip Bob Wenzel, bold emphasis added)

So what’s really behind the drive to privatize prisons, and just about everything else?

One answer is that privatization can serve as a stealth form of government borrowing, in which governments avoid recording upfront expenses (or even raise money by selling existing facilities) while raising their long-run costs in ways taxpayers can’t see. We hear a lot about the hidden debts that states have incurred in the form of pension liabilities; we don’t hear much about the hidden debts now being accumulated in the form of long-term contracts with private companies hired to operate prisons, schools and more.

Another answer is that privatization is a way of getting rid of public employees, who do have a habit of unionizing and tend to lean Democratic in any case.

But the main answer, surely, is to follow the money. Never mind what privatization does or doesn’t do to state budgets; think instead of what it does for both the campaign coffers and the personal finances of politicians and their friends. As more and more government functions get privatized, states become pay-to-play paradises, in which both political contributions and contracts for friends and relatives become a quid pro quo for getting government business. Are the corporations capturing the politicians, or the politicians capturing the corporations? Does it matter?

The point, then, is that you shouldn’t imagine that what The Times discovered about prison privatization in New Jersey is an isolated instance of bad behavior. It is, instead, almost surely a glimpse of a pervasive and growing reality, of a corrupt nexus of privatization and patronage.

Additional thoughts:

This is proof that governments have really been getting desperate over their state of finances.

But, privileges are hard to let go. Instead, politicians have used austerity from today’s crisis as opportunity to dispense concessions to friends, allies or favored special interest groups for political goals. This signifies a form of economic fascism

Politicians use accounting trickery to shield reforms.

Moreover, such privatizations represent fundamental admissions that even the most sensitive ‘public goods’, whether security or defense and prison services, can be delegated or outsourced to the private sector. This implies that these services can be depoliticized and delivered, through the competitive marketplace or (hold your breath) even without government.

The answer isn't to privatize (euphemism for fascism-cronyism) but to depoliticize and liberalize the sector.

Lastly, these are writings on the wall in favor of the growing forces of decentralization.

When governments become totally bankrupt then the de-politicization or decentralization process of political functions will become apparent.

Quote of the Day: Private Arbitration

Enter 21st century technology: there’s a relatively new service called Judge.Me, an online arbitration service whose decisions are legally binding in 146 countries, from Afghanistan to Zimbabwe… and yes, including the US, Canada, and Western Europe.

At just $299, disputes can be settled in a matter of days, and the firm’s case history shows that 96% of all arbitration awards have been honored.

This is the sort of thing that makes me very excited– the private sector displacing the public sector. And there’s going to be a lot more of it coming.

The more insolvent governments become, the more they’re going to be forced to axe all the things they can’t afford. We’re already starting to see this in places from California to England that can no longer hide from their fiscal reality.

With the government monopoly out of the way, the private sector will mop up every service that it can turn a profit on– trash collection, security, fire, prisons, libraries, etc. This forces competition, higher quality service, and lower prices for everyone.

The people who protest against austerity, or think it’s a tragedy when a courthouse closes down due to budget constraints, are really missing the larger point: the sooner this corrupt house of cards collapses, the better off we’ll all be.

Another gem from the maverick Simon Black at the Sovereign Man.

This serves as another example or evidence of how the information age has been transforming our lives and that will lead to decentralization.

Quote of the Day: The Supremacy of Public Opinion

This timely quote from yesterday’s article at the Mises Institute is dedicated to my libertarian and Casey Phyle friends, as well as my, passive freedom loving readers…

Here the best theories are useless if not supported by public opinion. They cannot work if not accepted by a majority of the people. Whatever the system of government may be, there cannot be any question of ruling a nation lastingly on the ground of doctrines at variance with public opinion. In the end the philosophy of the majority prevails. In the long run there cannot be any such thing as an unpopular system of government. The difference between democracy and despotism does not affect the final outcome. It refers only to the method by which the adjustment of the system of government to the ideology held by public opinion is brought about. Unpopular autocrats can only be dethroned by revolutionary upheavals, while unpopular democratic rulers are peacefully ousted in the next election.

The supremacy of public opinion determines not only the singular role that economics occupies in the complex of thought and knowledge. It determines the whole process of human history.

The customary discussions concerning the role the individual plays in history miss the point. Everything that is thought, done and accomplished is a performance of individuals. New ideas and innovations are always an achievement of uncommon men. But these great men cannot succeed in adjusting social conditions to their plans if they do not convince public opinion.

The flowering of human society depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority.

That’s an excerpt from the magnum opus of the great Professor Ludwig von Mises.

The bottom line is that the battle for freedom fundamentally hinges on the arena of education, where ideas of liberty must be made “palatable to the majority”.

In short, communicate to educate. And we can speak or write or do both. Aside from traditional mediums, the internet has facilitated horizontal flow of communications through blogs (such as this), podcasts, social media, youtube, or etc…, which essentially bypasses the top-down flow communication monopolized and controlled by statists and their cronies. Debates can be held on neutral grounds which runs to our favor.

Remember the more the sources of ideas of freedom, the greater the chances that these may become public talking points.

Localizing freedom or merging freedom with domestic applications should increase the topical relevance that should connect with the local audience and thus attract wider participants.

In other words, communicate freedom under the framework of your specialty.

Consequently, a widening reach to the public implies higher chances for social acceptability or a change in public opinion. It’s no easy task as Professor von Mises and our free market champions have shown.

But the deepening of the information age and the law of depreciating returns for vertical organizations has been and will continue to provide us with useful examples of why individual liberty is the only option to the economically unsustainable alternative of statism. There is no middle of the road compromise.

Freedom and the basic law economics are inherently compatible. And that's why I am optimistic that the knowledge revolution will provide the ideological justification for political reforms that should lead to social decentralization.

Nassim Taleb: Worry about the US more than the EU

My favorite author iconoclast Nassim Taleb says that the US and not Europe should be the source of concern

From Bloomberg,

Nassim Taleb, author of “The Black Swan,” said he favors investing in Europe over the U.S. even with the possible breakup of the single European currency in part because of the euro area’s superior deficit situation.

Europe’s lack of a centralized government is another reason it’s preferable to invest in the region, said Taleb, a professor of risk engineering at New York University whose 2007 best- selling book argued that history is littered with rare events that can’t be predicted by trends.

A breakup of the euro “is not a big deal,” Taleb said yesterday at an event in Montreal hosted by the Alternative Investment Management Association. “When they break it up, there will be a lot of fun currencies. This is why I am not afraid of Europe, or investing in Europe. I’m afraid of the United States.”

The budget deficit as a proportion of gross domestic product in the U.S. amounted to 8.2 percent at the end of 2011, government figures show. That’s twice the 4.1 percent ratio for euro-region countries, according to data compiled by Bloomberg.

“Of course Europe has its problems, but it’s in much better shape than the United States,” Taleb said. He voiced similar concerns about U.S. prospects at a conference in Tokyo in September…

Rising interest rates would make things worse for the U.S., said Taleb, a principal at hedge fund Universa Investments LP who also serves as an adviser to the International Monetary Fund.

“We have zero interest rates,” Taleb said. “If interest rates go up in the United States, you can imagine what the deficit would be. Europe is like someone who is ill but is conscious of it. In the United States we are ill, but we don’t know it. We don’t talk about it.”

In my view, decentralization of the EU will likely be the outcome from the collapse of the welfare states where Greece may likely to set the precedent.

And like Dr. Marc Faber and Professor Taleb, for the EU, after the storm comes the calm.

I would venture a guess that the tipping point for the US dollar as global currency reserve, is when the US economy run smack into another recession or into another financial crisis, where the knee jerk or intuitive response will likely be trillions of money printing by the US Federal Reserve. Under such condition, I think Professor Taleb’s risk scenario may unfold.

How Empires Die and the End of Centralization

Professor Gary North has a splendid article on the coming end of the empire states and of the centralized form of governments…

Death of the Empire

Empires disintegrate. This is a social law. There are no exceptions.

The first well-known social theorist to articulate this law was the prophet Daniel. He announced it to King Nebuchadnezzar. You can read his analysis in Daniel 2. Verses 44 and 45 are the key to understanding the law of empires.

The Roman Empire is the model. But there is a serious problem here. There are at least 210 theories of why it fell. There are so many that even my 1976 Ron Paul office colleague Bruce Bartlett gets credit for one of them – on Wikipedia, no less. He has made the big time!

In any case, Rome did not collapse. It wasted away over several centuries, wasting the treasure of its citizens along with it.

I suppose there were highly educated people who came to the voters in the late Roman republic and said something like this: "Unless decisive action is taken now, Rome will go bankrupt." If so, they were right. But it took a lot longer than they thought.

These days, it does not take nearly so long.

An empire grows at first almost unconsciously. No one goes to the powers that be and says, "Hey! Why don't we create an empire?" It is more like the person who says this: "I'm not greedy. All I want is to control the land contiguous to mine."

In military affairs, there are economies of scale. An army of warriors makes conquest cost-effective. There are also taxation advantages. An army of tax collectors makes tax collection cost-effective. "Hand over your money" is more effective. Pretty soon, you've got an empire.

But there is a law of bureaucracy that applies to empire. At some point, it costs more to administer the bureaucracy than the bureaucracy can generate through coercion. Then the empire begins to crack. It cannot enforce its claims.

So, the growth of empire has economics at its center: economies of scale. The fall of empire also has economics at its center: economies of scale.

I think this process is an application of the law of increasing returns. In the initial phase of the process, adding more of one factor increases total output. But, as more of it is added, another law takes over: the law of decreasing returns.

Example: water and land. Add some water to a desert, and you can grow more food. Add more water, and you can grow a lot more food. There is an accelerating rate of returns. The joint output is of greater value than the cost of adding water. But if you keep adding water, you will get a swamp. The law of decelerating returns takes over. Add more water, and the land is underwater. You might as well have a desert.

This law applies to power. Add power, and you generate more income. But if you keep adding power, expenses of the bureaucracy will begin to eat up revenues. Resistance will also increase: internal and external. The system either implodes or withers away.

With only one exception in history – the Soviet Union in 1991 – empires have not gone out of business without bloodshed.

In the case of the Soviet Union, the senior politicians privatized the whole system in December 1991. They handed over the assets to what immediately became the ultimate system of crony capitalism. They divvied up the Communist Party's money and deposited it in individual Swiss bank accounts. The suicide of the USSR was "Vladimir Lenin meets David Copperfield." Now you see it; now you don't. In the history of Marxism, no event better illustrates Marx's principle of the cash nexus. It seduced Lenin's vanguard of the proletariat.

Notice the pattern of empire. It begins slowly, building over centuries: the Roman Empire, the Russian Empire, the French Empire. Then the empire either erodes or else it is captured by revolutionaries, as was the case in France (1789-94) and Russia (1917). But this only delays the reversal. It does not overcome it.

Death of the Modern Centralized States

Economies of scale shaped the development of the modern nation-state. In 1450, the governments of Western Europe were small. They controlled little territory. They were remnants of the medieval world, which had been far more decentralized.

By 1550, this had begun to change. The beginnings of the modern nation-state were visible.

Tax revenues flowed into the centralizing kingships. Trade was growing. Revenues were increasing. Weaponry was advancing. All of this had been going on for half a millennium. But, like an exponential curve, the line began to move upward visibly around 1500.

Maritime empires grew: Spain, Portugal, England. They challenged each other on the seas. Then came the Netherlands and France. The fusion of naval power and trade monopolies lured nations into competition for trade zones. The idea of free trade was centuries away, except in the academic enclave of the school of Salamanca.

The law of increasing returns was evident in this process. It paid rulers to tax more and extend the jurisdiction of the nation-state at the expense of local governments internally and foreign governments externally. The benefits accrued mostly to the political hierarchy and its system of connected families.

Economies of scale drove the process. The division of labor favored centralization. Local units of civil government could not compete.

Let me give an example from the field of historiography. The historian of colonial America can write about lots of topics: immigration, technology, family structure, town planting, economic development, intellectual trends, and so forth. He writes about the issues of life that affected people's daily lives. He cannot write about national politics until after May of 1754: the "battle" of Jumonville Glen.

The Battle of Jumonville Glen is unknown to all historians except specialists in colonial America. This is a pity, because that battle was the most important military event in the history of the modern world. It literally launched the modern world. It led to (1) the French & Indian War (Seven Years' War), (2) the Stamp Act crisis, (3) the American Revolution, (4) the French Revolution, (5) Napoleon, (6) nationalism, (7) modern revolutionism, (8) Communism, (9) Fascism, and (10) the American Empire. It was started by Virginia militia Major George Washington, age 22.

Before the ratification of the U.S. Constitution, it is both possible and wise to write about America without tying the narrative to politics. After 1788, every textbook writer is drawn like a moth to the flame: Presidential elections. He cannot narrate the text without hinging everything on the outcome in the four-year system of national covenant renewal-ratification.

We are fast approaching a day of judgment. It has to do with economies of scale. It has to do with the law of decreasing returns.

The best account of this process is a book by Israeli military historian Martin van Creveld: The Rise and Decline of the State (Cambridge University Press, 1999). He traces the history of the Western nation-state from the late Renaissance until the late twentieth century. He argues that there will be a break-up of nation states and a return of decentralization.

Read the rest here.

The transition from the decaying centralized social structures out of the law of decreasing returns is presently being compounded by the widespread adaption of massive advances from technology.

People will need ideological justifications for such transition. Remember, the world does not operate on a vacuum.

And with the democratization of knowledge through the web or the cyberspace, people’s perception, mentality and attitudes will likely adapt to favor decentralized social orders.

Futurist Alvin Toffler calls this the Third Wave. From his 1980 book,

The Third Wave thus begins a truly new era--the age of the de-massified media. A new info-sphere is emerging along-side the new techno-sphere. And this will have a far-reaching impact on the most important sphere of all, the one inside our skulls. For taken together, these changes revolutionize our images of the world and our ability to make sense of it

The Arab Spring revolts of 2011 has partly been manifestations of the combination of the law of decreasing returns on centralized social orders and of technology facilitated knowledge revolution in process.

Several welfare states in the Eurozone are in the process of a monumental collapse from a debt trap.

This will deepen overtime.

Capital Markets in the Information Age: More Financial Innovations

The world does not operate in a vacuum. Given the trend of rapid increases in the imposition of strangulating bank and financial regulations, entrepreneurs have been exploring ways to sidestep or bypass the system, by harnessing advances in technology, where they can profit from serving the consumers.

I have earlier pointed out that the internet has spawned innovative ways of borrowing and lending, of payment systems, and of the financing of commercial projects via P2P Lending and Crowd Funding.

Jeffrey Tucker at the Laissez Faire Books shows us more

Squareup. This is an innovation by Jack Dorsey (Twitter fame) and his friends, and came about only in 2010. The first problem they were trying to overcome was there has to be an easier way for merchants to accept credit cards. They decided to give the hardware away for use on simple mobile phones, and then charge per transaction. Win!

In the course of developing the business, which is valued already at $1 billion, they solved an even stranger problem that all of us have but never really noticed that we have: If we don’t have our wallets with us, we can’t buy anything.

Now this is genius: Square allows you to pay by saying your name. The merchant matches a picture of your on the square system with your physical face. You look each other in the eye and the deal is done. Anyone can sign up. Yes, it is incredible. Simple and wonderful.

The Lending Club. Again, this is mind-blowing. The Lending Club matches up lenders and borrowers while bypassing the banking system altogether. The idea emerged in October 2008, just as the existing credit system seemed to be blowing up. Today, the company originates $1 million in loans per day.

Anyone can become a lender with a minimum investment of $25 per note. Lenders can choose specific borrowers or choose among many baskets and combinations of borrowers to reduce risk.

Any potential borrower can apply, but of course the company wants to keep default rates at the lowest possible level, and these are published daily (right now, they are running 3%). As a result, most applications to borrow are declined (this is good!).

The average rate of interest on the loans is 11%, cheaper than credit cards but more realistic than the Fed’s crazy push for zero. As a result, the average net annualized return is 9.6%.

The focus if of course on small loans for weddings, moving expenses, business startups, debt consolidation and the like. If you are an indebted country with large unfunded liabilities, you probably can’t get a loan. But if you are student with a job who needs upfront money to put down on an apartment, you might qualify.

Dwolla. This is a super-easy, super-slick online payment system that specializes in linking payments through social networks like Facebook and Twitter. Like most of these companies, the idea was hatched in 2008 in response to the crisis. The system was breaking down and needed new services that worked. Dwolla got off the ground in 2009, and today, it processes more than $1 million per week.

An easy way to understand Dwolla is to view it as the next generation of PayPal, but with a special focus on reducing the problem that vexed PayPal in its early years: getting rid of credit card fraud. Dwolla is focussing its product development on ways to pay that do not require sending credit card information over networks.

Dwolla has also taken a strong interest in the Internet payment system called Bitcoin, a digital unit of account that hopes to become an alternative to national monetary systems. It is a long way from becoming that, but it is hardly surprising that a young and innovative company would be interested in competition to failed paper money.

These are a few of the services, but there are hundreds more. None were created by the money masters in Washington. They are results of private innovation, individual entrepreneurs thinking their way through social and economic problems and coming up with solutions. They accept the risk of failure and enjoy the profit from success.

Indeed, as forces of decentralization deepens, we should expect more innovative technology based solutions to emerge and flourish in every industry; finance and money notwithstanding.