I disagree that free trade and free markets require military and
political power. Free trade is what people want because it gives them
more for less. People are hard-wired for cooperation in transactions
where mutual benefit is a possibility. However there are always those
who can't compete who want to use power to force people into decisions
that they wouldn't make on their own. One good example is the fact that
Californians must buy their gas from companies that refine it in
California. This adds tremendously to the cost to consumers but is a big
perk to Chevron.
Here are some more articles about the biggest monopoly of all, the US
government and the positive results of trade for the poor. I hope you'll
enjoy.
Mike
Government Seignorage
by John Galvin <mailto:johnwgalvin@…>
The other day I was reading The Daily Reckoning, Bill Bonner's email
newsletter sent out to Gary North's mailing list, when a commentator
mentioned "seignorage," the markup the government makes on the
difference between the value of a $20 bill and the cost to produce it.
This is not a new concept, but for me it was like a light bulb going
off. Gary North and others have been trying to explain why a paper money
system, even if it is backed by a "gold standard," inevitably leads to
government confiscation. It occurred to me that the term "seignorage"
may be the simplest way to understand it.
To start the discussion, let us temporarily accept the concept that
governments have a monopoly on the supply of money. The government of
South Africa, for example, manufactures Krugerrands. In this case the
seignorage value, the difference between the value of the gold content
and the price of the Krugerrand, is a comparatively small percentage.
That government is performing a valuable service and making a reasonable
profit. Investors all over the world buy Krugerrands freely, of their
own volition, without government coercion.
This was the original basis of the seignorage system. Governments
produced a real good - coins that contained true intrinsic value,
whether gold or silver or copper - which could then be exchanged for
other goods of real value such as food and clothing. Governments were
supposed to supply an equal value of coinage for the money, and
throughout some historic periods competition provided a series of checks
and balances. In modern terms, if South Africa were to dilute the gold
content of the Krugerrand, people would simply stop purchasing them and
buy Canadian Maple Leafs, or something similar.
In John Donne's Elegy XI upon the loss of his 12 gold coins we see the
process at work by which governments are continually tempted to debase
their currency, yet are constrained by competition to provide some
content of intrinsic value:
Oh shall twelve righteous angels, which as yet
No leaven of vile solder did admit...
Were they but crowns of France, I cared not,
For, most of these, their natural country rot
I think possesseth, they come here to us,
So pale, so lame, so lean, so ruinous.
And howsoe'er French kings most Christian be,
Their crowns are circumcised most Jewishly.
Or were they Spanish stamps, still travelling,
That are become as Catholic as their king,
These unlicked bear-whelps, unfiled pistolets
That, more than cannon shot, avails or lets,
Which, negligently left unrounded, look
Like many-angled figures in the book
Each European country produced gold coins, but some were recognized as
more dependable, while others were suspected of being debased. But once
any government is given an absolute monopoly, they no longer have any
incentive to produce real goods of true intrinsic value. They are
guaranteed a set price for their product, so the more they can cheapen
the product, the greater their profit. To see the incentive for
chicanery, we need merely ask, "What if an ordinary company were to be
given a similar deal?"
What if taxpayers were required by law to pay for, say, Compaq
computers, while Compaq was required to deliver something, but there was
no way to monitor the quality of Compaq's delivered products? Compaq
would know that the consumer would pay them so much money each month,
whether or not the product actually worked. In fact, the product didn't
even need to contain any actual computer chips, it just had to bear a
surface resemblance to the promised item.
Naturally they would realize that delivering cheap plastic or paper
facsimiles of computers would allow them to make the maximum possible
gross margin. The pressure to do so would be irresistible, and the
result would be inevitable. How could a chairman tell his board of
directors that he was going to continue supplying working computers at a
minimal profit margin, when he had the opportunity to make virtually
100% profit by delivering cheap replicas instead?
It would be a bad thing if Compaq were not delivering real computers,
even worse if farmers stopped delivering real food. But it's the worst
of all when the government does the same thing to money, because money
is the basis for all economic exchange, and so the government is
debasing every part of society. Every industry, every transaction is
affected.
To test our seignorage theory, let's look at other areas where
government has a monopoly and see if the same principles are at work.
The two most important which occupy the largest percentage of national
income would be education and national defense. In both cases, the
government owns either an outright or a virtual monopoly. The
government's monopoly on education is not reduced by the existence of
private schools since all citizens must pay for the schools whether they
use them or not. Parents who send their children to private schools are
required to pay twice.
Let us assume for the sake of argument that at one time the government
delivered real education, just as at one time governments delivered real
gold coins to their citizens. But over time, how long would it take
government educators to realize that they would get paid the same, and
that their income was guaranteed by the force of law, whether they
delivered a viable product or not? In the same way that governments
discovered that they could vastly increase the seignorage value of money
by delivering paper instead of gold for the same price, wouldn't
governments discover that they could deliver a mere simulacrum of
education as well? After all, property taxes do not rise or fall based
on the knowledge level of students. On the contrary, over the past 40
years there has been a consistently inverse relationship in which
expenditures increase while academic performance falls.
John Senior points out in his book The Death of Christian Culture
<http://www.amazon.com/exec/obidos/ASIN/0912141107/lewrockwell/> that
in the 19th century 16-year old students were required to write essays
in ancient Greek. As he says, they weren't necessarily brilliant essays,
nor was the ancient Greek necessarily flawless. But they could do it.
That was what was meant by receiving an "education."
Educated men of the founding fathers' generation believed that the
measure of an educated man was that he would be capable of holding a
conversation with educated men of the past, men like Aristotle, Cicero,
and Augustine. An educated man of that generation could do so, and in
the original language. In Henry Fielding's 18th-century novel, Joseph
Andrews <http://www.amazon.com/exec/obidos/ASIN/0140431144/lewrockwell/>
, the parson says to a fraud who claims to be educated, "Why, if my
8-year old boy could not construe Greek better than you, I would give
him a flogging." Virtually no one in today's society receives that level
of education, despite the expenditure of enormous sums of money that are
beyond the wildest imaginations of former centuries. How many Americans
would feel confident conducting a dialogue with Alexander Pope or Dr.
Johnson without embarrassing themselves?
Back in the 19th century when the pound sterling was as good as gold,
the word "education" meant something specific to the inhabitants of Tom
Brown's School Days
<http://www.amazon.com/exec/obidos/tg/detail/-/0192835351/lewrockwell/>
. Now that the pound has been reduced to only a fraction of its former
glory, and even that fraction is based on "faith and credit" rather than
intrinsic value, education in a similar fashion has been debased to a
level that would be hardly recognizable to a citizen of that time.
It's true that some young students are knowledgeable in areas of
technical information that did not exist back then. But in America at
least, that knowledge is usually gained through private initiative
outside the formal education system upon which the government lavishes
so much public expenditure. The science taught in most schools consists
primarily of indoctrination in certain ecological principles. And even
in the technical fields, virtually all of our science PhDs are being
earned by foreign-born students.
Our other proposed example of government seignorage was national
defense. Once again we see phenomenal public expenditures in an area in
which the government has a monopoly. But the question is, "Do we receive
anything recognizable as defense?" In the education field the government
has demonstrated that a seemingly infinite expenditure on
scholastic-related products is not capable of producing true education.
Likewise in the area of national defense, virtually infinite
expenditures by the government seemingly cannot defend the United
States.
If the United States had not one soldier in its army, nor even 1 plane
in its air force, would we be in any danger of foreign aggression? Would
we need to fear imminent invasion from Canada or Mexico? Would England
or France take advantage of the opportunity to launch a pre-emptive
strike? Would even the ultimate bogeyman, the former Soviet Union, pose
any threat?
Compare this situation to what we experience today. In place of the "no
standing army" rule envisioned by the founding fathers, we have a
massive military, greater in might than all the competing militaries of
the world. Yet we suffer under constant, unremitting threats, according
to our federal government, which considerately informs us of the daily
threat level, whether "Level Orange" or "Level Red." We are unable even
to perform the job which was done by the rudimentary Coast Guard system
that existed in the United States before the days of massive military
buildups - protect our own borders from a massive influx of illegal
immigrants and illegal drugs, although we are capable of obliterating
virtually any city in the world, a task in no way truly related to the
defense of our homeland.
In the case of both education and defense, a reader might point out that
the government does purchase something with all that money. From
education departments we get thousands of school buildings, hundreds of
thousands of teachers, countless numbers of books. From the defense
department we get hundreds of millions of dollars worth of guns, planes,
bombs, etc. The money is being spent somewhere, after all.
But the correct question to ask is not whether there is a lot of
activity going on, but whether the ultimate product is being delivered.
Historically, when governments started to deliver paper money in place
of gold, they did not go out of business. Rather they initiated a new
era of vast governmental expansion which we are continuing to live
through. The scope of national government activity increased in direct
proportion to the vastly increased seignorage value of their debased
currencies.
If Compaq were allowed to deliver paper facsimiles of computers, would
all activity at corporate headquarters disappear? On the contrary, the
activity would actually increase as the company enjoyed the ability to
play with 99% gross margins. More employees would be hired. All the
managers would get raises. Bigger buildings would be built. The
manufacture of paper computers would be presented as a task of
consummate skill and difficulty.
We see an analogous situation with money. The machinery of the
government-operated financial system is infinitely larger and more
complex than anyone could have imagined in past times. Enormous amounts
of monetary products are produced and distributed by a system that is
perfectly understood by no one apparently, not even by the people
running the system.
Where does money come from and how does it operate? When should we
supply more of it and when should we supply less? Who owns the Federal
Reserve and who benefits from the profits? These are all deep mysteries,
but the plain and obvious fact is that in the field of money supply,
just as in the areas of education and defense, enormous activities take
place, in which large amounts of currency change hands.
The only real question is whether any true money is delivered. Sure we
have lots of pieces of paper floating around, and lots more digital
representations, but does the government actually supply us with any
implements of intrinsic value that we can trade for other items of
intrinsic value? In the same way, we can ask, "Do we get education?"
Does anyone other than the immediate beneficiaries (administrators,
teachers, contractors) have any use for all these buildings, books,
computers, etc? And do we get defense? Are the citizens of our country
actually protected from foreign invasion by all this military-related
activity, or are we instead made more vulnerable?
Ludwig von Mises pointed out that a fundamental problem with a socialist
system is that in the absence of price indicators there is no way to
tell what is wanted and needed. The Soviet Union, for example, may have
exceeded their quota for tractors every year, but lacked fuel to operate
them. Tractor production was considered a good in its own right, whether
or not any food was produced with the tractors. Vast efforts were
undertaken, but there was no way to know if they were fulfilling their
ultimate purpose.
Our own government systems of money, defense and education operate in
precisely the same fashion. Vast efforts are expended but there is no
way to know whether we want more paper money, more school buildings, or
more fighter planes, or whether these things are achieving their
ultimate purposes. Alan Greenspan decides how much to increase the money
supply based on his own inscrutable logic. School systems decide to
construct new buildings and hire more teachers without any feedback from
a competitive system. When was the last time that you went down to the
store and decided that the F-117 stealth fighter was a better value than
the older F-16 fighter plane? These decisions are made in an economic
vacuum not significantly different from the Soviet economy.
Hopefully these 3 examples demonstrate that the seignorage concept is a
convenient way to visualize the problems with government-supplied
products. Government owns a markup on the products it delivers, and
there is a built-in incentive to maximize this markup, as there is for
all companies and products. But for the government, there are no
balancing incentives that force them to deliver full value for the
money. On the contrary, there are inevitable and irresistible incentives
to debase the product to the greatest extent possible. History has shown
that the government's ability to debase the product is very great
indeed, in fact virtually limitless.
June 6, 2003
John Galvin [send him mail <mailto:johnwgalvin@…> ] is a
businessman living in Cincinnati. His most recent publication is
"Humanae Vitae: A Critical Re-evaluation."
Copyright (c) 2003 LewRockwell.com
The Poor Like Globalization
But institutions and policies are needed to deliver the hoped for
results
David Dollar
YaleGlobal, 23 June 2003
The world is welcome to a market in Beijing: Chinese customs move goods
faster than India, Pakistan or Bangladesh. (Photo: Nayan Chanda.)
WASHINGTON: A recent worldwide poll may have come as a shock to those
who view the anti-globalization demonstrations as emblematic of a
general souring mood about global economic integration. The Pew survey
found that not only was the attitude generally positive but there was
more enthusiasm for foreign trade and investment in developing countries
than in rich ones.
A close look at the economies of those countries shows why: the
fast-growing economies in the world in this era of globalization are
developing countries that are aggressively integrating with the world
economy. However, the survey also found common anxieties around the
world that protesters often highlight but a majority of the polled did
not blame economic integration for it. It is increasingly clear that
while this integration brings benefits, it also requires complementary
institutions and policies in order to enhance the gains and cushion some
of the risks of greater openness.
Chart 1. Source: The Pew Global Attitudes Project Enlarged image
<http://yaleglobal.yale.edu/display.image?id=1938>
The Pew Center for the People and the Press surveyed 38,000 people in 44
nations, with excellent coverage of the developing world in all regions.
In general, there is a positive view of growing economic integration
worldwide. But what was striking in the survey is that views of
globalization are distinctly more positive in low-income countries than
in rich ones.
While most people worldwide viewed growing global trade and business
ties as good for their country, only 28% of people in the U.S. and
Western Europe thought that such integration was "very good." In Vietnam
and Uganda, in contrast, the figures for "very good" stood at 56% and
64%, respectively. Although these countries were particularly
pro-globalization, developing Asia (37%) and Sub-Saharan Africa (56%)
were far more likely to find integration "very good," than
industrialized countries. Conversely, a significant minority (27% of
households) in rich countries thought that "globalization has a bad
effect on my country," compared to negligible numbers of households with
that view in developing Asia (9%) or Sub-Saharan Africa (10%).
Chart 2. Source: The Pew Global Attitudes Project Enlarged image
<http://yaleglobal.yale.edu/display.image?id=1940>
Developing nations also had a more positive view of the institutions of
globalization. In Sub-Saharan Africa 75% of households thought that
multinational corporations had a positive influence on their country,
compared to only 54% in rich countries. Views of the effects of the WTO,
World Bank, and IMF on their country were nearly as positive in Africa
(72%). On the other hand, only 28% of respondents in Africa thought that
anti-globalization protestors had a positive effect on their country.
Protesters were viewed more positively in the U.S. and West Europe
(35%).
Chart 3. Source: The World Bank Enlarged image
<http://yaleglobal.yale.edu/display.image?id=1942>
This Pew attitudes survey is consistent with the findings from World
Bank and other research on globalization. In general, the developing
countries that have increased their participation in trade and attracted
foreign investment have accelerated growth and reduced poverty. Uganda
and Vietnam are two of the best examples, so it is not surprising that
integration is viewed positively there. More generally, globalizing
developing countries are growing significantly faster than rich ones. In
a paper for the World Bank , "Trade, Growth, and Poverty," Aart Kraay
and I define the top third of developing countries in terms of trade
integration as the "more globalized" countries. This group has seen an
acceleration of its per capita growth rate, reaching a
population-weighted average of 5% annually in the 1990s. By contrast,
rich countries grew at 2%, and the rest of the developing world, at -
1%. Over 3 billion people are included, for Bangladesh China, India,
Brazil, and Mexico are part of this category.
The anti-globalization movement often claims that integration leads to
growing inequality within countries, with no benefits going to the poor.
Generally, this is not true. There are certainly some countries in which
inequality has risen, like China and the U.S., but there is no worldwide
trend. Most important, in the developing countries that are growing well
as a result of integration and other reforms, rapid growth translates
into rapid poverty reduction. The total number of extreme poor (living
on less than $1 per day measured at purchasing power parity) increased
throughout history up to about 1980. Since 1980 that number declined by
200 million, while world population increased by 1.8 billion. The
progress is heartening, but there are still 1.2 billion people living in
poverty
Notwithstanding the positive views of globalization in the developing
world, the survey shows that there are common anxieties around the world
concerning the availability of good jobs, job insecurity, old age
support, and other quality of life issues. Interestingly, people tend
not to blame globalization for lack of progress in these areas, but
rather poor governance in their own countries. World Bank research shows
that openness to trade alone is not going to have much impact if that
openness is not complemented by other factors like a sound investment
climate - meaning the environment of regulation, infrastructure, and
financial services - and effective provision of basic services,
especially for the poor.
Reforming the investment climate is thus a front-burner priority in many
locations. A major new initiative at the World Bank consists of helping
countries carry out systematic surveys of firms in order to measure the
investment climate, relate it to investment and productivity at the firm
level, and identify priority areas for reform.
Investment climate surveys have been completed recently in Bangladesh,
China, India, and Pakistan. The surveys covered firms in tradable
sectors such as garments, textiles, electronics, pharmaceuticals, etc.
The surveyed firms had an average of 75 workers. For such firms,
weaknesses in governance and infrastructure services are among the main
problems that hold back productivity and growth. For example,
reliability on power supply is a big issue in all of the South Asian
countries. In our China sample, firms estimate losing 2% of sales to
power outages, compared to 3.3% in Bangladesh and 5.4% in Pakistan.
On many of these regulatory and infrastructure issues, China looks quite
good compared to other developing countries. For example, how long does
it take a firm to get its last shipment of materials through customs.
Firms in garments and electronics that are trying to compete on the
world market typically import materials on a regular basis, making
customs efficiency very important. Firms in China were able to get their
most recent shipment of imported materials through customs in 7 days,
compared to 11 days in India, 12 in Bangladesh, and 17 in Pakistan. Such
delays result in firms having to hold higher inventories and are
therefore less reliable suppliers on the international market. Another
good investment climate indicator is how many days it takes to get a
telephone line The wait varies from 16 days in China, to 42 in Pakistan,
to a whopping 130 days in Bangladesh. Though not the only factor, good
investment climate has allowed countries to benefit greatly from
globalization, creating jobs and rapidly reducing poverty.
In summary, globalization can support poverty reduction, but it requires
international and national actions - including enhanced market access
for developing countries, improved investment climates, and effective
delivery of health and education.
David Dollar is Director of Development Policy, World Bank. The views
expressed are those of the author and do not necessarily represent
official views of the World Bank or its member countries.