The Return of Mercantilism

Mercantilist trade policies have returned in a big, big way.

Dani Rodrik:

The liberal model views the state as necessarily predatory and the private sector as inherently rent-seeking. So it advocates a strict separation between the state and private business. Mercantilism, by contrast, offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power.

The mercantilist model can be derided as state capitalism or cronyism. But when it works, as it has so often in Asia, the model’s “government-business collaboration” or “pro-business state” quickly garners heavy praise. Lagging economies have not failed to notice that mercantilism can be their friend. Even in Britain, classical liberalism arrived only in the mid-nineteenth century – that is, after the country had become the world’s dominant industrial power.

A second difference between the two models lies in whether consumer or producer interests are privileged. For liberals, consumers are king. The ultimate objective of economic policy is to increase households’ consumption potential, which requires giving them unhindered access to the cheapest-possible goods and services.

Mercantilists, by contrast, emphasize the productive side of the economy. For them, a sound economy requires a sound production structure. And consumption needs to be underpinned by high employment at adequate wages.

These different models have predictable implications for international economic policies. The logic of the liberal approach is that the economic benefits of trade arise from imports: the cheaper the imports, the better, even if the result is a trade deficit. Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports.

Today’s China is the leading bearer of the mercantilist torch, though Chinese leaders would never admit it  – too much opprobrium still attaches to the term.

I have three things to add.

First, states around the world including in the West, and especially America, have massively adopted corporatist domestic policies, even while spouting the rhetoric of free trade and economic liberalism publicly. One only has to look at the growth trend in American Federal spending to see that America has drifted further and further and further away from its free market rhetoric, and toward a centrally planned economy.

Second, the key difference between a free market economy, and a corporatist command economy is the misallocation of capital by the central planning process. While mercantile economies can be hugely productive, the historic tendency in the long run has been toward the command economies — which allocate capital based on the preferences of the central planner — being out-innovated and out-grown by the dynamic free market economies, which allocate capital based on the spending preferences of consumers in the wider economy.

Third, these two facts taken together mean that the inherent long-term advantage of the free market system — and by implication, of the United States over the BRICs — has to some degree been eradicated. This means that the competition is now over who can run the most successful corporatist-mercantilist system. The BRIC nations, particularly China, are committed to domestic production and employment, to domestic supply chains and domestic resource strength. America continues to largely ignore such factors, and allow its productive base to emigrate to other nations. And the production factor in which America still has some significant advantage — design, innovation, and inventions — has been eroded by the fact that the BRIC nations can easily appropriate American designs and innovations, because these designs are now being manufactured predominantly outside of America, and because of (American) communication technologies like the internet. This is the worst of both worlds for America. All of the disadvantages of mercantilism — the rent-seeking corporate-industrial complex, the misallocation of capital through central planning, the fragility of a centralised system — without the advantage of a strong domestic productive base.

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Is Apple Really Worth More than the Sum of Microsoft, Dell, Google, Facebook and HP?

Because that’s what the market cap suggests:

But not the book value:

Nor revenue:

And nor earnings before interest, taxes, depreciation and amortisation:

The data suggests that relative to other tech companies AAPL is significantly overvalued. And going forward there is no guarantee that AAPL can justify today’s value by keeping up its dominance of the sector. Tech is an extremely fickle and fast-changing sector where one year’s turkey can be next year’s prize pig. And AAPL’s product lineup is still dominated by products developed under the charge of Steve Jobs — it will take a while longer to fully assess whether or not AAPL can succeed at the same magnitude over the entire product cycle from conception to sales without his leadership.

But I doubt that anything like a sober look at the data will stop the Apple bulls. Because this time is different, right?


Competing For State Contracts is Not Competition

Here in Britain, we hear the word competition a lot. Since Margaret Thatcher, there has been a general trend — in the name of competition — toward the selling-off of utilities such as water, railway, electricity and telecoms providers. More recently, there has been a trend toward government services being provided by private companies, such as the bungled Olympic security arrangements contracted out to multinational security giant G4S, as well as work capability assessments contracted out to French IT consultancy ATOS, and the contracting-out of some medical services.

The way this works is that the government provides the funding for services, which private sector companies then bid to undertake. This is also the way in which defence contractors have historically competed for defence contracts, a sector which is renowned worldwide for its profligacy, waste and inefficiency.

This is a bizarre arrangement. Competing for government contracts is nothing like the free market. In a true market environment businesses compete for the custom of individuals based on their ability to provide the best products and services. Individuals spend their money to satisfy their needs. New businesses can generally enter the marketplace at any time, and take business away from existing competitors. Competition is beautiful, because it allows economies to quickly adjust capital, labour and resource allocation to the preferences of society based on which goods and services people choose to purchase.

Under a model where private contractors compete for government cash, this is impossible because contractors are essentially bidding for a state-backed monopoly. State bureaucrats determining which contractor will get the money is not competition; there is no market mechanism, there are no consumer preferences. Contractors are just bidding for handouts from the taxpayers’ purse based on the preferences of economic planners. Consumers cannot take their custom elsewhere, because the custom is involuntarily coming out of their taxation.

This has also been the reality of privatisation. Although I am no fan of government-controlled industry, the reality of privatisation in the UK has been the transfer of state monopolies into private hands.

One very clear example of this is telecoms infrastructure. BT Openreach, an arm of the privatised BT, has a complete state-enforced monopoly on telephone exchanges. Other telecoms providers have to lease their infrastructure in order to operate.

And the same for railways; rail lines are sold off as monopolies for ten-year periods. For travellers who want to travel by rail from one destination to another, there is no competition; there is only a state-backed monopoly operating for private profit. No competition, only endless fare hikes, delays and a complete lack of market accountability as contractors take the government cash and do whatever they want.

Ultimately, the state-backed-monopoly model seems to manifest the worst of all worlds. Costs for taxpayers remain high, budget deficits continue to grow, and utilities remain inefficient and messy. The only difference appears to be that taxpayers’ money is now being funnelled off into corporate pockets.

A free society cannot be based on economic planners allocating resources based on a bidding process. A free society is based on the state letting society allocate resources based on the market for goods and services that people want and need.

You Didn’t Build That


If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business–you didn’t build that. Somebody else made that happen. The internet didn’t get invented on its own. Government research created the internet so that all the companies could make money off the internet.

Much of the blogosphere has defended Obama’s statement, along one of two lines:

  1. That Obama didn’t mean that business-owners didn’t build their businesses — he was talking about infrastructure creation and the wider economic, legal and political system.
  2. That Obama is right — and businesses owners are really not responsible for building their businesses.

Both of these arguments are nonsensical.

Economic and business growth is a complex and multi-dimensional thing, driven by the complex relationship between both supply and demand. To claim that those who put the legwork into building a business — whether that is the owners, or workers — “didn’t build” the business is totally false and absurd.

And even if Obama was talking about infrastructure and the wider economic system (which I suspect was the case) it is taxpayers who fund infrastructure creation, and the overwhelming majority of businesses and business owners (other than the bailed-out financial institutions and similar) contribute heavily to tax revenue.

Whichever way we look at it tax-paying business owners past and present — particularly small businesses, who create far more jobs than their larger corporate counter-parts — built not only their businesses, but also contributed to and funded the wider economic system and the institutions of the state.

Obama and his speechwriters ought to look more carefully at the country they desire to be elected to lead. Obama’s comments are hostile to the moral and intellectual foundations on which America has been built — the celebrated ideals of individualism and the self-made man.

As the former slave and abolitionist Frederick Douglass noted:

Self-made men are the men who, under peculiar difficulties and without the ordinary helps of favouring circumstances, have attained knowledge, usefulness, power and position and have learned from themselves the best uses to which life can be put in this world, and in the exercises of these uses to build up worthy character. In fact they are the men who are not brought up but who are obliged to come up, not only without the voluntary assistance or friendly co-operation of society, but often in open and derisive defiance of all the efforts of society and the tendency of circumstances to repress, retard and keep them down.

I wish we had a Republican Presidential candidate who acted in the spirit of Douglass.

Although Romney will outwardly claim to subscribe to Douglass’ values, his record suggests otherwise. The 2012 Presidential election is between two architects of socialised healthcare, two defenders of government bailouts, two advocates of pre-emptive warfare and indefinite detention without trial.

America, I think, still has a free spirit — although less than she once did. Yet Americans have been browbeaten by two political parties who are largely hostile to the old American ideals of individual liberty, individual responsibility, nonconformism and the frontier spirit.

Yet I am an individualist. If we as individuals are willing to accept the erosion of our liberty, we have only ourselves to blame.

Spreading the Wealth Around

Under Obama, corporate profits have soared to all-time highs:

Rentiers are doing better than ever; rental income has exploded and almost doubled since the recession (bubble-watchers — this is a huge one):

Yet employment still hasn’t recovered:

Income inequality under Obama has grown at a faster-rate than under Bush or Clinton:

All that debt Obama acquired, and all the stimulus did work to redistribute wealth and income — it worked to redistribute wealth and income toward the well-connected crony capitalist groups that funded Obama into office.

Obama can talk all he likes about cutting taxes for the middle class; the data shows who Obama’s redistribution policies have overwhelmingly favoured.

Of course, leftists and statists often end up favouring the super-rich. That’s been the underlying reality of communism — politburos, bureaucrats, technocrats, party members all benefit at the expense of everyone else (in spite of all that proletarian rhetoric).

Inviting the state to carve up national income and redistribute it is an invitation to corruption, and graft. Obama talks an updated version of the old communist rhetoric about redistributing wealth to the working class — he even adopted Stalin’s slogan “forward” — yet just like Stalin the reality of his policies is more wealth for the richest and most well-connected. What a surprise.

He continued and expanded the Bush bailouts of failed companies. He reappointed Ben Bernanke, who has hovered in his helicopter above Wall Street throwing out money to the well-connected rentiers and corporations. And his stimulus package went to his own donors like Solyndra who frittered away the loans he guaranteed.

That’s been the reality of “spreading the wealth around”. When will we wake up?

We’re All Nixonians Now

People have got to know whether their President is a crook

Richard M. Nixon

I often wonder who is worse: George W. Bush — the man who turned a projected trillion dollar surplus into the greatest deficits in world history, who bailed out the profligate Wall Street algos and arbitrageurs, who proceeded with two needless, pointless and absurdly costly military occupations (even though he had initially campaigned on the promise of a humble foreign policy), who ignored Michael Scheuer’s warnings about al-Qaeda previous to 9/11, who signed the Constitution-trashing PATRIOT Act  (etc etc ad infinitum) or his successor Barack Obama, the man who retained and expanded the PATRIOT Act powers under the NDAA (2011), who claimed the right to extrajudicially kill American citizens using predator drones, who expanded Bush’s expensive and pointless occupations (all the while having run on a promise to close the Guantanamo Bay detention centre and reverse Bush’s civil liberties incursions), who proceeded with Paulson’s Wall Street bailouts, authorised the NSA to record all phone calls and internet activity, and continued the destructive War on Drugs (even though he had in the past been a drug user).

The answer, by the way, is Richard Nixon. For almost forty years after that man’s resignation, it is arguable that almost every single administration (with the possible exception of  Carter as well as Reagan’s first year in office) — but especially that of Bush and Obama — has been cut from his cloth. It was Richard Nixon who inaugurated the War on Drugs — that despicable policy that has empowered the drug gangs and obliterated much of Latin America. It was Richard Nixon who so brazenly corrupted the White House and tarnished the office of the Presidency through the Watergate wiretapping scandal.  It was Nixon’s administration that created the culture of government surveillance that led directly to the PATRIOT Act. It was Nixon who internationalised the fiat dollar, so trampling George Washington’s warnings about not entangling alliances, and of course setting the stage for the gradual destruction of American industry that continued apace under NAFTA and into the present day, where America runs the greatest trade deficits in human history. It was Richard Nixon who set the precedent of pointless, stupid, blowback-inducing militarism, by continuing and expanding the Vietnam war. It was Richard Nixon whose administration authorised the use of chemical weapons (or as George W. Bush might have put it, “weapons of mass destruction”) against the Vietcong.

Presidents since have followed — to a greater or lesser extent — in his mould. This is particularly acute this election cycle; you vote for Obama and you get Richard Nixon, or you vote for Romney and you get Richard Nixon. Nixon’s words: “we’re all Keynesians now” have a powerful resonance; not only has every administration since Nixon retained the petrodollar standard and spent like a drunken sailor in pursuit of Keynesian multipliers, but every President since has followed in the Nixonian tradition on civil liberties, on trade, on foreign policy. Henry Kissinger — the true architect of many Nixonian policies, and Obama’s only real competition for most bizarre Nobel Peace Prize recipient — has to some degree counselled each and every President since.

It is hard to overstate the magnitude of Nixon’s actions. The demonetisation of  gold ended a 5,000 year long tradition. It was a moment of conjuring, a moment of trickery; that instead of producing the goods, and giving up her gold hoard to pay for her consumption habits (specifically, her consumption of foreign energy), America would give the finger to the world, and print money to pay her debts, while retaining her (substantial) gold hoard. The obvious result of this policy has been that America now prints more and more money, and produces less and less of her consumption. She has printed so much that $5 trillion floats around Asia, while the American industrial belt rusts. Industrial production in America is where it was ten years ago, yet America’s debt exposure has ballooned.

America has had not one but two Vietnams in the past ten years.

First, Afghanistan, in the pursuit of the elusive Osama bin Laden (or, “in the name of liberating women”, presumably via blowing their legs off in drone strikes), where young Western soldiers continue to die (for what?), even after bin Laden’s supposed death in a Pakistani compound last year.

Then, Iraq, presumably in the interests of preventing Saddam Hussein from using non-existent Weapons of Mass Destruction, or liberating more women by blowing their legs off (or as Tom Friedman  put it: “SUCK! ON! THIS!”).

Like Nixon’s Presidency, the Nixonian political system is highly fragile. Debt is fragility, because it enforces the inflexibility of repayment, and the Nixonian political system has created staggering debt, much of it now offshore. The Nixonian economic policy has gutted American industry, leaving America uncompetitive and dependent on foreign productivity and resources. The Nixonian foreign policy has created a world that is deeply antipathetic to America and American interests, which has meant that America has become less and less capable of achieving imperatives via diplomacy.

Future historians may finger George W. Bush as the worst President in history, and the one who broke the American empire. But smarter scholars will pinpoint Nixon. True, the seeds of destruction were sown much earlier with the institution of permanent limited liability corporations. This allowed for the evolution of a permanent corporate aristocracy which eventually bought out the political echelon, and turned the Federal government into an instrument of crony capitalism, military Keynesianism and corporate welfare. Nixonianism has been the corporate aristocracy’s crowning achievement. And to some extent, this period of free lunch economics was a banquet, even for middle class Americans. The masses were kept fat and happy. But now the game is up — like Nixon’s Presidency — its days are numbered.

The Vampire Squid’s Problems

Greg Smith, a now former Goldman Sachs derivatives executive slams his former employer in the NYT:

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

What are three quick ways to become a leader?

a) Persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.

b) Get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them.

c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist.

Smith’s sentiments are appreciated, but actually he is wrong about a fundamental point, at least in today’s business environment. Goldman doesn’t have to give a damn about its clients because the vampire squid has found a much more lucrative way of insuring their bottom line: government largesse.

Let’s be clear: the bailout of AIG was not solely a bailout of AIG. It was also bailout of Goldman Sachs, to whom AIG were a counter-party. AIG’s failure would have meant Goldman’s balance sheet — already stuffed with derivatives dynamite — blew up. Goldman — along with a whole slew of other firms who created and invested in these dynamite products — would have been bankrupt.

And so the real problem is not Goldman’s rapaciousness. It’s the fact that systemic rapacity is being subsidised and protected by the government. Malpractice and malinvestment — such as the current global derivatives mesh which spreads risk around balance sheets like a pandemic — will in nature always eventually be punished by failure. That’s precisely what we saw in 2008, and that’s precisely what governments around the world crystallised and condoned through their bailout programs. Goldman have no incentive to change their business practices under the present conditions, and they won’t.

What’s the point of running a good business when you can run a rapacious and badly-run one and continue to thrive on government welfare? Bailouts destroy the market mechanism, and allow immoral and stupid firms (and systems) to prosper at the expense of better-run ones.

I wish Smith had the moral courage to approach the real problem — the arrogant and deluded central planners who allow the vampire squid to thrive and prosper.