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Free market and democracy
Published Tuesday November 8, 2005 · Permalink

This post started as a question to myself: Why did it take me so long to start caring about economics? Only last year, at age 37, I felt the urge to start reading about economics and its relationship with society. Before that, I used to have this primordial (to use H.P. Lovecraft’s language) reaction towards economics, particularly its free market variants.

I think that one of the major ‘whack on the head’ moments was realising that claiming an admirable objective is completely different from achieving it. That, in addition to the realisation that many good intentioned policies actually achieved opposite effects was enough to decide start reading about economics and ‘classical liberal’ approaches. The last part of my excuse is that I was first exposed to free market principles under Augusto Pinochet’s dictatorship.

I still believe that imposing economic change without political freedom is wrong, and costed me years of rejecting open economies. The problem is this: an unelected government (a dictatorship to be honest) pushes for economic reform. Because I disagree in principle with a dictatorship and the lack of freedom, I will tend to oppose most policies, even reasonable ones. At some point this includes supporting the opposite of economic freedom, well, sort of. Chile represents a funny free market, an economic system that for many years lacked transparency.

An interesting feature of this dicothomy between ‘market freedom’ and ‘political freedom’ is the attitude towards democracy in Latin America. The Economist published the results of The Latinobarómetro poll, and even in countries like Chile—that has had major economic growth—around 50% of people are still ‘not very satisfied’ or ‘not at all satisfied’ with the way democracy works (see Figure 3 in the linked document). So, why are people still struggling to come to terms with a freer system? I would venture that there are at least two important reasons:

Is a future of free market and democracy possible for developing countries? I believe so, particularly if we are talking about ‘real capitalism’, with more responsible politicians and business people, as well as a preoccupation for the unintended consequences of electoral promises. May be there are too many ‘ifs’ in the previous sentence, but the experience of countries like Venezuela4—devastated by demagogy and government/business inbreeding—may be a good reminder for personal and social responsibility.


1 I do not think that the mere existence of inequality is in itself an issue (I do not mind about the existence of multimillionaires). The problem is when there is still a large proportion of people that has little hope for the future, as is still the case in many Latin American countries.

2 This is well put by Johan Norberg in his In defence of global capitalism book. By capitalism he means (PDF 112KB):

...the liberal market economy, with its free competition based on the right of using one’s property, the freedom to negotiate, to conclude agreements and to start up business activities. What I am defending, then, is individual liberty in the economy. Capitalists are dangerous when, instead of capitalist ownership, they join forces with the government. If the state is a dictatorship the enterprises can actually be a party to human rights violations, as for example in the case of a number of western oil companies in African states. By the same token, capitalists frequenting the corridors of political power in search of benefits and privileges are not capitalists either. On the contrary, they are a threat to the free market and as such must be criticised and counteracted. It often happens that businessmen want to play politics and politicians want to play at being businessmen. This is not a market economy, it is a mixed economy in which entrepreneurs and politicians have confused their roles. Free capitalism exists when politicians pursue liberal policies and entrepreneurs do business.

3 This problem is also linked to environmental degradation.

4 I am not ‘just picking’ on Venezuela. I lived five years in the country and have very good memories of its people and landscape.

PS. This is my long promised post 165, which ended up being very late and completely different from my original intention.
PS2. 2005-11-10: Johan Norberg emailed me saying that ‘I’m sure I would also have shared your attitude had I experienced that’.

del.icio.us tags: democracy capitalism economics latinamerica.


Taxes and spelling
Published Thursday September 8, 2005 · Permalink

A current affair (ACA) is, together with its competing alternative Today Tonight, one of those lame ‘current affairs’ TV programs, which provide simplistic coverage and advice. A typical story will be around five minutes providing fairly useless information1. As an example, a story of people troubled with heavy debts will suggest ‘use a budget’, or a story on obesity will tell you ‘eat less and exercise’.

Last night ACA had a story on the rich paying less taxes than ‘the battlers’ or common people. The program asked how come that rich people pay only 30% (company tax) or even 25% (after tax deductions) when people in a salary pay up to 48.5% (the highest marginal tax)? Then the program went on the existence of ‘loopholes’ and people creating companies to avoid paying taxes.

One of the assumptions behind ACA’s reasoning is that the government actually has a natural right to take a large proportion of people’s income, which sounds very dubious (PS 2005-09-12: Catallaxy has a post covering this issue). In addition, people using legal means of reducing taxation are somewhat acting unethically. The fact that many people with higher incomes actually own a company, from where they derive their income, did not seem to bother the writers of the story.

I would say that the argument should be put in a different way. The problem is not that rich people are paying too little, but that people with lower incomes are paying too much. It seems very reasonable to me that people try to minimise payments to the state, from which they perceive they do not get good value in return.

Ironically, the same night ACA had a story on how poor was the quality of current public education, which is producing students who are unable to spell words. It seems that, again, the writers of the program did not relate people’s unwillingness to be highly taxed with the way our money is spent. Incidentally, the comparison of school students’ ability to spell with the spelling ability of people who are thirty to fifty years older was completely meaningless. There are so many differences between the cohorts that attributing differences on spelling ability only to different teaching philosophies is preposterous (apart from the use of different sets of words).

Once again, ACA provides a populist and insubstantial approach to current affairs coverage.

1 You may be wondering why was Luis watching the program anyway? Some times I watch TV just to have something to complain about (masochism?).


Rampant protectionism
Published Thursday July 7, 2005 · Permalink

I have written before about protectionism in Tasmania, but never at such a large scale. McDonalds had the chutzpa of choosing different sources of potatoes (New Zealand to be exact) and it is like they are a bunch of criminals.

Vegetable growers in Australia are saying that is unAustralian to eat foreign grown vegetables. They do not seem to realise the consequences of following that logic. Agricultural products is one of the main exports of Australia, so if other countries decide to ban foreign produce, what is going to be the market for Australian products?

Some potato growers want people to boycott McDonalds, which then would sell less french fries, requiring less potatoes, reducing even more the need for Tasmanian farmers. Brilliant!

In addition, what are the consequences of people choosing to buy local—and more expensive—products over imports? People spend more of their income in food, leaving less for other things and affecting other industries. A clear explanation can be found in these posts on protectionism and offshoring by the Angry Economist.

I also find this quote from Making Economic Sense by Murray Rothbard quite a good explanation:

Myth 10: Imports from countries where labor is cheap cause unemployment in the United States.

One of the many problems with this doctrine is that it ignores the question: why are wages low in a foreign country and high in the United States? It starts with these wage rates as ultimate givens, and doesn’t pursue the question why they are what they are. Basically, they are high in the United States because labor productivity is high—because workers here are aided by large amounts of technologically advanced capital equipment. Wage rates are low in many foreign countries because capital equipment is small and technologically primitive. Unaided by much capital, worker productivity is far lower than in the United States. Wage rates in every country are determined by the productivity of the workers in that country. Hence, high wages in the United States are not a standing threat to American prosperity; they are the result of that prosperity.

But what of certain industries in the U.S. that complain loudly and chronically about the “unfair” competition of products from low-wage countries? Here, we must realize that wages in each country are interconnected from one industry and occupation and region to another. All workers compete with each other, and if wages in industry A are far lower than in other industries, workers—spearheaded by young workers starting their careers—would leave or refuse to enter industry A and move to other firms or industries where the wage rate is higher. [p. 29]

Wages in the complaining industries, then, are high because they have been bid high by all industries in the United States. If the steel or textile industries in the United States find it difficult to compete with their counterparts abroad, it is not because foreign firms are paying low wages, but because other American industries have bid up American wage rates to such a high level that steel and textile cannot afford to pay. In short, what’s really happening is that steel, textile, and other such firms are using labor inefficiently as compared to other American industries. Tariffs or import quotas to keep inefficient firms or industries in operation hurt everyone, in every country, who is not in that industry. They injure all American consumers by keeping up prices, keeping down quality and competition, and distorting production. A tariff or an import quota is equivalent to chopping up a railroad or destroying an airline for its point is to make international transportation artificially expensive.

Tariffs and import quotas also injure other, efficient American industries by tying up resources that would otherwise move to more efficient uses. And, in the long run, the tariffs and quotas, like any sort of monopoly privilege conferred by government, are no bonanza even for the firms being protected and subsidized. For, as we have seen in the cases of railroads and airlines, industries enjoying government monopoly (whether through tariffs or regulation) eventually become so inefficient that they lose money anyway, and can only call for more and more bailouts, for a perpetual expanding privileged shelter from free competition.