Quantum Forest

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:

• The extreme level of inequality¹ still present in society. By the way, I do not believe that one of the reasons for this is the presence of a capitalist system but that the system is not truly capitalist² yet. The major issues would be: the existence of a small number of people restricting a proper access to a market economy for the rest of the population, and lack of property rights, with a substantial proportion of transactions in an informal economy³; namely Hernando de Soto’s dead capital argument.
• The feeling that there is a ‘restricted version’ of democracy, where there are still groups of people (e.g., higher ranks of the military, very rich people) who are beyond the reach of the legal system. That is, a feeling of lack of justice and unfairness, which I think is being corrected, albeit very slowly.

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.

Footnotes

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.

P.S. 2005-11-10: Johan Norberg emailed me saying that ‘I’m sure I would also have shared your attitude had I experienced that’.

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 (P.S. 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?).

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.

I received comments about this site from an old university friend who works in Latin America for a major environmentalist organisation. He had some compliments and many criticisms, the latter including that ‘there is only a superficial varnish of conservation biology and you don’t touch political issues like overconsumption and rural poverty’. He is somewhat right, because — mostly due to lack of time — I have not treated with detail all those issues. I will start with poverty.

It is possible to claim that poverty is closely linked to many environmental problems. If one lives in poverty environmental problems tend not to be at the top in one’s list of worries. This probably is because this would imply long term planning, and one is in survival mode. A typical example of poverty and its interaction with the environment is that large part of natural forests deforestation — particularly in the Third World — it is due to harvesting for firewood by poor people. Another one is that reproduction rate (and therefore larger populations that exert more pressure on the environment) is higher in poorer societies.

Richer societies tend to develop a preoccupation for the natural environment — and can dedicate resources to improve it. An increase of living standards is often accompanied by a reduction of birth rate. Graphical representation between income and a series of ‘quality of life’ indicators can be found at Gapminder’s site. Environmental conditions and quality of life tend to improve when societies become richer. Then the questions are Why are some countries poor? and How do we get people out of poverty?

In The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (you can read the introduction here), Hernando de Soto argues that developing countries have failed because most people have dead capital.

Even the poorest people save… but they hold these resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.

My old friend’s comments and the previous quote reminded me of some lectures on ‘rural development’ at university, where with another friend we questioned the approach proposed by the lecturer. ‘Weren’t we just perpetuating a subsistence level but not increasing living standards?’ ‘Wasn’t the lack of clear property rights (going back to old Spanish institutions like mayorazgo) one of the main causes of environmental degradation in Chile’s IV region?’

Rather than continuous handouts, poor countries need help on implementing reforms that transform all the wealth in their informal economies into capital. Doing this will certainly contribute to improve environmental conditions in the Third World. Going back to my university days: developing a drought-tolerant tree species for firewood is a nice thing to do, but will do very little on improving living standards in a permanent way, because it doesn’t tackle the roots of the problem.

Last Saturday the coalition Liberal/National Party easily won the election, despite polls predicting a very close result. However, the market (i.e., betting odds) was giving a probability of 0.6 for a Liberal victory.

This reflects an interesting phenomenon: one should trust more where people put their money than what they say will do. I call this the ‘footy tipping effect’, where most fans will bet against their team if that means they can win the tipping competition. Thus, one can extract more reliable information from tipping than when there is nothing to loose (like in an opinion poll).

Coming back to election policies, Labor was unable to sell its forest policy in Tasmania and did not get anything in exchange in mainland. Labor lost two seats — Bass and Braddon — in Tassie (at least in part because of that policy) and failed to gain the marginal seats in urban mainland that were the reason of being for that policy.

I expect that now that the election is over, political pressure on the forest industry will reduce a bit. Despite of this, I think it is a good idea for industry to use this post election time for making changes that enhance community support in urban areas. This would reduce the ability of its adversaries to put again forestry in the spotlight at federal level. Finally, it is clear from the election results that rural areas are certainly behind industry, as it has been suspected for a long time.

In June I made some comments on how chemists (pharmacies) were stifling competition. That was a comment solely based on my experience dealing with them. Ten days ago Choice Magazine, owned by the Australian Consumers’ Association, published a report on the quality of advice and pricing provided by pharmacies.

Access to the report requires paid subscription (which I have), but the main findings were made public. The study included 87 seven pharmacies in Sydney, the Wollongong area and Adelaide, and found that:

• Advice given in 58 out of the 87 pharmacies we visited was rated ‘poor’ by our experts. The pharmacy profession needs to improve the quality of advice being given to consumers.
• Speaking to a pharmacist rather than a pharmacy assistant didn’t guarantee good advice.
• In a price spot-check of two of the products our researchers bought, the most expensive of each product in a supermarket was still cheaper than the cheapest pharmacy price for the same item.

The report also claimed that:

…there’s some evidence that restricting pharmacy ownership may be limiting competition and make prices for some medicines higher than they would otherwise be, and the results of our spot-check seem to support this.

Sadly, it seems that my experience with pharmacies was not an exception at all.

I went to the chemist to buy formula for Orlando. At the entrance of the shop there was a poster highlighting a campaign aimed to stop supermarket selling medicines and other health related products. The poster pointed out that the quality of the service provided by the supermarket would be much lower than the one in the chemist. They were even collecting signatures, to show how many citizens are outraged by the idea of risking our health. My dialogue with the dependant was more or less like this:
—Hi, I would like to know which formula do you recommend for newborns.
—Err, not sure. What did the pediatrician recommend?
—The pediatrician did not want to suggest any brand, just to avoid any commercial implications and conflicts of interest. He suggested asking you.
—Err, what did the nurses recommend?
—They didn’t recommend anything, same reason as before (Getting tired of the conversation).
—Err, this is the most popular brand (pointing to some middle of the range tin of formula).
—I didn’t ask which one was the most popular, but which one was the best.
—I really don’t know. Did you ask your Doctor?

I thought ‘lets try in another chemist’, which was less than a block away. The dialogue was almost identical. I bought something else, and the chemist provided me with ‘advice’, actually she just read the instructions from the box… Thank you, I know how to read. Would I be worse off going to the supermarket? Not really, and things would be cheaper. This seems to be just another sector where consumers are worse off because of artificial entry barriers; the result is poor service more expensive than necessary.

Watching TV a few days later I saw a protest of apple producers in Tasmania. They want to stop imports of apples from New Zealand because of phytosanitary reasons (some low risk of fireblight attack). However, it sounds pretty much like avoiding competition with a lame excuse. As a result I still miss my favourite variety: Pacific Rose. Incidentally, I do miss Hubbards’ ‘Fruitful Breakfast’ cereal too!

This post has a follow up in September 2004.

Some time ago I started participating in a more proactive way in the forestry debate in Tasmania. After a few weeks I realised two things: this debate is part of a much larger picture— which includes issues like freedom, economics and environment—and that I needed to review (and study) more economics.

After browsing a while I found many references that I would like to read, but I could not afford to buy them all. I started ordering three new books, two through amazon.com and one through ‘Hobart Bookshop’. The books are:

• A world without walls: freedom, development, free trade and global governance, by Mike Moore, ex director of the World Trade Organisation.
• In defense of global capitalism, by Johan Norberg, who works for a liberal think-tank in Sweden (Timbro).
• Eco-nomics: what everyone should know about economics and the environment, by Richard Stroup, Professor of Economics at Montana University.

One of the interesting things about globalisation is that I paid more for Mike Moore’s book in Hobart (about AU$60) than I would have through amazon.com (about US$32.50 including postage, ~AU$44). Anyway, I will be writing some comments about the books in the near future.