the dilemma of the kiwi

One last post before we leave, this afternoon my friend Daniel and me were discussing about this responsible consuming thing, and how often people who want to do it are confronted with conflicting facts about stuff they consume. And it reminded me of this children's story of the son and his father taking the donkey to town to sell fruit. The first time the son goes with his father, he rides the donkey together with the fruit, and when they arrive in town people start commenting how shameful it was that such a strong young boy would let his old father walk while he was comfortably riding the donkey. He felt so ashamed that the next week he told his father he'd prefer to walk instead. This time when they got to town people started commenting how ridiculous such a strong man would let a weak little boy walk, while he lazily rode the animal. The week after the boy asked the father if both should ride the donkey this time. When the people saw the beast arriving in town, loaded with fruit and the 2 people, they started commenting how disgraceful they treated the poor animal. So the next week when the boy was about to suggest, out of shame, that they should carry the donkey, the father said wisely, that he should not mind so much what other people say, they will always find something to comment about, that's what they do. 

So people who want to consume with a conscience often encounter the boy's dilemma, you buy the kiwi from New Zealand, and people tell you, but that comes all the way around the world in a ship that spends tremendous amount of fuel and pollutes, it is not environmentally friendly; then you buy the kiwi from Spain, and people tell you that in Spain kiwis should not grow there in the first place so they use enormous amounts of fertilizer which is not environmentally friendly, plus they subsidise farmers in Spain such that the New Zealanders and others are jobless; then you decide not to eat kiwi, and your unhappy because once in a while a kiwi would be nice. 

Daniel and I seem to agree that acting with conscience is to act to the best of your knowledge and to the most reliable information source you have. It is not easy to compute the impact of one kiwi, let alone all the things you consume every day. I try not to be fundamentalist about anything, but to be conscious of what I do and why. Moderation is, i think, an even more reliable guideline for behaviour than responsible consuming. And also willingness to accept the best and most sensible explanation you get as the most likely to be correct and adapt to new ideas instead of stubbornly attach to dogmatic ideas.

 

What does this all mean then?

After such a long tale, I should at least give some conclusions, there are several, so here they are, as I see them:
- Government controlled economies cannot cope with a complex trade world that constantly evolves in which offer must match demand in a more dynamic and efficient way. Furthermore this type of systems tend to be despotic and limiting of peoples desires to express freely and make choices that affect their lives freely (and without being flooded with possibilities as demonstrated in Alex's post)
- Free markets are more dynamic and efficient, but the cost of that is that increase in demand is met by a greedy principle to match it (profit maximization is what drives corporations), and a decrease in demand has as impact that it will result in closure of businesses and if not always permanent at least transitional loss of jobs and their corresponding social consequences.
- Corporations will always act in self interest to maximize profit and return benefit to the shareholder, only when it suits this purpose will they ever show any social concern. Government should be the main driver of common welfare.
- In today's age of global trade, knowledge based economies and unbounded communication and exposure capability supported by internet, skilled individuals hardly need to be backed up by a corporation. What does a Google engineer need Google for? Secure his or her payment? If Google considers this person worth receiving a big salary, the free engineering market will secure him, via projects where this person's skills are required, that exact same salary, or more, because this person would be able to claim for himself the profit that Google makes on them. Power to the people means power to the individuals to contribute directly with their skills to the economy, without the need for Government or Corporative backing.
- Efficiency of a market cannot be an argument for making it free when it is obtained at the cost of fairness. It is not fair that you should only be allowed to get complex surgery if you can afford it. A human life is worth the same regardless of that person's income, and if you subvert this logic you're hurting society beyond repair.
- Resource limited or resource intensive markets cannot be made free at the cost of exhausting that resource, appropriate regulation and taxing are required. Taxing pollution and other economical externalities of free markets cannot stay in the nice theoretical papers of economists it needs implementing and enforcing now, against all corporative interests.
- Government incentives to corporate spins-offs or start-ups rather than mergers and acquisitions should be put in place. For example do not tax the first or provide optimal credit possibilities and tax heavily the second. Anti-trust laws must be enforced and not wavered as is often the case, bowing to corporate interests.
- Power to the people also means the power to influence corporate behaviour by our collective consumering patterns. Consumering passes the right message, it tells the corporation what you believe in. So use it responsibly and as informed as possible. The traditional power to the people by influencing government will always apply and requires involvement and information. Where there is a human need, it will be met with an offer in some magical way.
- Any change, but in particular a change in economical paradigm must be brought about, in any place of the world, in a sustainable way, that considers the specificities of the local populations, culture, anxieties, and current in place economic processes, and most importantly its impact on the environment and resources. It may require time, but it's always better not to rush and make each step securely. Try a solution and reverse if evidence shows it ineffectual or counter-productive.
- Gigantic corporations are as likely to become inefficient as massively government controlled economies. The trade off between scale-economies and the loss of flexibility and corporate dynamism means the consumers stand to loose, not only the gigantic corporation will not be able to adapt to market demands as foreseen in the free market model, but they are likely to abuse of scarcity power, and accumulate undistributed wealth. Besides in the world of internet, scale-economies can be obtain by smaller enterprises coming together to purchase together.
- Markets where competition cannot be guaranteed because of scarcity power (for example limited bandwidth for mobile phone operations), than the government should detain and explore or make available at production cost the limited resource. It should not be privatized and owned corporately, this is not at the best interest of the consumers and citizens, who ultimately own the resource as it pertains to their country.
- Government should not discard its responsibilities to provide universal welfare and solidarity to citizens under the false pretense that it will be better administered by private enterprise. That's why we pay taxes for. Citizens expect tax policies to be applied under the principle of fairness, and balanced redistribution of wealth.
- Financial markets where enormous corporative profit is obtained is not fairly taxed compared to consumer and workforce markets. In particular speculation investment involving vital resources as food should be more heavily taxed or even discouraged by law as its consequences are often inhuman.
- News editors and journalist have as much power in today's society as the judicial system and should therefore be regulated under a similar state funded but independent institution and not be confused with entertainment, or state/corporative interest based opinion making.

Most of all when it comes to pointing fingers we're as much to be blamed for injustices we witness as any body else as we've allowed it to happen under our noses, and we should come together to denounce them.
Eventually other ideas will occur and I'll post them in the future, this is the main message I wanted to pass with this series of posts. Once more, if you had the patient to read, you have my admiration. Thanks.

Some of the literature I've been reading about these subjects:

• The Undercover Economist, Tim Harford
  
• The Silent Takeover - Global capitalism and the death of democracy, Noreena Hertz
• Freakonomics, S.Levitt & S.Dubner
• Cheap? The real cost of living in a low price, low wage world, David Bosshart

Can it get any worse?

In this post, the seventh of the series, I will bring the adventure in the Banana Republic of Chitita to an end. Not that the country will disappear, but the characters will, it's the natural way. So in this post, my alter-ego is an old man, who has lived to see the enormous economical and social change in his country.

I'm an old man now. I've gained as much in cynicism as I've lost in naiveness. I'm not as enthusiast and I've grown embittered and sad. And as I write down my last report, and look back to all that has happen to us, I cannot help feeling that I had been wrong about my vision of life. It is not like a snowball that due to some uncontrollable forces starts to develop downhill towards a nicer warmer valley. My first impression was that we never actually reached that promised valley in the first place. It was as if in that valley there was a wild river and we just fell into that, and kept riding it in a mad roller coaster, which seemed out of control. And as we rolled down, sometimes still breathing, sometimes drowning, it was as if the river went through narrow canyons and we could not come out of it. But now near the end I see that life is more like a pinball machine. There is this ball, which represents things (the economy, society, happiness, and so on) that gets thrown up by circumstances and then starts coming down, and as it comes down, it bounces and ricochets in all sorts of complex phenomena and it gains momentum towards the bottom, and then someone has to bounce it back with a pad, back to the top or at least keep it in the board, because if not... the game may be over. But it seems that each time this ball is thrown back up it gains weight, and when it comes down it comes heavier and demands all our strength to pad it back up, and then you get tired and old... and you hope someone will pick up the pad and do it...

Can it get any worse? The answer to that is the same as before, but how could it ever get any better from where we were is a more subtle matter. What had lead us to catastrophe before was a series of misfortunes, now what could bring us back could only be a series of good-fortunes.

But first let me tell you a bit more how things got bad:
As you'll remember I'd been fired, evicted, and run out of money. I had spent most of it trying to buy expensive banana to get my hair back, and not only did I not get it back as I kept losing more and more. There was no other job I knew how to do so I tried to keep doing agriculture. Some friends and I went to the woods and what was left of it and tried to clear another part of it to grow some orange trees, we figured other people by now would be missing them too. Unfortunately we were met by more dogs, and now it was forbidden to plant in those woods since they had become protected natural reserve, although there were no animals left in it and the trees were sick. They claimed, that this was exactly why they felt they had to protect it now, funny that nobody thought about it before they started devastating the woods in the first place. Some other people managed to cultivate some arid land way on the outskirts of the country, with enormous effort to water it, but as soon as they had a crop, that could mean some competition to the Chitita Corp. they were bought out of business and offered minor jobs at the corporation.

A lot of people went into business by themselves doing other things, like polishing shoes or cleaning toilettes for the top managers of the corporation. Some actually had it very good. A middle class of people dedicated to provide other more value added services of marketing, engineering and consultancy had it very easy. But even in that middle class there were discrepancies that began to exacerbate, those people dedicated to education, health and justice empowerment, saw their positions in society being constantly undermined by bad government and eventually lost motivation and lost quality of life. Yes, we had become mostly a services country by now. Mind me, when I say that things were bad, they were not actually bad in absolute terms for the whole of the country. Even me in my poorest phases now, I had never been again as hungry as I had been many years before when our crops failed. And I did not feel as restricted and censured in my behaviour as in those times, even if strict censorship had been replaced by a softer form called “politically correct”. But relatively, things had never been so unequal. Before, in the old days, we all ate from the same pot, whether government or worker. Now, the richer kept getting richer and the poorer, poorer. There was clearly a deficit of fairness and a great amount of greed. And the growth of this gap meant that if you weren't part of the right group, your hopes for a cross-over and for a brighter future were getting slimmer and slimmer as the gap got bigger and bigger and that hopelessness lead many people astray, to quit education and to fall into vice or uncontrolled consumerism.

In the meantime, and on top of this social unrest, the land which had been intensively cultivated for the last years started to give in and became exhausted. The crops started to fail. Not only that, but due to the excessive fertilizer usage most of our water was contaminated and a lot of new diseases that we had never know before started to appear. The rich drank bottled foreign water and therefore were immune. Lucky for them. I too got sick. But since I could not afford to pay for the private medical insurance, I had to just tough it out, the pain, the fever, the coughing. After that I could not hold a plough any more. I became a bum.

Chitita Corp. converted from a fruit plant into a pharmaceutical plant, to provide medicine for all the now sick people. And there was a lot of sick out there in the world who wanted to buy some of that medicine too, so it was great business for them. Now the pharmaceutical plant, made a lot of pollution, and often had to dump some of its chemical waste back into the lakes, this made the water even worse and created a whole new set of diseases of treat. And the pharmaceutical became even bigger, and so on, in a growing spiral.

Jobs for bums were difficult to come by and I eventually sold my 4 sqm. apartment to a family of 5, for some money. And I went to live out in the street, I wasn't scared, I'd often slept under the orange trees as a young boy, the cold did not scare me, even if I had been sick. But after the first nights out, I started to get really scared. Our country had developed an intense night entertainment industry, including night clubs where people could get seriously drunk, drugged and even buy young men and women for sexual pleasure. Now the nights were crowded with a strange fauna of owls, going about these places in enthusiastic moods. It was not uncommon that shouting and fighting would start and eventually lead to shooting, that would hurt innocent by-standers. Most people were now carrying guns for protection. Robbery attempts had gone up dramatically, insurances were at a premium. Many blamed it on the poorer foreigners who kept pouring in, running away from their own poor countries and misery. Our country was in an official state of war with our neighbour, it was said that the neighbour had become a fanatic religious terrorist and hate us deeply, for whatever what, I could not tell then, and I never even knew the neighbour was religious at all, we'd never heard of it.

At my age I did not hate anybody any more, and I blamed no-one for our situation but myself. After all if I hadn't been so lazy all those years ago, maybe my wife would not have forced me to make those cupboards and we would have kept reserves for that bad winter, and then we wouldn't have been so desperate to bring about all those changes. Maybe we would have done it like the neighbour and built only one road, and built up our production capability slowly, and caring for its impact in the environment and the people, a step at the time. Maybe we wouldn't have needed Cap to help us with the food corporation, maybe my wife could have done it just fine, after all she'd been doing it for so long and kept doing it afterwards for the corporation, and she could not possibly have been blamed for the weather when that calamity happened. But even the neighbour who had built up his economy in a more sustainable way, was not entirely protected from cheating in the free market and bad will, and that made his economy collapse, so who knows what would have happened if things hadn't happened the way they happened.

At that point, as it was, the country was in the hands of an enormous corporation, and the corporation was in fact itself, a country, a virtual one, without land or borders, but nevertheless a country, and an egotistic one at that, that cared only for its own inhabitants, the employees, event then, mostly for its managers, who had millionaire salaries and bonuses. It had a logo for a flag, a jingle for a hymn, which was played continuously by this Merdia guy driving his van around (everybody figured by now he was no scientist, just a loud mouth). And it had its own army, a private security force of angry dogs. It could take over our country if it wanted, there was no more Waldy around to prevent it. Our own democracy was a joke. At the beginning we cared to debate ideas and needs and to choose the best candidate, now the election campaign debates had turned into a circus. The candidates would just have vans shout out their names very loud and then would meet in a public arena and throw cream pies at each other and the one that came out the cleanest and smartest looking was chosen to represent us, but nobody really expected them to do much. Mostly they would do their utmost to issue laws that pleased the corporation, expecting a nice job there in return. Unemployment was rampant, but the country kept exporting tremendously, mostly goods that were bought at cheap price for speculation, or to be packed with a nice brand and promotion campaign and then resold at twice the purchase price as fashion items for enormous profits. Our country, as I said, offered an assortment of services, provided by just a few educated people with good corporate connections. The rest of the people started parallel illegal markets to make money, involving mostly drugs, falsified corporate branded fashion items and electronics. The little money people got was immediately spent on consuming cheap goods for pleasure, like an addiction. Needs were exacerbated by fashion and publicity, and by quick obsolescence of goods. People drank much more, not out of pleasure or laziness, or even because they had worked a hard 16 hours long day at the plant, but because they had no work, no future and wanted to forget about their families demanding them for more than they could provide.

One night as I was sitting around a fire together with another group of bums at the end of an alley, I noticed an old lady, wrapped in a blanket, shivering. I asked if she was cold. Her eyes were frozen and in them I saw death approaching, she said only these words: “my baby... in the basket”. My heart shrank. I thought of him, I had hated him, I would have had him expelled, where was he then? I thought of my wife, had she forgotten us? Had she cared for the baby? When I looked back the old woman had given up living. Do coincidences exist? Really? If not, I cannot explain why when I got on my feet, I saw my wife approaching. She was looking around, walking slowly, sometimes kneeling to see the bums. I came closer and said hello. She had a tear falling out the corner of her eye, which she immediately wiped. “Hello my dear, how are you?”, she said in a mellow voice. I hadn't seen her in so long, she kept her beauty intact, her hair just a bit greyer. I said I was fine, all things considered, and asked her about the baby. It seems he had gotten a fantastic education abroad and was now the new CEO of the Chitita Corp. She then took my arm, and asked me in my ear: “What have I done?”. I wanted to explain to her that it was not her fault, it was in fact mine , and she continued: “Do you remember the song?”. The song was an ancient myth of our country, it was a set of very old verses passed from mother to daughter, of which my wife had been the keeper. It went like this:

"From your womb, a flower will grow, her stem of white, her leaves of green, her petals of gold her eyes of blue. With her petals she covers the sun that burns the land, with her leaves she covers the land from the snow that freezes, her stem is strong and her eye is smart, and she will love you, like you will love her, oh Sousalandia."

I have failed my country and my people, I sold us, my wife said, but I still love you, will you help me? I could never refuse her anything, so I followed her. She had abandoned the corporation, and with the money she had, we bought a van of our own and drove around the countries shouting what unfair deeds the corporation had been doing. Every time we denounced something the corporation went to great length to amend their ways, and we discovered we had the power to change things. They were afraid the bad publicity would prevent people from buying their products, so we kept at it until we were too tired and old. Many times we got mysterious flat tires and engine break downs, as if to prevent us from proceeding, but it didn't deter my wife and her determination to make things right again. Sometimes I'd ask her if she didn't prefer we'd go somewhere far and start another little farm, just with a few tomatoes and oranges. She would tell me, she'd been everywhere and this place did not exist any more. Everywhere there were roads now. There was no going back.

When one day we returned to our country, ready to retire, we came across something fantastic in the park. My wife pointed at a woman who spoke to the people around her. But this was not just any woman, this, we could see was a special being. You could feel it before you even listened to her. Her skin was a beautiful mulatto brown tonality that expressed in the most splendid way the mix of ethnics of our country of today, her eyes were blue but orientally drawn backwards. She wore a simple white and green dress, and a golden sun-flower in her hair. She moved in a gracious way that told you she was a mother. But not that mother that has 3 children and runs around them in immense worries. She is the woman that has grown into the wisdom and maturity that is required to mother someone, her name was Fairy Trady. And we listened to her, this is what she was saying:

“A child is put into this world unprotected and unable. It's her mother's job to raise her, to educate her in the basic ways of the world, to feed her, to decide for this child on how to dress, how to behave. To censor the behaviours that offend her own principles and to give those principles to the child. When that child becomes of a certain age, then it is given to the hands of the teacher. And the teacher knows better of the complex ways of the world, its dangers, but also its opportunities, and from the teacher and his example, that young person learns for himself what is right and what is wrong, for him, for his fellow man and the land he inherited. And one day that person is ready to take his life in his own hands, without the mother and without the teacher. The teacher, has his own interests, he benefits from having the student, that's what he's paid for, and will keep telling the young person that he is not ready to take on the world, that he needs supervision. But that bond also has to be broken. It's the natural way. Likewise is a country. It is born into the dictating hands of a ruler, that shapes it and brings it up, some more strict and censoring, some more benevolent and compassionate. One day, that bond is freed and in comes the corporations, that teach that country to do business, to relate to the world, to produce and to trade. But one day, that bond too must be broken. The people does not need for ever a paternalistic figure that cares for every aspect of their life. They need guidance, support and motivation, but not a cradle. They don't fit in it any more. The real power to the people will come only when the people is truly empowered, not just to choose government or choose the corporation they'll work for, or what they will buy, but empowered to contribute as an individual, as a skilled individual, to the country economy. And in today's age of global communication and trade, that individual does not need the teacher or the corporation to sort out the complexity of the world, it is there, ready to be explored. The corporation will survive, because the teacher doesn't die, but its role should be that of teaching and of bringing skilled people together in projects and associations with the world but then letting them free. It is unfair that the teacher becomes rich out of exploring the student. And as for the mother, she will always love and look out after her child, and make sure she eats well and is warmly dressed, and healthy, and that the world treats it right, no matter how far they may be.”

My wife and I looked at each other, and without words we knew that the prophecy could still become true, a new flower had grown into the womb of our land, and things may just be getting better. Now whether this vision was really true or just the dream and delusion of an old man in his death berth, I cannot really tell any more, as I am now dead. I do know this, things may be getting better or worse, but they'll always be getting somewhere. Fairness will make things better, greed will make things worse, for all. Thank you, if you read this far. But if you're wondering what does this whole tale mean, and what am I trying to say, then read the next post as well.

Can it get any better?

This is now the sixth post on a series about economics of the free markets and society. If you read the previous post you will remember my alter-ego in the Banana Republic of Chitita (the BRC) has been reporting on how his country has evolved from a government controlled economy to a free market economy. So you'll now find me 10 years down the road from the last post, when a number of reforms were put in place to adapt the country to the new free market economy and how everything was wonderful in this new system.

But can it get any better? Well, just when you think it can't get any better, well that's probably when it can't. Not only it can't, but in this case, things actually began to deteriorate. That's the whole point of life, things are either getting better or getting worse, but they are always getting somewhere. What things? I'll get to that in a minute.

First let me tell you a bit more of how good we had it. Although we'd been working like dogs, 16 hours a day for little wages, our economy was growing stronger and stronger. Our government, in spite of our ever increasing production and exporting capability, kept our currency deliberately under-valued in the international market, such as to make our exports grow. And boy did we grow! Everybody was buying our cheap fruit. We basically took everybody else out of the orange and tomato business. Other countries were even growing suspicious of our dumping and wanted to impose new tariffs on our products, but luckily we had signed a World Free Trade alliance that prevented them from doing just that, suckers!

We also had elected Cor Uptible as our first president. He had promised to fight for higher wages, paid vacation and pension. So he actually went to my wife, who was then the CEO of the Chitita Corp., and asked for all these things. She said that the actual owners of the corporation would not be very pleased with it and it was better not to ask for those things just now, because, they were still consolidating business and if we asked too much they might leave the country, and that was not nice. So Cor decided it was better to wait for a more appropriate moment. In the mean time he went about privatizing all the things that were still the government's responsibility, schools, hospitals, even old Waldy, the dog became privatized and joined the Chitita private security force. The rest of us could not have it that Cor had failed to negotiate our demands, we lived in a free country and we'd certainly do something about it. We got unionized. Yes, this was actually suggested by our friend Com Unist. All the workers should unite to fight the oppressing bosses. So we started a big protest, we threatened to go on strike, and eventually they broke in. We got our pay raise of 1% and paid vacation of one week. I had never been on vacation before, and I had never left our country, except to go to the neighbour. So I decided to travel to see the outside world with my own eyes, I'd never been so excited like this in my whole life. So I travelled for a whole week and visited other countries, and saw how they had it nice as well. People in general were a bit colder and distant and didn't talk to each other, but they looked beautiful. I've been in a country where everybody dressed corporate brand clothes and got facial surgery, I wanted so much to have one myself, but I couldn't afford it. I realized that our country still had a long way to go until everybody could afford so many luxury goods, but I was glad we were on the right track.

When I got back to Chitita, something terrible had happened, I was told. Just the day before a van with loud speakers had driven by and a guy called Merdia, who was claiming to be a fantastic scientist had been shouting for all to hear, that he had made an important discovery, and that was that eating oranges caused men to get bald. I was shocked. I had never realized that relation although I'd been eating oranges all my life and had in fact by now gotten to be considerably bald. It was so obvious, how could I have not realized it? He said also that on the other hand eating bananas would make hair grow twice as fast. And then he moved on to shout that in other countries.

This was terrible indeed, this meant our currency had just lost roughly half of its value because nobody would be buying oranges anymore, and we were basically poor. The union called on all the workers and we rushed to the farm to cut down all those orange trees. But when we got there, and to our astonishment, by some miraculous coincidence, all the orange trees were already gone, and in their place, surprise, surprise, banana trees. I didn't even know bananas could grow so far up North, but as I was later explained this were a sort of Genetically modified banana (don't ask me to explain that), we were rich again, bananas would be selling like crazy as they make hair grow back! I couldn't wait to have some of those bananas myself. Now what was more concerning to me was, of course, who had done this. The answer was a fleet of bulldozers. And next to it another fleet of agriculture machines was ready to take over the ploughing, the picking, and the watering of the fields. Just 10% of us men were required from now onwards to manoeuvre the machines, those would receive appropriate education, and the rest would be laid off, and would be free to pursue another more fulfilling career in another area. I was glad to be free, but was very worried what I would do if I did not got chosen to work with the machines, I only knew how to plough and water and pick fruit. What career did they mean?

I got laid off. This was the worst day of my life up until then. I got some money as severance, but it would only last me for a couple of months. What was I to do? I went to my wife to see what she could do for me, and she said she was sorry, but I was getting kind of on the old side, did not have the same stamina of some of the young folk, and investing in my education would be a bad managerial decision. But that I should look on the bright side of things. The guys who did stay would be producing much more with the help of the machines and the whole economy would go much better, which meant things would be better for all, and that was the best thing that could happen to us all. That's one way of seeing it, but I couldn't help feeling bad.

A bad thing never comes alone. When i got home, that is the barn to where I'd been relocated some time before, there was an eviction note on the door. I was to be relocated again to a new social building with a hundred floors and 4 square meter apartments, I got a flat on the 80th floor with a fantastic view, but a bit cramped. At least I didn't end up in the street, like some other foreign colleagues, I guess my wife must have had some pity on me. The reason I got evicted however was this. Rumours had it that the barn was needed for chickens. I was very surprised to know that we were going to produce chickens, since the neighbour produced so many already, and wondered who'd had such a stupid idea. It turned out, I later discovered, that we were not going to produce them after all. Chitita Corp. bought an incredible amount of chickens from the neighbour and stored them in the barn, they told the neighbour they wanted to feed a lot of hungry people, who had lost their jobs. I was so happy they'd thought about us and waited to receive my portion of chicken, but somehow it never came. The reason it seems was because, all of a sudden a strange disease attacked the remaining chickens of the neighbour killing most of his productions, since there was then so little chickens in the market, their price went sky high, and a lot of people in the World suddenly became extremely hungry for chicken.

Our Chitita did the human thing, and provided them from the stored chickens at a high price, because those chickens had been intended for the poor of our country.

The neighbour who had not put in place all the reforms we did, and had his economy relying solely on chickens and beer, was shaken by this event, and was in a bad situation. He went a bit cuckoo and one day came barging through our country with a bulldozer trying to destroy our plantation. Why would he do that? We'd even offered to sell back to him some of our chicken... Chitita Corp. issued a note saying he'd become a terrorist and put back the barb-wire around the plantation to protect it from other possible crazy terrorists. People with envy of our wealth and progress. And can you believe that even that wasn't enough. Another guy, an ex-colleague of mine, who had been fired from Chitita, infiltrated into the plantation and attempted to sabotage the irrigation system and a couple of plough machines. They caught him too. It turned out that he was some how related to the neighbour, a cousin or something, which I found totally strange, because he had never mentioned anything about it, and certainly they didn't look a bit alike, since the neighbour was white and this guy was black. You never know. Well, the end result was, the whole plantation security was scaled up, and now big X-ray machines were installed at every road entering in our country. Trade continued as usual, but people had to be a bit restrained as some, we realized, were potentially dangerous.

The union people got together to protest again against the corporation, but all the guys who remained working there had actually quit the union, so all we could do was shout for work at the doorsteps of the government. They let the new dogs (angry Dobermans) on us, and we had to run for our lives. We went to the pub and got drunk. I run out of money. Man, how I started to miss the old days. Even people who had not been here in the old days were missing the old days. Someone said quite wisely: "Oh things were much better, back in the days when things were much worse". And all these stupid foreigners who kept coming in thinking this was some sort of El Dorado, where you find work in a blink and make lots of money, just made things worse. Some of us started hating the foreigners; even people who not long ago had been themselves foreigners hated the new foreigners.

I missed my wife too... yes she was strict, and wouldn't allow me to drink beer and made me work a lot, but it was for my own good. She really cared for me back then. Even people who never knew her as head of the country wanted her back. Now what have we become? Our government had been for the last 10 years either lead, by Cor Uptible, or Cor Uptus, his cousin. We could not tell the difference anymore. And nobody cared to vote. They were just selling away everything and making more laws to please Cap and his people in the hope of getting in to the top management of the corporation where good money was to be made. Now can this get any worse? And that I hope will be the topic of the next post.

How's life in the wonderful market economy?

In the fifth post of this series, I have to admit I somehow grew attached to the characters of my wife's and mine alter-egos, in Sousolandia and I think I could use them to further explore the effects of such a radical economical change. Forgive me if you just find the whole thing dumb.

So this post will find me a couple of years down the road from that incredible time when we changed our country from a Government controlled economy to a free market economy. And things could not have turned out better. This is it. We love it. We have reached the Nirvana of the economic paradigm, prosperity for all has arrived and the end of hardship. Ok, maybe, I should admit that we still work hard, but at least now we can get a lot of good stuff for it, stuff I never even dreamed I'd be needing, but without which I cannot live anymore (Whisky is among them).

How did we get here? So you'll remember that Cap, Cap Italist, the great foreign agriculture expert, came luckily our way, and out of his immense generosity offered to help us with the production. My wife, of course told him, she'd gladly accept it, but that he should always keep in mind that she was dictating the rules, and that of course she counted on my advice, because she didn't want things to somehow turn bad for me or the baby (the one we found on a basket), she loved us immensely of course. Oh yes, the baby has been growing fine, beautiful boy, he needs even more stuff than I do. My wife adores him. The funny thing is that some years before, when things had been going relatively OK, I had even proposed we'd get some of our own, which she then found that it wasn't such a good idea because we wouldn't be able to feed them on such low crops. Funny how things turn out.

Cap was fine with it, in fact he said he loved our rules, and even propose to suggest some of his own which could help improve things even more. He called them Reforms. First of all, he said Sousolandia sounded very old fashioned and that the outside people would not associate it with a modern fruit exporting country. So he came up with a beautiful alternative, Chitita, the Banana Republic. I raised my arm and told him, that in fact, we were neither a Republic, nor did we produce bananas. To which he smartly retorted that "one has to look into the future, my boy". I liked Sousolandia, but Chitita was just as fine.

With a name like that many more people came and we all got work down at the plantation. We even had to expand it. So we started to cut down parts of that useless forest that was surrounding our farm, sure it was beautiful, with all those birds, and flowers, and lake, but it was completely useless, nothing really worth anything was being produced there. I thought I'd miss the times when I was a child playing in those woods, but then again I'm not a child anymore, and we need to increase production. By then we were producing so many tomatoes and oranges, which we were using to trade for everything else that we realized that it was such a burden to carry them around to do business, so Cap suggested the Monetary Reform. That is for each tomato and orange we produced, which for us were worth more or less the same, my wife, the government, would issue a little paper saying "I'm worth an Orato" (that's what we called our currency), and then we just needed to use those papers to trade instead of fruit. Because we started carrying lot's of paper, she then made some which said "I'm worth 5, 10 or 100 Oratos".

The neighbour did the same and created the Chikollar, which was worth a chicken. So in order to trade with him we had to maintain a table to convert Oratos to Chikollars, depending on the level of production and exporting of either country and how appreciated those products were in the market, which oscillated with the fashion. Then we figured out that everybody else was doing the same and we had to expand our table to foresee all possible conversions from all currencies to all currencies. This also turned out to be complicated then one country said that they produced something that was worth more than anything else in the planet, diamonds, and that we should all just calculate the worth of our currency with respect to that (he was right, I'd seen one of these diamonds in the neck of my wife, a little present from Cap, to celebrate their everlasting friendship, it seems it had cost him a few thousand tomatoes and oranges). That made life easier; we all indexed our currency as a fraction of a diamond. Now doing business was really smooth. I hardly ever really saw a tomato or orange again, but some one must have been buying them because our papers were always worth something. Sometime we could tell that the selling was not going well because all of a sudden the paper value would drop, and you'd need more of it to buy something, and they called that inflation. Oh yes, Cap was giving us paper money for our work at the plantation, a fixed amount, which he adjusted every year so that we didn't feel so much this inflation (my wife had to push him to do so, but never mind).

The other thing Cap proposed was to buy the right to plant the land. He said that the land would still belong to the country, but he wanted to own the right to plant it how he saw fit, because if others would be coming to interfere this could make things very inefficient, and after all if he was going to invest most of his possessions in it, he wanted to be sure he wasn't going to get ripped off, dispossessed of his most valuable belongings and expelled once the plantation was yielding lots of fruit. My wife agreed to it, they signed a contract which she swore to honour and we received a few diamonds in return. So we had the Privatization Reform. But he didn't stop there. He asked my wife: "Why is it that you only take loans from the neighbour? You know he's always ripped you people off, he asks too much interest.” we had never really thought about that one. He was after all the only other person we knew until then, and even if he was not entirely fair, we at least trusted him. But Cap said that now we were trading with all kinds of other people and if we trusted them to trade and balances our currency; why not trust them with loans? In fact there'd be so many others offering nice loans that we would find much better interest rates, and use the money to invest in the plantation. How can you argue against that? My wife immediately started the Liberalization of the Capital Market Reform. Cap was very pleased with us, and told us how smart he thought we were to come up with all these nice reforms. It was very nice of him to say so, especially since most of these ideas were actually his.

My wife in the meantime got very busy attending to the needs of everybody in the country, we had grown now to a considerable size in population, most of them Foreigners, but now some were having their own children here, which I guess makes them nationals. She had to make sure everybody stayed more or less healthy, but unfortunately there was no more hot water bottle in bed and herbal tea as before, everybody was just getting an Aspirin, and had to pay money for his or hers. She had to make plenty of rules for how people should behave, because everybody was accustomed to something else from the places they come from. She also had to teach them all to speak our language. To sponsor all these things, health, justice, education and others she needed funding. Before in the old days when it'd been just her and me and Waldy, she would take all of our production and basically decided how much each would get in oranges and tomatoes and use the rest as she needed and that was it. Now she wasn't in control of the plantation anymore but she had to make sure to get some funding out of it somehow. So she came up with her own reform, the Tax Reform. She decided that since Cap was making so much money out of our production she would tax a percentage of the profit he was making. He thought that was again a very smart idea and agreed, but he convinced her that most of that money could be better used if re-invested on the plantation to make it even bigger, and that he could think of a number of other ways to get tax. Namely he said "Look at all those people in your country, they're earning such big wages, that's basically all profit, because they don't have to invest any money in tools and fertilizers, I do that for them, so why don't you also tax their enormous profits? And since you have all this trouble in issuing money to match the production why don't you also tax all the sales to cover your expenses. This way you can lower my taxes, I produce more, and everybody gets a salary raise and then you can tax them more. All so logical and simple. And that's how she introduced wage tax and sales tax, and lowered the tax on the food corporation profits.

All these reforms were not easy to introduce, there was always so much protest all the time about everything that she started to get really fed up. People were just used to the old ways and would not accept easily change, even if for the better. And so she started dreaming of her old job, when she was planning the production. Now the whole enterprise was so big and interesting that surely the job must be fantastic. She kind of mentioned her anxieties to Cap (who she now considered to be a kind of spiritual Guru) and he told her that in fact, he'd been thinking of making her his own personal assistant, to oversee the production locally while he had to be away so often to do international business. She asked "But what about the government? Who takes care of the people?". He said, in his infinite wisdom, that the people would take care of themselves, that in fact this would be a fantastic opportunity for them. After all, weren't they always complaining of how you did things? So they probably think they can do it better. Some of them were even calling my wife a despotic tyrant. Could she believe it? She did. She would not be talked of, in the outside world, as a tyrant. She loved her people more than anything in the world, me, the baby, and all the people who came afterwards, and their children as well. So she decided to do what was best for all, and for her as well (she was earning more as an assistant to Cap, then as the head of the Government) and let the people decide for themselves. And she created the greatest of all of the reforms, the Democratic Reform. This was a beautiful day, and everybody congratulated our country for joining the train of the progressive countries of the free world, and we pledged to every year commemorate this day with big parades. We called it Freedom day. We were now all free to decide for ourselves who'd represent us. A marvellous thing.

So the next day a big bunch of us decided to stand for election and become the new President of the Republic. We knew not much of what the job entailed, but it seemed like the smart thing to do. Maybe we could follow on the footsteps of my wife who'd been offered such a great job after she left the government in the corporation top management. After a while it seemed unlikely that all of us would get elected so we started debating to see if we could find the guy with the best ideas to represent us. So a guy stepped up and proposed that if we all voted for him, he would trash the contract where we sold the planting property rights to Cap, and we could kick him out of the country and take over from him the control of the food plant, and make money for ourselves. His name was Com, Com Unist. Nobody took him serious, because we all knew we had neither the international connections nor the money or the skills to manage this thing as Cap did. So another guy stepped up and said he would rather convince Cap to share a bit more of his profits with all of us, since we were doing most of the hard work, and demand some benefits like vacation and a pension scheme. We all thought that was more reasonable, and we chose him. And that's how Cor, Cor Uptible, became the first president of our free Republic. Long live the Republic.

Everything was just grand, Cor is much less strict than my wife used to be, and we basically can do what we please. The only one who wasn't much happy these days was Waldy, our old Münsterländer. His services had not been needed much lately, since we did not have to repel anybody anymore. In fact the barb wire around the whole farm had been removed and roads appeared from all directions. Waldy kept barking, mostly at foreigners, but he wouldn't scare anybody. We gave him the task to patrol the streets and bark at drunken people, but even that was starting to be too much for old Waldy. He never really did like Cap either, strange dog.

Now, can this get any better? That I hope will be the topic of the next post.

How do you go from a controlled to a free market economy?

I know i promised to blame somebody for the problems of free market economy on the previous post, but maybe its a bit early for that just yet, it's not nice pointing fingers, so I'll leave it for later. If you just came across this post, this is the fourth of a series, it's best to read the others to know what I'm talking about, unfortunately, they're rather long...

However I thought of an analogy which may help visualize what pushes an economy to abandon government controlled economy for a free market one. I apologize already for the inaccuracy and extreme simplification of this example. But just bear with me and even if you find it bullshit, you may find it somewhat funny.

Imagine this little country, out in the middle of nowhere called Sousolandia, and it has 3 inhabitants, that's my wife and I, and our dog Waldy. Our country is actually a farm, where we produce tomatoes and oranges, the basis of our nutrition. So we're not rich, but we're honoured. We're well protected from foreigners because we barb-wired the place and we have Waldy.

We are a government controlled economy, my wife is the government and she also controls the main corporation of our country, the food plant, I'm the working class, the middle class and rich when I'm lucky. Waldy is the army. Every year she tells me how much of the land to fill up with tomatoes and then in the rest we let the orange trees grow. She's no big agriculture expert, so she looks roughly at what we've been producing for the last couple of years and gives her best guess, and I just do it, and then we just hope the weather is going to be nice on our tomatoes. So every year we get a crop of tomatoes and oranges which is most of the time plenty for us to eat, and when we have some exceeding we try and sell it to our neighbour.

Oh yes, our neighbour, I forgot about him, he's the only other country we contact with and he's also a farm one day walk away from ours. He produces chickens and beer. When we have exceeding we go there and try to change our oranges and tomatoes for a few chickens. Normally a couple of oranges and a couple of tomatoes are enough to get one chicken. He claims to be a believer in free trade, but the matter of fact is that he then claims that since his cousin is also producing some oranges and tomatoes, he doesn't feel too good about receiving ours, so we often offer him double, which he then happily accepts. So he's effectively taxing us. That's why when he comes around to ask for our products when his cousin fails to deliver, my wife also asks him double. Reciprocation. And those beers? My wife strictly forbids me of having any, she won't have a drunken husband in the house. So I bring along some of my own food to trade secretly for a couple of beers which I smuggle in my pants. The neighbour really rips me off on those beers, but they're worth every orange and tomato I let him have for it.

So our little economy had been going wonderfully for a number of years, everything was smooth, except for the odd year when the weather wouldn't help and we'd hold on to our stomachs over winter. Often if nothing serious happens, systems like this may remain stable for ages. In mathematical terms they are in equilibrium in a local minimum. This means that in the terrain of all possible solutions to have a stable economy we've came to rest in a little snowy tall valley between two high peaks. We found stability, but any push may drive us over one of the peaks on either side and we can find ourselves rolling down the slope in an ever growing snowball.

And that's exactly how we came to be today a free market economy. So let me tell you how that happened.

One fine year, not too long ago, a number of things happened or developed that took our little economy out of balance. We'd been having 5 very mild years in a row, and our production had been running at a good output level. We were happy and confidently planned the new year counting on another wonderful crop, we did not think it necessary to store reserves and clearly this trend of good weather was here to stay for ever. The work itself had no real secrets to me anymore, and I eventually even found myself with lots of spare time on my hand, I'd water the plants in the morning, a couple of strokes on the land to plough after lunch, and then wait for it to grow and the time to pick up the results. In fact I had so much free time that I would often indulge in some of that beer I had stacked away and imprudently appear drunk before my wife. She started suspecting I was getting lazy and irresponsible, and that I had too much time on my hands, on a few occasions she actually caught me totally pissed, my pants wet, snoring away under the orange trees. She got into a rage and saw this as a serious social problem in our country and decided that I was actually under employed. So she thought of a fantastic project to guarantee me full employment, which she thought was her moral duty. I was to build new cupboards for the house, cupboards in every room, even in the cellar, where we don't need cupboards. Well she should know better, after all she's the government.

So I started the challenging task of building cupboards. To do this I had to borrow some tools from the neighbour, which actually was costing us additional food, and I decided I'd cut some of the orange trees for wood, and I had to clear some of the tomatoes for space to have the workshop. And I worked a lot on those cupboards, I hardly had any time to enjoy a little beer, and I was getting exhausted of accumulating the tasks. I simply wasn't used to it. So much work.

On top of it, April came, and with it came the rain. And it rained and rained and rained and it flooded a good portion of the remaining of our tomatoes. With the parts I took out for workshop and the trees we lost to cupboards, the crop was miserable. I was discouraged and blamed my wife for her incredibly bad planning and lack of foresight. How could she not have seen this coming? Does she think good weather really lasts forever? Shouldn't we have made reserves (or preserves) for such a case, instead of filling the cellar with cupboards?

When in August we went to our neighbour to trade some of that dripping fruit for some tasty chicken (and hopefully a little beer), we had another surprise coming our way. The neighbour had invented a miraculous grain that doubled the production of chickens and had built a road to other countries who were all dying to eat some of those chicks and drink some of his beer, so he was trading it for exorbitant prices. When we showed up with our meagre fruit, he laughed and so we came back with a very few dirty small sick chickens, and not a single beer in my pants, and feeling distraught. When we got home, Waldy was barking wildly, there was something at the door steps, a basket. We thought, oh great, could it be that someone came by and dropped some aid in the form of food? Would some foreigner be that generous?

We took a closer look, and a noise came out of it, a shriek, it turned out to be a baby... with a paper on it saying that it'd be happy if someone would take care of it... Not only these foreigners don't help, but they still impose. I told my wife, we could not possibly have another mouth to feed in this country, we don't have enough food. My wife took to the child immediately and would not hear of it. I said it was too much, I wouldn't have it, I wouldn't have any smelly immigrant coming into our house, and I’d strike and make things even worst if she didn't listen. Not only this bum baby would not help a bit with all the work, but it would literally be taking food out of our mouths into his. I felt so outraged that my mind was filled with thoughts of revolt. I wanted civil war, I wanted to get Waldy on my side and together over throw her and make her go and plough those fields herself to see what it's like, and let the planning to me, after all I'd been working those fields myself, who knows more about it than me? That next winter was the coldest and hungriest of our lives, and all through it Waldy and I conspired in the cellar for the Revolution that was to come soon. We hardly spoke to my wife anymore, and I hated that baby.

It was then, as winter was fading, that she had a fantastic idea that could actually save us. She said: "Why don't we do like our neighbour?", I said: "What? Make beer?", she said: "No stupid, build a road and start trading with other countries? We will not tax them like we do to the neighbour, so they'll have more incentive to buy from us, and I tell you what, if you don't like my planning skills, we'll let an expert foreigner come in and plan it for us, he'll make this farm produce so much that you'll be able to get as much beer as you like, and if you don't complain about the baby, I'll make the beer legal, so the neighbour cannot rip you so much", "How do you know the neighbour has been ripping me off on the beer?", I asked, "His wife told me, now what do you say? We don't have a choice, this is just going to get worse, we'll never eat chicken or drink beer again". What could I have said the prospect of infinite cool beer, sounded just well to me. Maybe those other countries would even have other stuff that was as cool as beer, I'd heard rumours of the existence of a television, a sports cars and smelling cosmetics, and those sounded all just super awesome to me.

So we told the neighbour we would not be taxing him anymore if he wouldn't tax us, he had no problem with that since now he was also selling exceeding tomatoes and oranges to other countries so he was free to take as many from us as from his cousin, so we asked him for a loan and we built ourselves a road which connected us to other countries and we invested again in our farm, we expanded the production to include other fruits and vegetables, way beyond our own needs, such that we could trade for lots of other cool stuff. This was not easy, and demanded a lot of work, so now i wasn't so concerned about having other people in the house and we actually put out a sign on the road that we'd give free boarding a food for help in the farm, and a few foreigners came by to offer their services, some of them looked very hungry, and poor, I was often afraid they'd rob us or kill us during the night, well, some were really weird, I tell you. But they turned out to be nice people in the end and we welcomed them. One day a foreigner came who claimed to be an expert in agriculture; my wife blinked to me and invited him in. He said he'd be glad to take over the burden of planning the crops, he had good knowledge of the needs in the outside world, and he happened to have some valuable possessions which he'd be willing to trade in for more tools and fertilizer. Can you imagine? Fertilizer? So we could never go wrong, he'd make sure our production would be just optimal. His name was Cap, Cap Italist. My wife gave him a big kiss, which I found totally unnecessary, and she gave him my room to sleep in and sent me off to sleep in the barn, since the rest of the house was already packed. And that's how we came to be a free market economy. So far I can't complain, I don't really like sleeping in the barn but at least i don't get to hear the baby cry, but I hardly ever see my wife anymore, she often has business dinners with Cap, she claims he's explaining the new agricultural methods, which are going to make us rich! She started drinking beer herself. I told all this to the neighbour and I made also my own private loan which I traded down the road for cheap Whisky. Whisky!! Man, life is good in the free market world! Next year I'll pay back the neighbour and get a whole lot of new stuff including an I-Pop, or whatever that is.

So you see one day you're in a tall snowy valley, cosy but often cold, and then something crazy happens, and you find yourself rolling down the mountain in a snow ball and you think you're going to crash and die, but eventually the snow melts, you find yourself in a warmer valley, better than the one before, all is well, and that my friend I call Progress!!

Would you like to know how life in the new free market economy is? That I hope will the subject of the next post.

Now, what's the problem with this new model?

Well, none, if you happen to be on the right end of the game. For some (a growing majority) on the wrong side, things have progressively been getting worse, and for them there are one or two inconvenient problems. We'll get to that later.

First, who invented this fantastic free market system? I honestly don't know, some of the prophets of this new branch of the economy religion were Milton Friedman and Friedrich Hayek, but I can't tell much more about them and the others. But, to me, there's nothing remarkably new about it. Free markets, where the government regulation and taxation are minimized and Offer miraculously matches Demand have always existed. They used to be called Black Markets. And they used to appear everywhere where there was a chance to do some business which was not well seen by the rest of society, or where there was a chance to do it without paying taxes. In Europe there are still black markets for Polish plumbers or Portuguese brick layers, or more frightening, black market for foreign women as sexual slaves.

Take the drugs market, do you know of a drugs dealer that pays taxes on his profit? Do you know any law that regulates how this dealer should sell his stuff, how to pack it, and at what price? Maybe the drugs dealers have some sort of code of conduct that I'm not aware, but traditionally it's a very Free market, very black market (no pun intended). The dealer is free to trade the product with the consumer without strong regulation and taxation. Now is it an efficient free market? Will the consumer  get a reasonable price for what he or she gets? Traditionally not. This market is often dominated by cartels, which means they have a monopoly and charge more because of that, competition which could bring down the price is strongly discouraged often with violence, plus restrictions on importing and the risk of police crack down puts the product at a premium. 

Now let's look at another innovative aspect of these free markets, the possibility, via free financial markets, where capital flows globally, to invest in goods anywhere in the world. You can actually put your money on a fund, which will use it to buy tons of rice in say Vietnam, because a big tsunami destroyed all the rice fields in Thailand, and you believe the price of the rice will go up, and therefore these tons will be worth double when sold, and by keeping them stored somewhere you actually contribute for the shortage of rice which will also ultimately make that rice price climb (now for the sake of this example, never mind the indians who'd love having that rice at least one bowl a day, who'll be hearing strange noises in their stomachs). Now what did you normally call it when you put your money on something you believe has a good chance of returning you a profit, without you needing to actually make an effort to earn it? Gambling? I don't know, I mean gambling is for example when you bet (invest?) on a horse who has a chance to double your money... does it sound familiar? What do you call it when you bet on a horse, which you know has been given a nice doses of steroids to win? 

Now, having said that, I have nothing particularly strong against black markets and gambling. I mean, apart from the slaves and drugs and such, in other black markets you can get some really good deals (my mother used to take us to the gipsy market in Carcavelos, close to where we lived, all the time to buy clothes, there was so much competition there, and so little regulation, that you could get some really attractive Levi's look alike pants or fake Lacoste shirt for peanuts), and nobody really gets hurt. And gambling, I mean, if you do it at your own risk and don't bother others with your debts who am I to judge you... but gambling with food? go gamble on gold, who cares if the rich can't afford it, but food? Doesn't it sound just a little bit more distasteful than a horse race addicted person.

So we basically legalized some concepts which were already there, but were considered distasteful, because some economists realized that these often worked more efficiently than what we had, and now we consider it very tasteful indeed. Keep in mind that Efficiency does not relate directly to Fairness.

So are these new bla... pardon me, free markets really that efficient? According to Tim Harford, in The Undecover Economist, a market is efficient when you can't make somebody better off, without making someone else worse off. What does this mean?

It means this, if I'm a drug dealer and I'm charging an enormous premium on my cocaine, and ripping the hell off of a regular junky, and then i decide to lower it a bit, I'm not making my position any worse off because at that new lower price I may even sell it to the poorest of all the junkies who couldn't afford it before, and make some additional income,  but I will certainly make both those junkies better off (worse in terms of health of course). That means my market was not efficient in the first place, and by lowering the price I made it more efficient. Now if by lowering more I cannot cover my importing cost, then I'll be worse off and the market was already efficient before. Or if instead I raise the price and my regular junky cannot afford it anymore, then I don't sell it and he doesn't consume it and I've wasted a selling opportunity, then the market was again already efficient before. This potential of reaching an efficient point is what makes free markets so interesting, they are like self-control mechanisms. If the government had interfered and fixed the price of cocaine, then the market would not be free and could not adjust in such a situation.

According to that same economist there are 3 factors which reduce the efficiency of free markets, and they are:

1. Scarcity power - being the only one that can deliver the product, the boss of the drugs cartel
   
2. Asymmetry of information - when I know more about the cocaine ingredients, namely the amount of flower in it, than the junky
   
3. Externalities - the impact that the junky stealing money from people on the street to buy my cocaine will have on those people
   

Such a market plagued by all these factors is inefficient, not to mention highly unfair. If you were the government how do you fight these issues (I mean how do you improve the market, not how you arrest the dealers)?

1. Allow markets to be highly competitive to reduce scarcity power - let all the gangsters in on the game
   
2. Allow access to information to all parties to reduce asymmetry - force them to put a label on the cocaine bag
   
3. Identify and charge taxes on each market's externalities - apply fines on junkies who steal or their dealers and give that money to the victims.
   

So the problem with the new free market model, is basically this: The economists would love that the free markets were highly efficient distributing benefits to all in it, low prices for consumers and enough profit for the producers to stay in business, so they keep coming up with new recipes involving any combination of some of the medicine above, but most of these markets not only are highly inefficient but are highly unfair, and what's more they don't want to be efficient. And who's to blame? Well, that I hope will be the topic of the next post.

Was our economy always like that?

Well, according to this book I'm reading (The silent take over, by Noreena Hertz), it was a bit different. Until about 30 years ago (before Thatcher and Reagan came into power in late 70's, early 80's), in most of western countries, including most of Europe, the heavy industry (the big corporations, like steel, energy, transport, oil, even food) were state-owned. This meant the state decided how much to produce and at what price to sell. This worked well, especially during the war when basically production was required at a maximum rate and there was social cohesion towards a common goal.

In democratic countries, politicians who wanted to stay in power had the incentive to please the electorate (government by the people, for the people). And they had the incentive to stay in power because they were in control of an enormous machine, the main bulk of the national economy (according to S.Levitt/S.Dubner, in Freakonomics, humans respond extremely well to incentives), and power made them happy. So workers conquered a lot of benefits in those days, which were not there before (payed vacation, unemployment benefits, retirement pensions, health care, better education, and so on). These were nevertheless hard-fought battles with a lot of striking and protesting, leading up to major confrontations, like the 68' student movements. That economic model was based on the economic theories by John Maynard Keynes, who advocated that government should intervene in the economy to guarantee full-employment and welfare. This model resulted from the analysis of the American Great Depression, when a vicious cycle of under-spending lead the economy into a negative spiral, such that many people lost their jobs. The idea was that if under-spending lead to recessions, than a lot of government spending would solve it.

So governments and their associated industries grew to become enormous, heavy monsters, which provided work for many people, but became extremely inefficient. Governments had to plan production for the year and they would do it by looking at figures from the past 5, 10 years, which would not always apply to the circumstances faced in the new year (aging of population, changes in preferences, bad weather or other catastrophes, or like in my country the fact that many people returned from the ex-colonies in the mid 70's). Often production was too low, causing the country to have to import (at high costs since the economies were protected with trade tariffs) and inflation would ramp, or was too high, and the producers could not sell the exceeding because the prices were fixed (i remember as a kid watching on TV farmers dumping excessive tomatoes they'd been asked to produce on the streets of our capital because they couldn't sell it). Subsidies would be put in place, taxes raised, purchase power reduced, international loans asked, debt increased, more taxes raised, and so on, down the drain. In very small countries, or countries which are rich in valuable resources (like oil) this government controlled economies may work, but as economies grow in complexity it tends to become highly inefficient, and government cannot plan it anymore (this is what lead to the collapse of the Soviet Union).

It could have happened to other European countries as well, if democratic alternating had not allowed for experimenting with other models. And this is what happened when Thatcher became elected in Britain in 1979, and Reagan in the US shortly after. The Keynes theories were abandoned and replaced by new ideas which embraced the concept that private and free markets tend to regulate themselves. That is offer will equal demand in some magical way. This magical way relies on the fact that private enterprise will aim at maximizing profit, therefore reducing waste, increasing efficiency and optimizing production. The governments saw an opportunity to cash fresh money by selling their enterprises, thus relieving the tax payers, improving the efficiency of the economy, thus making life better for all in it. Some of the reforms required to liberalize the markets were painful because in the transition periods a lot of people got worse off (for example massive lay-offs because private corporations require less workers, more competition for your job, less security, etc.), this made some of these right-wing governments unpopular, but, once this radical change started and economies became more dynamic, there was no stopping it. It was a domino effect, either you were in or you were out at the risk of seeing your economy collapse, like it did in most of Eastern Europe. Even the left-wing governments that followed (Blair, Schröder, Chirac) could not (and had no desire to) do anything to prevent it, in fact they pursued it even harder.

One more note: what lead to the collapse of the Eastern Europe economies was, i believe, more the fact that the economy of the rest of the world grew so much in production (GDP) that the money of these economies became worthless (they had little or no exports to make it worth anything to others) and vital imports (food, energy, parts) extremely expensive, when considering on top the trade tariffs that came with it. So they collapsed, not so much because they were communists, but because they didn't grow as much. It's the difference that causes the problem, not the absolute size.

And that's how we arrived at the model I described in the previous post. So from a starting point where governments were ruling the economy to a point where corporations now control the economy.
Now what's the problem with that? It all sounds efficient and fantastic. And that i hope will be the topic of the next post.

Macro-Economics, what is that?

I found the diagram above in Wikipedia, and I think I'll spend a few posts making considerations on it. First i should try and explain what it means. I have no real knowledge on Economics, but it doesn't seem so difficult. This picture depicts the way our national economies work today. It is like a machine with its different parts, and the economists, which are the engineers of these types of machine love to oil it and make it run better and faster and bigger. So how does it work?

There are 3 national players and an international one, and 3 markets where transactions occur.

The first player consists of the households, the families (or as we are also known, the consumers), of which some work, some are retired, some are too young, and some are sick, and some are hard working, and some are lazy, some are smart and some are less. It's us. Out of those that can and will work we offer labour to the workforce market. In return we receive wages. With these wages we consume goods and services from the commodities market, or we make savings and investments in the financial market expecting to receive interests in return or we make loans for our private consumption (buying a house or a car).

The second player consists of the corporations, and they demand labour from the workforce market and resources (like energy) or raw materials in order to produce goods and services, which are sold to other corporations, households and government in the commodities market in return for profit. They obtain capital from the financial market in the form of loans or investment (shares) which they use to set up their logistics and improve their production capability. Banks which are corporations controlling the financial markets will often make investments in commodities for speculation (such as food, causing the prices to rise and some people to starve).

The third player is our government, these are some of our own kind which we elect to represent us, they collect taxes from wages and profits and transfer benefits or redistribute wealth and provide welfare (education, social subsidies, health, roads, justice, police, defense, etc.). They also provide laws to regulate private and corporate behavior. They make savings and investments in the financial market and often also require loans. They used to have also the power to manage money issuing to control inflation, but since the euro this capability is limited to the political power of each nation in the European institutions, so their influence in the economy is basically in tax policy, interest rates and regulation.

The forth player is represented in the picture as Foreign, and are all the other countries out there, with which we do business, that is we import and export goods and services, and we receive or supply capital via direct investment or aid through the financial markets.

Modern economic theories requires that regulations and protectionism in the functioning of these described markets be kept to a minimum, competition to a maximum, and information shared, such that they work fine. When this happens, then in some magical way, production will match consumption (when there is demand new companies will appear, when there is exceeding some companies will go bankrupt), prices will be kept to an acceptable value that consumers can afford and employment... well, no one can guarantee anything about that, but if the economy grows then there should be nothing to worry about.

To have an idea of how well the labour market is doing we look at unemployment rates. To have an idea of how well the commodity market is doing we look at GDP (Gross Domestic Product attempts at estimating how much a country is producing by calculating how much it consumes - from the magical formula Consumption = Production - GDP = Consumption + Investment + Government Spending + Exports - Imports) for size and inflation (the commodities price variation) for dynamics. To know how well the financial market is doing, well you can look at interest rates or the bank profit declarations, it's normally doing well except when you hear of sub-prime crisis (which means banks have lent money at high interest rates to people who can't pay back)!

So everything should be alright and everybody happy when unemployment and inflation are low and GDP and interest rates are high (if the central bank lowers interest rates it normally means it thinks corporations are in trouble and need to borrow money, and lowering will stimulate the economy). And how do you do that? What is the fuel that powers the engine? Well most people would claim it's to consume, consume, consume... corporations profits stay high and they employ more people, government collects more taxes, wages increase, there's more money around for people to spend, spending makes people happy, government collects more taxes and may decide to lower them, stimulating even further the economy, more corporations appear, prices lower, people consume more, and so on in a virtuous cycle, or so we wished... (but that's another post)

Did it always look like this, our economy? This will be the topic of the next post.