Category: Democratic Capitalism

TPP – A Way to Preserve First-Mover-Advantage

The TPP is presented as opening up trade between the Pacific nations, but the sub-text is preserving first-mover-advantage.

TPP – Staying at the Top

The main thrust of the TPP is intended to extend the rule of law to cover intellectual property. A secondary purpose is to stop nations from passing laws that hurt an already established advantage in the market place. In other words, to preserve whatever first-mover-advantage has already been earned (or achieved by whatever means).

It may not have been the clearly thought through intention of the legislators, but the outcome is to ensure that nations that are already poor remain relatively poorer than the richer nations.

In Australia, we have the naive dream that we will be a supplier of intellectual goods to Asia. If this dream is realized, what is the result for Asia? Are all Asian supposed to be satisfied with supplying cheap consumer goods to Australia, while the Australians supply the more expensive and more profitable intellectual goods to Asia? At least, if the TPP deal is agreed in the USA, then Australians will be able to hang onto whatever first-mover advantage it has, and the Asians will be the poorer as a result.

The USA is beginning to feel the first winds of change resulting from the availability of cheap Asian goods. Its leaders also have a dream of hanging onto their hard-won first-mover advantage, which they hope will ensure that alternative jobs will become available from those that are lost. This, of course, is a forlorn hope, as current experience with structural unemployment in the USA has already shown.

Nevertheless, despite the weakness of the case for even more free trade, the intention of the TPP is to ensure that the developing and emerging nations will remain on the teat of the West for intellectual property for as long as this can be sustained, thus keeping them relatively poorer than the West.

First Mover Advantage

Any newly emerging nation would know that an existing first-mover-advantage is very difficult to overcome. It was an issue faced in the USA during the 19th century, when the cloth and clothing manufacturers on the US east coast found that they could not compete on a “level playing field” with the British manufacturers. Those politicians in the US who wanted to build up a US manufacturing industry argued for the imposition of tariffs. Eventually the advocates of the so-called American System, which involved introducing tariffs, won the political argument, and the USA went on to become a manufacturing power-house. As a consequence, UK manufacturing dominance came to an end. It was a hard-fought fight, even though it is obvious to us now that the advocates of the American System were in the right.

China has its own strategies for overcoming first-mover-advantage. This involves a combination of tariffs, subsidies and other protective measures to support its developing and established industries. It is also claimed that the Chinese use industrial espionage and the blatant stealing of secrets to leap-frog the hurdles standing in the way of developing high-tech industries. The TPP is designed to counter both of these, at least within the developing nations that are signatories to this deal.

So, if tariffs and cheating are not open as a means of overcoming first-mover-advantage what are the options for developing nations? If anyone knows what they are, please comment on this post.

Fraudulent Arguments for Free Trade

Advocates for Free Trade often argue that it lifts poor nations out of poverty. This is only partially true; and has a very limited impact. The wages in Bangladesh for textile workers have increased from $1 day to $2 day as a result of increased exports of finished garments. Yet any attempt to push wages higher, towards Western standards, is met the fierce resistance from the textile manufacturers. They probably use the argument that an increase in pay like that will make them noncompetitive. So unless Bangladesh can come up with new industries in which they can compete, so that there are other opportunities for the Bangladeshi people to gain work at higher pay, it looks like the future for wages in Bangladesh is likely to stop at a maximum of $5 day.

Also, the advocates of Free Trade are unlikely to be the workers who will be the first to be displaced in Western nations. If Western nations can claim to be virtuous by opening their industries to fierce competition from Asia (and from Mexico and South America), it is not the advocates of this policy that will bear the cost: it is the ordinary workers on those nations. These are the workers who are unlikely to get jobs in the “winner-takes-all” high tech jobs, such as in Apple and Google.

Another fraudulent argument for Free Trade is to cite China as a shining beacon. Certainly it has benefited from the opening of trade in Western nations. But it has made the most of this situation by protecting its own industries at the same time. With this protectionism (and possibly cheating as well), it is unlikely that China would have been able to move hundreds of millions of workers from farms to the cities. It is not Free Trade on its own that has helped China to develop. It also required the Chinese government to look after the interests of its own people.

TPP is a Moral Fraud

The TPP is advocated on the basis that it will help developing nations to develop. In fact, what it is designed to do is to entrench privilege. This is not the privilege of entire nations, but rather the privilege of corporations. It is not privilege of all corporations that is being protected: it is the privilege of those corporations that have an edge that makes them the best in the world.

I don’t want my world to be come a place in which only the “very best” or most successful have a reasonable share in its abundance. I want a world in which everyone has a fair chance of success, and a reasonable opportunity for each to share in the success of his or her own nation. That is why agreements like TPP are an anathema to me, along with anything that reduces the power of democratic governments to shape their societies according the needs and aspirations of their own peoples.

Do you agree?

Tariffs are not a curse-word

If international trade is to be of benefit to every nation upon the earth, then tariffs must come back into our economic vocabulary.

Tariffs are not evil

Tariffs are a supplement to the automatic stabilizer of an exchange rate. They help iron-out the development disparities within a nation and are necessary if a national government is determined to do whatever it can to ensure that there are jobs for people of every skill and education level.

If handled correctly, tariffs will have two results. While all imported goods will be more expensive, some sectors of the economy that would otherwise die without tariffs will survive. The question to be considered is, “What is the trade off for more expensive imported goods?” The answer should be, “Jobs for those who would not otherwise have jobs!”

The corollary of imposing tariffs is, “What is the trade off for cheaper imported goods?” The answer has been, “Jobs will be lost, with no sign of them ever been regained!” For those who are skeptical about the “never” aspect of this answer, just consider the Enclosure Laws in England in the 17th-18th century. They resulted in 100 years of chronic unemployment and poverty in England. This is not just a historical aberration. Modern attempts to fix the structural imbalances of Western economies via monetary policies, have not worked. Here is a prediction that is beginning to be recognized as true in the world of Central Bankers: they will never work! BoJ’s “decision” to aim for 10 year interest rates at 0% must soon be recognized as nuts!

Rather than Tariffs being “evil,” it is the zero tariff objective of the WTO that is evil, and has brought on the unremitting distress of the current economic situation.

Tariffs will not end World Trade

Re-instating tariffs will not end globalization, or world trade. It will just regulate that process and restore economic control to national legislators.

Even if every nation imposed a 20% tariff on all imported goods and services most items of global trade would continue. This is because the Real Advantage held by some nations in the production of those goods and services will mean that trade in those goods and services will continue.

Take an example of simple manufactures. Australia buys most of its clothing from China and Bangladesh. Even at retail, a T-Shirt often costs only $A6. With a 20% tariff it will cost $A7.20 (if the margins stay constant). No-one will notice!

Take an example of complex manufactures. The NSW government is planning to buy trains from South Korea, because they are less expensive than Australian-made trains. Also the history of train-manufacture in Australia has been fraught in recent times. It is quite unlikely that a 20% tariff would change that decision, although it would impact the dynamics of the decision-making process a little. Once again, since the decision is likely to be unchanged, and the cost will only be 20% more (rather than, say 40% more if made in Australia) then no-one will notice.

Tariffs will Save Jobs

Although, under the scenario I have painted, the introduction of tariffs, even at the relatively high level of 20% on all goods and services, would not end world trade, in other areas it will mean that domestic production can continue.

In cases where the imported cost is currently less than 20% below the locally manufactured cost, a 20% tariff would mean that local manufacture will be preferred over imported supply. For an Australian example we can look at steel manufacture. Here the existing South Australian plant is balancing on the brink of being uneconomic. A 20% tariff would change that situation overnight.

Tariffs will Restore Prosperity

Most Western nations are now consumer societies, where most jobs are created by providing goods and services for other consumers. However, for consumer societies to work, there must be jobs for everyone, for everyone is a potential consumer. Here potentiality is converted into action by having money, and for most of us money comes from having a job.

The USA is the most telling example of the failure of this principle because of defective economic orthodoxy. Here we see the impoverishment of US “Middle Class” since the 1980s. This has followed the zero-tariff ideology pushed by the economic elite. This ideology was even supported by the Democratic President, Bill Clinton, and also by the Republicans. The consequences of the Democratic Party’s acceptance of this bogus theory is now being felt on the streets of their impoverished cities. Since Hillary Clinton also believes that America should continue down the same path upon which her husband set the country, there will be no saving American cities if she is elected. Just more ringing of hands and ineffective “black lives matter” protests.

The elite pushing zero tariff policies now has its own world body, namely, the World Trade Organization. That body, and those who support it, can take the majority of the credit for the current economic malaise impacting on the West. Its malign influence is now spreading to emerging nations, since they are finding limited scope to sell their goods. This has happened because the consumer/worker in the West has been crushed by the trade policies of the US.

The same elite who pushed for zero tariffs are now “subtly urging” the WTO to making it more difficult for UK to leave the EU. The best outcome of that talk could be for the UK not to join the WTO and for the UK to prosper without its dead weight of WTO rules around that nation’s neck.

Tariffs are better than Quotas

While quotas can have a place in food production, since it is natural objective of every nation to maintain a large measure of self-sufficiency in food for cultural and defence reasons, tariffs are more economically efficient than quotas. This is because they allow the market to establish a close-to-optimal division of labour between economic sectors.

Quotas are not economically efficient. They can result in much higher prices of now-scarce goods, even leading to a doubling of prices. They can also result in super-profits for importers who have a licence to import up to the quota level, since they are now dealing in scarce goods. Of course, that can be partially compensated by using an auction system for selling the licences to import.

Sectional Impacts

There will be downsides in using trade controls via tariffs for those sectors of the economy that are very heavily dependent upon exports. This, too, will require a balancing act by the national government in order to ensure that no sector of the economy is unreasonable impacted by the introduction of tariffs. This can be done via rebates for the tariffs embedded in their exports, and by targeted measures designed to offset the extra costs that they have to bear compared with producers in other nations. It is worthwhile to address all such matters, since everyone in the nation benefits from a cohesive society in which everyone has the realistic chance to obtain a job.

Democratic Capitalism & 21st century economics

Democratic Capitalism is the way forward. Capitalism + empowered democracy is the key to restoring economic fairness throughout the world.

George Cooper

Recently, George Cooper, in his Money, Blood and Revolution (2014), and in his new Fixing Economics (2016), explained that the economic leveling tendency of the twentieth century was a result of the processes inherent in democracy itself. While capitalism is intent on increasing shareholder returns, other forces tend to reduce these returns. Obviously, competition between firms is a contributing factor in this process, but Cooper was able to show that democracy plays a major part.

Whereas capitalism can be expected to improve the wealth of those at the top of the economic pyramid, Cooper argued we should not ignore the fact that, in a democracy, the majority of the people actually have the power to elect those who favor their own cause. For Cooper, this has resulted in taxation being used to redistribute income, most notably seen in the impact of inheritance taxes in England. Other welfare measures meant that those at the bottom part of the pyramid shared in part of the economic prosperity of the nation. Even wage policy can help to share the wealth.

Therefore, on Cooper’s model, capitalism helps to improve the economic value of each person’s labour and effort, and democratic forces ensure that this increased value is spread more fairly between capital and labour.

Trade policies

The relatively fair income distribution of the 20th century has come under direct threat with the beginning of the new millennium. The gap between the rich and the poor has increased in all developed and undeveloped nations, whether they are democratic or not. The old mechanisms are no longer working, and there is little chance that this will change unless there is a change in our economic thinking.

The first thing to accept is that nations are in competition with each other. We do not live in a world which can be realistically governed as if national borders do not exist. They do, and most ordinary people (if not the elites running the show at the moment) want them to continue. Most people value many of the unique aspects of their own national culture and situation. Most people would like the economic situation of their own nation to improve. They are prepared to co-operate in order to achieve that result, and look to their own national government to advance the economic welfare of their own nation. Democratic governments that ignore that imperative do not get re-elected.

The economies of western nations are out of balance, with currently unresolved structural imbalances, and difficult to resolve unemployment issues. These can be fixed, but the first thing is to win the argument against the dominant economic theory, Ricardo’s Comparative Advantage theory. This theory has meant that “tariffs” has become a curse-word. Yet tariffs should be in first line of defences for any national government seeking to advance the economic interests of its own people, particularly when faced with chronic unemployment.

Tariffs are a necessary part of any nation’s economic weaponry, and are certainly essential if the forces that are pushing nations to more and more inequality are to be countered. I say, put democracy ahead of a failed economic theory.

Democratic Capitalism

The economic model of Democratic Capitalism recognizes that capitalism is the engine for economic development. It will deliver economic benefits that neither socialism (of the Sanders and Corbyn type) nor communism (of the Venezuelan and Cuban type) is able to deliver. Yet the 21st century has shown that capitalism needs controls, excised via democratic processes, to ensure that it serves everyone, not just those in control of capital.

It is time that we clearly recognized the two most important economic drivers in a modern economy, Democracy and Capitalism, and stopped toying with dysfunctional alternative models.