When Billionaires Want to Get Rid of Capitalism

When Billionaires Want to Get Rid of Capitalism

“Successful economies are not jungles, they’re gardens, which is to say that markets, like gardens, must be tended, that the market is the greatest social technology ever invented to solving human problems, but unconstrained by social or democratic regulation, markets inevitably create more problems than they solve.”

These are the words of Nick Hanauer, a self-described capitalist. And a billionaire.

He was an early investor in Amazon.com and founded Aquantive Inc., which was purchased by Microsoft for $6.4 billion.

More recently, he has been receiving a lot of attention as a “thinker.” According to a TEDtalks, “Nick Hanauer is one of the world’s most provocative thinkers about our society’s growing inequality and the dire consequences it creates for our democracies.”

In his 2019 TED lecture, titled “The dirty secret of capitalism—and a new way forward”  Hanauer warns us of the supposed dangers of capitalism and economists who have supported market freedom:

“If we truly want a more equitable, more prosperous and more sustainable economy; if we want high-functioning democracies and civil society, we must have a new economics. […] But how do we leave neoliberalism behind and build a more sustainable, more prosperous and more equitable society? […] It’s becoming painfully obvious that the fundamental assumptions that undergird neoliberal economic theory are just objectively false […]. It isn’t self-interest that promotes the public good, it’s reciprocity. And it isn’t competition that produces our prosperity, it’s cooperation”.

In his talk, Hanauer stresses reciprocity and cooperation while blasting self-interest and competition.

Reciprocity and cooperation are indeed good things. But contrary to what Hanauer thinks, they are, in fact, the very basis of capitalism, a system of voluntary exchanges. In a system of voluntary exchange, I give you something you want if you give me back something I want. In this case, money is just an instrument (transferable and deferrable) to make trade easier and flexible (feasible in complex societies).

In this train of thought, free market economies are nothing more than gigantic voluntary systems of cooperation based on reciprocity, where people who do not know each other can cooperate to get what they need or want without excessive waste.

But Hanauer can’t bring himself to praise that kind of cooperation and reciprocity because market exchange also involves self-interest and competition. Hanauer, as many before him, desires a specific kind of cooperation. Hanauer only wants cooperation when he deems it to be sufficiently virtuous. Free cooperation isn’t acceptable among self-interested people, Hanauer contends. It can only be allowed if the people involved have the right motivations.

This has long been a fantasy among critics of market freedom.

In 1714, for example, the Dutch writer Bernard Mandeville was responded to this criticism with his poem The Fable of the Bees. In his story, a beehive was thriving on the “vices” (self-interested behavior) of its bees. But then bees became virtuous. They demanded a new kind of cooperation, no longer acting in their own self-interest but for the greater good of the hive. The result? The beehive collapsed.

For theorists like Mendeville and Adam Smith, self-interested behavior wasn’t necessarily good. But it was assumed to be human nature, and thus any good political economy, they thought, should take this into account.

Hanauer disagrees, which is hardly surprising. He affirms acerbically that the “neoliberal assumptions (of free-market) are just objectively false.” The economy must be “tender,” constrained by social norms and regulations, which means a state-organized cooperation. His point is that a good system replaces voluntary cooperation with forced cooperation. Socialists have been trying to do this for centuries. Moreover, cooperation based on coercion cannot be taken as a sign of prosperity.

Let us examine the historical record. Some historians reported that after Germany was divided into two following the Second World War, East Germans displayed a high degree of “cooperation.” But this wasn’t because of a change in human nature. It was because people who lived there were forced to use their social network for basic survival. A simple drain clogged up would turn into a matter of calling in favors. The solution was not a simple matter like calling for a plumber.  Inhabitants of the East had to know someone who knew someone who could help — there was little money, few accessible equipment and tools, and no available spare parts. In West Germany, on the other hand, people were reported not to be so “cooperative,” so to speak. True enough, because they could simply hire some (unknown and self-interested, perhaps moody) plumber, who would impersonally fix the problem. Guess which Germany had a higher standard of living?

Of course, even in a heavily regulated and centrally planned society — one designed to abolish all the excesses and problems of the marketplace — there’s no reason to believe self-interest was actually abolished.

Why Not Teach by Example?

On a personal level, however, it appears Hanauer is not a big fan of voluntary action.

At the end of the lecture, the interviewer asked Hanauer why he should not just give all his money away and join the 99 percent? If he cares so much about taxes, why doesn’t he pay more voluntarily? If he cares so much about wages, why doesn’t he pay more?

He could be a role model, such as Henry Ford, who shocked the business world by paying higher (doubled) wages for his employees even (or especially) in times of crisis.

Nick Hanauer answered he could do that. But (according to him) it would not make that much of a difference. He said to had discovered a strategy that works a hundred thousand times better: using his money to build narratives and to pass laws that will require all the other rich people to pay taxes and to pay their works better – for example, the minimum wage.

Here, a basic moral principle is removed. As Frédéric Bastiat noted: “it is impossible for me to separate the word fraternity from the word voluntary. I cannot possibly conceive fraternity legally enforced, without liberty being legally destroyed, and justice legally trampled under foot.”

Republished from the Mises Institute

Why Workers Don’t Need to be Protected from Automation

Why Workers Don’t Need to be Protected from Automation

As this article shows, technology creates more jobs than it destroys – despite the claims to the contrary, innovation is a job creator, not a job demolisher”. But this issue keeps receiving attention. For example, Bill de Blasio’s “robot tax” idea and Andrew Yang’s insistence that “robot compensation” is necessary. Both proposals are misleading and harmful. Innovation is the real engine for economic growth, employment and social development. 

According to a report by the Brookings Institution titled “Automation and Artificial Intelligence: How Machines Affect People and Places”, automation is a direct threat to 25 percent (36 million) of jobs in the US. Oxford University economists Carl Frey and Michael Osborne agreed. They argue that 40 percent of all jobs are at risk of being lost to computers in the next two decades.

When scholars are creating waves, politicians are always ready to surf them!

It’s no wonder Democratic presidential candidate Bill de Blasio recently published an op-ed titled “Why American Workers Need to Be Protected From Automation” where he proposes a “Robot Tax.” Businesses that “eliminate jobs through increased automation” would be forced to pay additional taxes for every employee replaced by a robot.

He is not alone! His fellow aspirant to the presidential chair, Andrew Yang, has claimed that “automation is a threat to the country.” His proposal is not a tax, but an aid (universal basic income) for every American adult in order to compensate for the prospective job losses due to automation.

Are they right about the need for workers’ protection? 

Absolutely not! 

A Door Closes…Others Open

Blasio and Yang are not exactly inventing the wheel. They are exploring pessimistic pre-existing scenarios. 

A survey by Pew Research Internet found that Americans are roughly twice as likely to express worry (72%) than enthusiasm (33%) about a future in which innovations are capable of doing tasks that are currently done by humans. Why are so many people afraid of technology?

It is likely because people have been told they will be replaced by robots! Actually, this fear has always haunted workers. In 1930 the notorious economist John Maynard Keyes wrote an essay suggesting that there would be mass unemployment following automation of manufacturing, after all, a single machine can replace dozens of workers. Was he correct? Of course not!

If technology blew some jobs away, somehow it put many others in the place. Keynes (as well as Blasio and Yang) forgot that the stock of work in the economy is not fixed. Where a door is closed, others (usually bigger ones) are opened. Don’t believe me? See the figures ahead!

Soon after Keyne’s article was published, unemployment rate plummeted from 22 percent in 1932 to 1.2 percent in 1942 – nowadays (when we have more automation than ever) it is around 4 percent. The funniest thing is that employment in manufacturing truly dropped from 38 percent of the workforce in 1948 to 8 percent by 2012, but jobs created in new areas more than compensated the losses.

Technology Changes the Way We Work

In 1901, 6.15 percent (200,000 people) of the (32.5 million) population in England and Wales was engaged in washing clothes. Then, electricity and indoor plumbing were invented These technologies made the automatic washing machine possible. The drudgery of hand washing was left in the past. By 2011, just 0.06 percent (35,000 people) of the (56.1 million) population worked in the sector, most in commercial laundries.

It looks like we lost a lot of jobs (165,000), doesn’t it? It only seems that way!

As the German economist Werner Sombart argued, the destruction of the old opens the way for creation of the new. For example, shortage of wood led to the use of coal. Austrian economist Joseph Schumpeter would go even further in claiming that progress comes from innovation, which is responsible for creating new markets that are far more profitable and effective than the ones it destroys.

Data from census records on employment in England strengths these statements: if in 1841 most people (35.5 percent) worked in manufacturing, by 2011 this share has decreased to 8.9 percent, while the number of workers in the service industry boosted to 81.1 percent. 

In simple words: what we lose in one industry, we gain in another. Check this out in the chart below.

What innovation does is fundamentally change the labor market structure – not simply take away jobs.

What Jobs Do We Want to Keep?

There is no point in denying that, in some sectors, technology costs jobs through the process of creative destruction (well-explained by quoted economist Joseph Schumpeter). New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. 

However, in a vast number of cases, innovation merely eases our workload or allows us to stop doing what we do not want to do anymore (usually something dull, dirty or dangerous). Then, the question is whether the jobs lost are really jobs we want to keep.

Allow me to illustrate. In 1841 around 20 percent of workers were concentrated in agriculture and fishing. This number declined to less than 1 percent by 2011. Now, we can have our dinner without taking part in the harvest. But what about safety? Today, robotic technology makes up 29 percent of welding applications, freeing humans from work with chemical reactions (hazardous fumes and ultraviolet light) and extremely hot temperatures. This is just one example of how robots can supplement our roles by making them less dangerous than before.

Indeed, the last few centuries have witnessed a profound shift in the labor market, which is switching from muscle power activities (agricultural workers, cleaners, domestic servants, routine factory operatives, construction laborers and miners) to caring professions (health and teaching professionals, welfare and care home workers).

No matter what apocalyptic prophets say, we cannot predict how technology will shape tomorrow’s society. But we definitely can read the trends and expect that automation gets rid of the most laborious and less satisfactory jobs and makes room for new cognitive or manual non-routine occupations. It is a good scenario, isn’t it? 

A Game Where Everybody Wins

Innovation improves living standard for everyone, particularly the poor, and creates more jobs.

For instance, the grounding-break inventions of the Industrial Revolution (mass production machines) lowered costs and prices, enabling working class consumers to purchase things that before only aristocrats had access to and that today we take for granted (sugar, tea, coffee, watches, porcelain, glass, curtains, colorful clothes, etc.). 

This trend remained in contemporary times. As the study by economists at the consultancy Deloitte indicates, between 1950 and 2014, the price of food plummeted from 34.8 to 11.3 percent (in the retail price index basket); clothing and footwear followed the same path: 9.7 to 4.5 percent. In 1948, a 16-inch TV cost $795 (equivalent to $12,000 today) – roughly a quarter of the average annual salary in the US (only the rich could afford it); nowadays a top of the range TV can be bought for less than $1,000 (anyone can have one on their wall).

Moreover, declines in prices leave more money to be spent on additional goods (especially non-essentials), what increases the demand – including in “non-technological” occupations.

The Myth of Low-Skilled Jobs Disappearing 

Despite what we have just seen, perhaps the main point is still troubling: the fear of being left behind. People are afraid of being losers today in this process of creative destruction. They fear losing the jobs they currently have and not being able to find another one. This is an understandable concern.

It turns out that it is a myth that technological development will leave behind nothing but high-skilled jobs. Historical data show a different picture. Innovations-driven declines in prices lead to an increase in consumer spending power, which, in turn, creates new (immediate) demand and new jobs in “normal” sectors of the economy (not only in high-skilled ones). 

For instance, in England and Wales, while the Industrial Revolution was scattering its effects, the barbers built their “empire” – in 1871, there was one barber for every 1,793 citizens; by 2011 this relation was one for every 287. Not enough? The number of people employed in bars rose four-fold between 1951 and 2011, whilst technological development was spreading (and roaring) at a fast pace (see the chart below).

Yes, rising incomes enable consumers to spend more on personal (non-essential) goods and services such as drinks, happy-hours, grooming and hairdressing. It is hardly a surprise that PwC predicts that by 2030 innovation (software and robotics) is likely to add $15.7 trillion to the global GDP, boosting it by about 14 percent.

Surprising Long-Term effects

Most of the direct benefits of technology are relatively clear and well-known – related to overpassing human limitations. Less known are the long-term effects, often distant from the original purpose (beneficial side-effects). I will provide some examples. 

Car ownership: Not a big deal, huh? First, it has allowed people to live in suburbs, pay cheaper rents and work far away from their houses. Furthermore, as the Nobel Laureate Herbert Simon noted, before the Car Era, one of the most important skills a doctor could have was the ability to ride a horse to reach his patients. Cars enabled medical progress. We now have big hospitals, health centers and equipped doctor’s offices only because patients can travel to them.

Rising female workforce participation is a very strong contemporary claim. Fortunately, married women’s participation in the formal labor market increased dramatically. It rose from around 2 percent in 1880 to over 70 percent in 2000 in the US. This process was undisputedly facilitated by inventions such as the contraceptive pill and the development of labor-saving domestic technologies and convenience food.

Computers and ease of communication permitted the arising of new means of long-distance learning (such as video broadcasting). Nowadays, people from the countryside can access and afford relatively high-quality education in order to compete for well-paying jobs. Instruction required to grab better positions can be reached by almost anyone, almost anywhere. 

Technology is a wide-ranging revolution.

Leave Technology Alone

The conclusion is simple and clear. Over time, technology (and its daughter, automation) has improved living conditions, made our lives easier, created new sectors and jobs, allowed people far from big centers to access education, made female workforce participation feasible, boomed the economy and increased wealth. Even better, it will continue to do that if we allow it to do so. 

A new tax on robots or a compensation-aid because of automation would be nothing more than a disincentive to innovation. that would be bad news for workers. 

Jean Vilbert holds a Bachelors and a Masters of Law. He is currently a Judge, Writer and Professor of Law and Economics in São Paulo, Brazil. You can reach him on Twitter.

Amazon is Burning?! It’s About Time We Called Capitalism For Help.

Amazon is Burning?! It’s About Time We Called Capitalism For Help.

The Amazon is burning.

This headline has crossed the world and received widespread media coverage. People everywhere have adhered to the broad claim and voiced their concerns about the planet’s future over social media. The most frantic ones marched in demonstrations carrying banners that blame agribusiness and capitalism for the catastrophe. They demanded urgent government action.

The truth is: hysteria will not help us, capitalism will.

Capitalism is NOT to be blamed… it is the KEY

We still do not know how the fires started – farmers, NGOs, the dry climate, deforestation are some of the explanations hinted at so far. But those explanations don’t matter now. The main questions are how to put these fires out and, especially, how to protect the forest for years to come. 

So, who would be willing to do that? Who better than… CAPITALISTS! Individuals pursuing their own interests. Here’s the formula: if you want to protect something, make it valuable for someone. You do not need to beg people to not let their houses burn down, do you?

So, what we need to do is recognize what these fires are telling us: making nature “untouchable” by decree does not work. We need a new, more efficient model of preservation. We need practical measures to protect the Amazon. 

How can we do that?

We must insert the Amazon into a FREE MARKET framework

Critics of capitalism always say that “money talks”. Yes, it does. And we need it to talk louder. We should let it talk in favor of preservation.

The better way to protect the Amazon is to find profitable, sustainable ways to use its natural resources. If we did that, the immediate consequence would be that destructive practices – which generally (but not exclusively) take place in black markets – would disappear or evolve into a sustainable growth model. If you are speculating that what is profitable is usually not sustainable, check the pop quiz below:

“What’s the difference between bald eagles, white rhinos, and giant pandas on one hand, versus talking parrots, dairy cows, and thoroughbred horses on the other? Answer 1: All of the former are endangered species, while the latter are in plentiful supply. Answer 2: It is illegal to trade in the former, while the latter are bought and sold in the open market”. 

Dr. Robert P. Murphy points out that the hysterical warnings about natural resource depletion overlook the fact that within a free market framework, businesses find new ways and develop alternative technologies that conserve resources long-term, much better than any government regulations could. But, it happens only when it is profitable to do so.

So what kind of market can we expect for the Amazon? Ecotourism and biological research are just two initial examples. Want more? Take it easy! We’ve barely had the chance to think seriously about it. It is certain that, especially nowadays, there is a huge market for eco-friendly businesses. If you allow capitalists to use market forces to think of profitable solutions to these questions, you will see things happen. 

Why CAN’T nature be a COMMODITY?

Environmentalists intend to make natural resources unsullied

It is quite beautiful on paper, but the picture is not so attractive in reality. Regardless of ecological policies, tropical rainforests have been burning year by year (this year’s fires are not even the worst) and deforestation has long been a problem. 

How long will nature suffer because of an abstract idea of integral protection?

By the way, the short-documentary “Save the Rhinos!” by ReasonTV illuminates this phenomenon. For 20 years, South Africa made it legal to own rhinos and sell their horns. Because of that, rhino farmers had a strong incentive to breed rhinos and protect them. What happened? The rhino population quadrupled. But then, in 2009, the activity was made illegal again. Why? Environmental groups screamed loudly that perceiving natural resources as commodities is fundamentally wrong – we should not farm animals in order to endlessly supply a bloodlust and thirst of people to consume wildlife products. What was the practical result? Poaching went up by 1000 percent in less than five years and now rhinos are at risk of being extinct within 10 years. 

If it works like that for rhinos, why would it be different for the Amazon?

Is it a KIND of collective INSANITY?

“Insanity is doing the same thing over and over again expecting different results”. I do not know if this quote is truly by Albert Einstein. What I do know is environmentalists continue to ignore it. They insist that the solution for protecting the Amazon is surveillance and environmental regulation. 

So, instead of trusting the free market, should we keep spending more public money on surveillance of miners, farmers and lumberjacks? Many South American countries (Brazil, Bolivia, Peru, Colombia, Venezuela, etc.) are poor! They hardly have money to invest in health, education, and infrastructure. This issue is a matter of budget (or lack thereof). 

Ah, I got it! Rich countries should give money to these developing countries once they move to more restrictive environmental laws. First, more money will not necessarily change the situation. The Amazon is immense (2.7 million sq mi, while the US is 3.8 million sq mi and Europe is 3.9 million sq mi) – it would be impossible to design and pay for an oversight system that would operate across the entire forest. Second, if law could solve every problem, crime would not be a worldwide issue (there would be no drug dealers).

So what is the answer?

The answer lies in minding our own business

As I noted earlier, when people talk about nature, they always call for the government to do something. What they fail to realize is that governments have been active. The current model of preservation is based on two pillars: (1) Public Ownership (of national forests, parks, wildlife reserves, and so forth) and (2) Regulation. The problem is that these measures have proven to be highly ineffective.

It does not matter how many acres the government says are being protected or how many statutes have been enacted, environmental problems continue. Governments have tried vainly to protect nature through legal constraints. We should end where we ought to have begun: property rights.

Nowadays, it is not worth buying a piece of land in the Amazon region. Regulations do not allow you to profit from it (not even in sustainable ways). This is not good at all. In fact, this is an invitation for illegal activity: unauthorized lumbering and mining, predatory hunting and fishing, animal and plant trafficking. 

In other words, the South American rainforest is the perfect portrait of what the economist Garrett Hardin called tragedy of commons – in theory, everyone wants to protect it but no one really does. The incentives favor irresponsible exploring, not careful protection. The Amazon is a nice house without doors or walls.  Immoral people can enter and take valuable things for free.

Imagine if we changed that. If we had landowners care about their property in the Amazon, things would change. How? Simple! What if your neighbor came and tossed garbage on your lawn? You would not accept that, of course. But how many times have you passed by a wasteland and saw it covered with trash?

The same principle applies to the Amazon. What do you think would happen to a land lot in the Amazon, with operational real estate structure, if a landowner tried to use fire to prepare land for crops or to clear it for cattle? He would have to face annoyed neighbors. There would always be someone near to avoid this kind of activity.

What if the cause of the fires was something different, such as a dry climate.  No problem! Let’s leave it to the capitalists to think of how to manage any of these challenges. Surely they will try hard to protect their OWN belongings. All they need is the proper incentives and property rights. 

Let’s unlock the human creative potential to protect the Amazon.

Do people and governments still prefer inertia? Pay for that!  

It is possible that the national government, foreign governments and the general population will insist that they want to prevent direct exploration into the Amazon. Although we may disagree, they are free to stand their ground (no pun intended). In fact, real estate rights are not incompatible with the classical preservation model (let’s call it holy inertness). It just requires someone to pay the owners to keep everything quiet – an agreement of non-exploration and duty to preserve nature.

Funding will not be a problem. There is currently an Amazon fund that has raised almost $ 1 billion since 2008 and whose slogan goes: “Brazil protects it. The world supports it. Everybody wins.” Germany and Norway are among the fund’s biggest supporters. 

If sending money to the government and NGOs is a good idea, why can’t we send it to a landowner? What’s the difference? Oh, maybe there would be a significant change: sponsors would have to pay enough money to make inaction economically more profitable than the use of the land – holy inertness would be a product in the market with a price. But it is not that bad, is it?

South American people use to complain that Europeans destroyed their nature and now want countries to keep it at a high cost, non development. So, if rich countries pay a reasonable price (higher than the exploration one), this argument will no longer be available. 

Another big advantage is that sponsors would not have  a dozen NGOs wandering through the wilderness receiving tons of money (in 2018 NGOs working in the Amazon received $54 million) despite being unable to prevent fires, deforestation,  and other illegal activities that cause problems. Instead, through free agreements, sponsors would hire an army of landowners eager to defend the forest and pursuing their own direct interests by guaranteeing the paycheck (fair price). As Adam Smith showed us long ago, “people respond to incentives”.

At the end of the day, this private system would be cheaper (including lower for supporters, since landowners would act under competition) and much more efficient. Besides, it would flow money into poor economies and create jobs by fostering new sectors and technologies related to environmental preservation.

In short: Landowners protect it. The world supports it. Now, everybody wins!

When EVERYONE owns something; NO ONE owns it

Who does the Amazon belong to? Every time I hear someone stating that the Amazon cannot be owned because it belongs to mankind, I remember Ludwig von Mises’s warning:

“If land is not owned by anybody, although legal formalism may call it public property, it is utilized without any regard to the disadvantages resulting. Those who are in a position to appropriate to themselves the returns — lumber and game of the forests, fish of the water areas, and mineral deposits of the subsoil — do not bother about the later effects of their mode of exploitation”.

When the government (“the public”) owns something, it is as if no one owns it.

Therefore, privatization is the solution.

In 2009, Brazil launched a land titles programme that distributed lots in the Amazon to small-scale farmers. What happened? Independent analysis based on satellite maps and government data showed that land where title deeds had been distributed had more forest left compared with territory lacking in titles. It’s a start.

Still, one might think that the insertion of biodiversity into a real estate system (a market mindset) is revolting. Well, if that is what it takes to save the forest, should we not embrace the idea?

What is worth more: the real nature or an ideology?

See, we are not assuming that a “Capitalist Amazon” would bring perfection (a Heaven on Earth). There would be distortions here and there, but we are convinced it would be a far more efficient way to protect nature than the current system.

And if, despite the evidence, some keep asserting that the free market is not an acceptable solution for the Amazon’s problems, then I am forced to say that their goal is not to protect nature, but to impose an ideology. The price of this ideology is watching the Amazon burn.

Jean Vilbert holds a Bachelors and a Masters of Law. He is currently a Judge, Writer and Professor in São Paulo, Brazil. You can reach him on Twitter @jean_vilbert

Welfare State: Good Rhetoric, But Bad Outcomes

Welfare State: Good Rhetoric, But Bad Outcomes

In poor countries, welfare state represents a system where businessmen and statesmen work side by side (to plunder money from the people)

The idea of an economic model able to set an improbable combination of economic liberalism with central planning (a middle way between capitalism and socialism), aimed for the best of both worlds to promote social justice, has been fascinated politicians, scholars, artists, the people (voters) around the world. Surfing this wave, welfare state has spread fast and furiously.

Some even say that Nordic countries are the final evidence that it is possible to deliver a prosperous and egalitarian society through state intervention, mixing free market with high taxes in order to get high living standards and smaller inequality grab. 

Well… Latin America tells another history, a narrative where welfare state leads to weak social-economic results and additionally makes feasible a cozy alliance between businessmen and statesmen, which is established to extract huge amounts of money from the people and redirect it to the rich (some entrepreneurs and politicians).

Figures Never Lie

People in Western have repeatedly been told the way of reducing poverty and curbing social inequality is enlarging the government’s role in economy through expansion of public services and works. 

In Latin American this train of thought came as a tsunami. From mid-1990s on, welfare state was chosen (by voting… in ballots) to carry the hope for a better future. Brazil, Chile, and Argentina are lived examples of that – their people elected over and over again politicians who promised to bring this agenda to life. 

But according to scholars such as Sonia Fleury, earlier than that, since early 1970s, social policies had already started to impose this regime and its variations – there are at least two types: (1) a public universal system of integral social benefits, in which the state guarantees social rights through an equitable system of social policies; and (2) a dual system that locates the poor in the public sector (of health care and pensions, for example), while those who can afford are stimulated to move towards a private market. 

What was the result? We cannot say much good about these countries’ economic growth rates. Latin America GDP per capita rose modestly (not to say it remained stagnated) between 1950 and 2006. Over the same period, comparatively, East Asia and World GDP per capita roared. In other words, particularly (and curiously) after early 1970s, Latin America has lost relative income share on a consistent basis (underperforms consistently) in relation to the rest of the World (on average). Check this out in the chart below:

GDP per capita for Latin America (LA), East Asia (ASIA), the World and the Developing Word (Dworld). Source.


Source: Authors’ own computations on the basis of Penn World Tables 6.3 (2010).

On the other hand, we can say some (bad) things about these countries’ public spending (which skyrocketed). Gross Public Debt of GDP in Brazil rose from 30.6 percent in 1995 to incredible 87.87 percent by 2018. Argentina and Chile followed the same path. In Argentina GPB of GDP boomed from 25.74 percent in 1992 to 86.26 percent by 2018 (it had reached 152.24 percent in 2002). In Chile, it was just 11.08 percent in 2011 and went up to 27.16 percent by 2019.

Nevertheless, until recently, people did not seem so concerned. They assumed everything was being done by the government had an undisputed solidaristic purpose: helping the poor and putting an end to social privileges. Elites were supposedly being overthrown.

But then, came the crises.

In Brazil, the relatively stability reached until early 2000s was shaken especially after 2015. GDP growth shrieked to -3.8 percent, worse result since 1990; real (the national currency) suffered a huge devaluation – the exchange rate real-dollar passed from 1.829 in 2000 to 3.327 (nowadays it is 4.2), inflation (that was 1.65 percent in 1998) reached 10.67 percent.

In Argentina it was not different: GDP growth (stirring 6 percent in 2011) suffered ups and downs and eventually squawked to nerve-racking -2.51 percent by 2018. And how about Chile? Guess what? The same thing! GDP growth went from cheering 6.11 percent in 2011 to shy 1.25 percent by 2017. All over the continent, the combination of slow economic growth and high unemployment along with inflation led to stagflation (what we checked in the chart above).

But what is more remarkable is that while these countries were slumming into crises, a small group of entrepreneurs enjoyed profits that grew exponentially. For instance, between 2003 and 2015, Odebrecht (the largest Brazilian’s construction firm) saw its revenue burst from $4.25 billion to enviable $44 billion. How is that possible? It might sound weird, but the answer was provided by the criminal justice system.

A Fruitful (And Shameful) Alliance

In early 2015, a continental wide anti-bribery operation cranked by the Brazilian Federal Police (Car Wash Operation) discovered that a shocking scheme of illegal payments, over-invoiced contracts, and bribes had been operated for more than a decade throughout Latin America. The public contracts under investigations total a striking $4.2 trillion – money that had fleeced out from taxpayers supposedly to afford public works and services (in the name of commonweal, of course).

And although Brazil was the initial epicenter, the multiple and interconnected trails of corruption were traced far beyond its borders as foreign politicians and companies were dragged in: (a) in Argentina, three public works and $35 million in illicit payments made during Cristina Kirchner government were put under investigation; (b) in Chile, an informant said that the campaign of the president Michelle Bachelet was sponsored with slush funds; (c) in Peru, the former president Alejandro Toledo was arrested due to having taken $20 million in exchange for facilitating contracts related to the building of an interoceanic road linking Brazil and Peru. 

By the way, as some of the suspects taken into custody agreed to co-operate with investigations, the whole organization fell into pieces, exposing that the corrupt entrepreneurs had agreed to channel a share (up to five percent) of every over-invoiced contract to politicians, not just to make them rich beyond their wildest dreams but also to fund election campaigns and keep the governing coalition in power (the so-welcomed welfare state) – in Brazil, Argentina, Chile, Colombia, Peru, Venezuela, Equator… 

Isn’t it scary?

After these revelations, it became pretty clear (I suppose) that Latin American people had been deceived. They have been paying taxes to afford a colossal scheme of corruption which used the need for public services to extract money from most people and redirect it to a small group of corrupt important politicians and the biggest corporate executives.

Capitalism Of Coalition

Nowadays, when someone claims that welfare state means combining market with public utility services, I cannot help thinking the reality shows it forges a capitalism of coalition where statesmen and businessmen agree on how to extract money from the people in the name of helping the needy.

Thinking about this juncture, never has it been more obvious the reason why, in some countries (such as USA) multi-millionaires make their fortune mainly in technological field, whilst in other places (especially developing countries) the “capitalism of coalition” provides the best opportunities for big companies specialized in biddings – most of the super-rich in Latin America (so-called “entrepreneurs”) made and grew their fortune not exactly in the marketplace, but building public works and providing services required by welfare state.

As Lew Rockwell warns, welfare state expenses have been growing since 1980 in the name of helping the poor. But the money largely does not go to the poor, who receive just the crumbs, but to those interest groups powerful enough to bribe and lobby in favor of redistribution. The real money goes to the “pooerers” (the real defenders of the poverty), consultants, big companies that build state-subsidized housing (VPOs), public officials, and, specially, the members of bureaucracy who operate the whole scheme. The poor are maliciously and intentionally turned into a perpetual subclass, government dependent, in order to allow that some parasites can live comfortably well at the expense of all the rest of society.

You Can’t Be Too Careful

Now, it seems hardly surprising that some guys get richer and richer in countries like Brazil, Argentina, Chile, Peru, Colombia… even though, at the same time, the rest of the citizens struggle into consecutive crises and kept being poor. The key-factor seems to be the covenant between corporations (powerful enough to make alliance with the State) and the welfare state project (whose framework is based on public expending). 

I know most part of welfare state supporters is well intentioned. However, the road to (social and economic) failure is full of good intentions and as Adam Smith beautifully recall, “there is no art which one government sooner learns of another than that of draining money from the pockets of the people”. You cannot be too careful when the matter is the State’s power. 

Jean Vilbert holds a Bachelors and a Masters of Law. He is currently a Criminal Judge and Professor in Brazil. You can reach him at jeanvilbert@gmail.com.

Is The EU A Federal State?

Is The EU A Federal State?

In 1776 the Kingdom of Great Britain saw the Thirteen Colonies in America announce their Independence. At stake was the question of sovereignty. In 2016 the United Kingdom declared its independence from the EU. At stake is the question of sovereignty. Ironies of history…

When Brexit came up, a lot of people around the world were clearly surprised. Why would the United Kingdom want to leave the European Union? The slogan “take back control” got on the scene to supporting the leaving. But what control? It might sound strange for many (the world still does not know when Brexit will take place), but this debate is nothing new for those who have been watching the EU closely during the past decades.

Since 1993, when the European Community was renamed the European Union, or likely even earlier, the expansion of the community’s scope entails tensions between (1) those who want to see it enlarge its range and (2) those who seek to limit the swelling supranational powers. Who is winning this tug of war?

Answering this question helps us to understand not only Brexit but also why the EU should be considered nowadays much more than an international body (a union of sovereign countries), but a true quasi-federal state.

Trade blocs v. Federal states

A trade bloc is a type of international agreement that aims to reduce or eliminate barriers to trade among the participating states. Depending on the level of integration, the blocs can be classified as preferential trading areas, free-trade areas, customs unions, common markets, and economic and monetary unions.

Mercosur is an example of trade bloc (its full members are Argentina, Brazil, Paraguay, Uruguay, and, shamefully, Venezuela), whose purpose is to promote intra-zone trade and a common trade policy, likewise fluid movement of goods and people. The Mercosur’s institutional structure (as we ordinarily can see in trade blocs) is formed by councils and commissions – there is not, strictly speaking, a supranational government.

A federal state, in its turn, is a diverse kind of political entity. In thesis, it is unlike anything we have just seen.

Federal states bring to life a form of government (federalism) characterized by the division of powers into two levels of government: there is a central power (federal) and regional powers (state, provincial, cantonal). The central power (representing the federation as a whole) keeps the sovereignty while regional powers maintain only autonomy – sub-units can have their own government and create their own laws, as long as they observe the federative pact (according to the Federal Constitution).

Further essential characteristics of the federal states are: (1) a national court of justice is charged with (or claim) the power of invalidating regional laws, acts and government actions considered incompatible with the terms of the Federal Constitution; (2) normally adopt the separation of powers, under which the government is divided into branches: a legislature, an executive, and a judiciary; (3) secession (withdrawal of the federation) is forbidden – the cause of the American Civil War (from 1861 to 1865), between the North (Union) and the South (Confederacy), was the southern states’ right of seceding from the United States and keep on with slavery.

Considering this, how dare we affirm EU is more of a federal entity than a trade bloc? Keep reading and you will see!

From unpretentious origins to bold goals

Long narratives are normally boring, I know. But, in this case, the full comprehension of the EU’s development requires a brief historical approach.

In 1951 Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany created the European Coal and Steel Community (ECSC). Five years later, the same countries structured the European Atomic Energy Community (Euratom) and the European Economic Community (EEC).

These three bodies (ECSC, Euratom and EEC) were unified in 1967 to form the European Community (EC). Between 1973 and 1986, United Kingdom, Greece, Ireland, Denmark, Portugal, and Spain joined the club, followed by many others. In 2013 Croatia became the 28th European Union member.

Supposedly to achieve the integrational projected aims, a new institutional structure was fashioned to include an executive (a Commission residing in Brussels), a legislature (a Parliament sat in Strasbourg), and a judiciary branch (a Court of Justice, which took place in Luxembourg). As we can see, the community has developed into a supranational entity arranged such as a State.

This is remarkable! What originally was just a means to coordinate essential industries and integrate economy (creating a common market) turned into something completely different, encompassing (gradually) deep political integration, a single economic market, a shared currency (Euro), suppression of internal borders, a European citizenship, and common policies in several areas (some quite controversial, such as immigration).

And that is not the end (it was just the beginning). Over the years, EU organs would dramatically expand their roles, supported by most of national politicians, who likely believed this process was favorable to their countries or that it was too costly (economically and politically) resist it. The point is: as only few critical voices sought to set clear boundaries to the community institutions, the supranational powers moved forward.

Continental law: an old novelty

A unified law is a European’s old dream.

Back in time, around the 12th century, when arising capitalism system brought revitalized towns, new centers and commercial routes, and intensified immigration, many already claimed for a unified law, which could rule relations between trading partners from different communities.

But then England took an entirely diverse path, adopting its own common law system, and the national law enacted during the French Revolution lead to a radical transformation in legal theory, turning it upside down. Europe moved away from any uniformity. Who would have thought this audacious idea of a continental Law still could become reality? The conception of the EU has made it possible.

More than legal acts, in 2004, representatives of the 25 member states signed a fishy treaty intending to create a Constitution for the whole European Union. However, the rejection of the document by French and Dutch voters (in popular referendums) brought the ratification process to an end.

It happens that, through the Treaty of Lisbon, signed in 2007, many of the provisions originally rejected were furtively reintroduced. The core of the changes was kept. Now EU has a new superior law, able to drive and bend national laws. Currently there are several European statutes in force to which supremacy is conferred. Projections indicate that maybe half of national legislation across Europe is influenced by European law.

Expanding the jurisdiction and taking control

By the 11th century Europeans lived under a feudal regime. Vassals were tied to lords, not to monarchs. This was a problem for kings, who wanted to gain direct control over vassals. They sorted it out expanding the royal jurisdiction, what meant to claim the power to adjudicate the biggest number of conflicts as possible or, at least, the most important ones. The same recipe was used with good results by Norman kings in England (12th century) and… guess what: by the European Union (20th century).

The European Court of Justice was charged with interpreting European law and guiding how legislation created by European Parliament should be applied, what include (a) ensuring the supranational law obedience and (b) ruling on questions when member states disagree about its application, meaning, and extension.

Wielding these prerogatives, in two key decisions, the Court held (1) that member state´s courts can apply European law directly, regardless any procedure of reception or reenactment (Van Gend en Loos v. Nederlandse Administratie Belastingen) and (2) that European law has primacy over national law (Flaminio Costa v. ENEL). Wow!

After these decisions, it was clear that European law must be seen as a sort of supreme constitutional law (taking precedence over any norms of national law, including the Constitutions of member states). Moreover, the European Court of Justice vindicated the exercise of a kind of judicial review to guarantee this primacy, declaring inapplicable national laws when they are considered incompatible with continental law.

A quasi-federal state

The classical meaning of sovereignty, provided by Jean Bodin, is the highest, absolute, indivisible and perpetual power to create laws that subject the citizens. Law is the command of sovereignty. All other rights and prerogatives are included in the power of making and repealing laws.

Considering this, if European law has the power to override national laws, in fact national states are no longer sovereign.

And it is hardly surprising. Never has the Dani Rodrik’s trilemma appeared more accurate: it is impossible to attain economic integration, national sovereignty and democracy at the same time. They are mutually incompatible: we can combine any two of them, but never have all three simultaneously – integration requires the removal of variations between countries. But as people from different countries want different things, a single institution means ignoring the preferences of electors from some countries. One option is to go for an “international federalism”, with the dissolution of nation-states.

This is the way the European Union (in practice) has taken.

In historian Tamar Herzog words, “as a result of these developments, many now argue that de facto, even if not de jure, the European Union lost its original character as an international body and became a quasi-federal state with a quasi-federal constitution (European law) to which all member states are now subject”.

So, why all that noise around the UK leaving the EU? Since the community will not retreat in the powers it has taken on, the only remaining door for Britain was secession – invoking article 50 of the Treaty on the European Union. And perhaps this possibility of withdrawal from the community is the last lived difference between the EU and a classical federal state.

Jean Vilbert holds a Bachelors and a Masters of Law. He is currently a Judge and Professor in São Paulo, Brazil. You can reach him at jeanvilbert@gmail.com.

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