Review – The Medici

The Medici: Power, Money and Ambition in the Italian Renaissance

by Paul Strathern, published 2017

The history of the Medici family might best be summarized with the phrase “from dust to dust.” As if to emphasize how they were destined for greatness and nobility, the family started out as a bunch of Tuscan hillbillies who could trace their lineage to a legendary knight of the Holy Roman Empire who settled near Florence in the 8th or 9th Century. From there and then, no one heard much of these people until some of the clan moved into Florence proper in the early 1300s and formed a small money-changing business.

Using conservative business practices and investing in roles of civic responsibility, eventually a Medici was elected to the position of gonfaloniere, the primus inter pares of the Florentine Republic. From this position the dice were carefully loaded in the favor of subsequent Medici generations by artfully forming governing coalitions that cemented their public position while creating leverage across their business and investment portfolio through the tactical use of subsidy, official privilege, insider information and regulatory capture wielded against competitors and opponents.

The story of the “overnight success” of the Medici begins here. The first great head of the Medici family and Medici bank, Giovanni de Medici, had jockeyed for favor with the newly appointed (anti-)Pope John XXIII in order to secure a role as the personal banker to the Papal Curia upon his ascendancy, which was then granted. For much of the 14th Century and Renaissance period in general, the papal revenues and banking needs were equivalent to managing the treasury function for the modern era’s most wealthy and complex multi-national corporations. To gain this trust was not only a measure of unique esteem valuable in and of itself, but a responsibility that carried with it priceless information and irreplaceable business franchises throughout European Christendom and even the Levant.

However, Pope John XXIII soon became embroiled in the Great Schism in which he and 2 other rival popes were called before the Holy Roman Emperor and summarily dismissed, to be replaced with his appointment, Pope Martin V. At his son Cosimo’s urging (whom he had sent to be his representative at the delegation attending the papal conference) the Medici’s continued to support the defrocked pope, even helping to pay his ransom for his release from imprisonment. Rather than being a financial disaster, this loyal support of the former pope led to a new lucrative banking relationship under Martin V, because in return for bartering his release the former Pope John XXIII agreed to support the nomination of Martin V and participate in the reconciliation of the Schism, leading to greater legitimacy for the new pope.

As a major political player on top of his business responsibilities, Giovanni left three apocryphal warnings for his descendants:

  1. focus on business, not politics
  2. do not be ostentatious
  3. don’t oppose popular will, unless it is aimed at disaster

It seems as if it should be unnecessary to say that in time this advice was forgotten and eventually, so, too, were the Medici.

But the dissolution of the Medici was a ways away yet. After Giovanni came Cosimo as head of the family and the Medici bank. He faced a disastrous and unpopular war between Florence and Lucca (backed by Milan) which threatened to ruin the Florentine treasury and which had pitted the various leading families against one another. Subscribing to Rule #3, Cosimo opposed the conduct of the war and worked to hide the bank’s assets outside of Florence to avoid expropriation in the war’s aftermath.

For these maneuvers and others, Cosimo was recalled to Florence and imprisoned in the bell tower of the Palazzo Vecchio by a faction led by the rival Albizzi who had plans to execute him for treachery. However, Cosimo’s far flung banking business and participation in the geopolitics of Western Europe had led him to a series of alliances and power relationships with foreign entities such as the Venetian Republic and the Papal States which he utilized to create a kind of diplomatic protection for himself, pressuring his enemies to choose exile over execution as his fate.

In the meantime, he used bribes and the threat of invasion of the city by his own mercenary forces outside its walls to add to the diplomatic pressure and engineer a favorable outcome for himself, all while behind bars.

Shaken but not stirred, Cosimo came to rule Florence through the intervention of the Pope and Venice, but vowed that “he would rule, but he would not be seen to rule” going forward. He had learned his lesson about bearing personal responsibility when it came to matters of state. Further, he was coming to understand that it was easier to wield power when others weren’t watching.

According to one supporter, “Whenever he wished to achieve something, he saw to it, in order to escape envy as much as possible, that the initiative appeared to come from others and not from him.” One policy he pushed for through his crony network was the use of the “catasto”, which had originally been levied to pay for the war, as a punitive tool to crush his political and business opponents through ruinous taxation. While he was forcing his enemies into exile to avoid financial ruin, purchasing and redistributing their former property to his supporters on a bargain basis, he simultaneously used inflated personal balance sheets to hide his income and appear to be bearing the heaviest personal tax burden on a relative basis.

But Cosimo was far from poor:

Between 1434 and 1471, Cosimo spent 663,755 gold florins supporting public works, by comparison, total assets of the Peruzzi bank at its height were 103,000 florins from Western Europe to Cyprus and Beirut.

If he was able to spend 6X the total assets of a well-known competitor at the height of its powers on public works, his total assets and wealth must have been a multiple of that amount. Normal banking and family secrecy aside, the Medici wealth at this time seems to have been nearly incalculable. It is no wonder, then, that one of Cosimo’s key strategies in building and wielding power was to always return favors with favors.

Following Cosimo, who was once to have said that “Trade brings mankind together, and casts glory on those who venture into it” his son Piero and Piero’s son, Lorenzo began to venture the family increasingly beyond the scope of banking and business and into the realm of politics and social standing via nobility. Depending upon how you interpret the events that followed, Piero and Lorenzo were either some of the most “magnificent” leaders of the Medici banking and political enterprises or they were equivalent to the decadent dissipators of the true talent and generational thrift of their greater ancestors.

Either way, the local power of the Medici in and around Florence was successively traded for inter-regional power and influence within the royal families of Europe. As the Medici gained a queen mothership in France, they lost their rule over the Florentine Republic to foreign invasion and intervention and increasingly squandered the capital of their banking and related enterprises. By the early 18th Century the Medici had failed to produce a male heir and had ceded their Grand Duchy of Florence to the Holy Roman Emperor and ceased to be a meaningful business or political entity forever.

When Was America Great The First Time?

American presidential candidate Donald Trump’s campaign slogan is “Make America Great Again.” One thing that is interesting about this slogan is that no one thought of using it in the past. It’s intuitive and it touches a positive nerve– few Americans think America is great right now, and the idea of returning to past glory is a popular idea for adherents of both major parties and even libertarians. Democrats dream of the 1960s, Republicans dream of the 1950s and 1980s, and Libertarians dream of the 1780s, so there is something for everyone to grab ahold of.

Embedded in the slogan is a time reference. To make something great “again”, it needs to have been great at an earlier date. So some interesting questions that should be asked and discussed are:

  1. When was America first great?
  2. What specific policies or circumstances contributed to its greatness?
  3. What policies are you proposing to make America great again?
  4. Why do you believe these policies will allow for a return to that greatness?
  5. Could improvements have been made on America at the time of its former greatness, as great as it was?
  6. If so, what policies would’ve made America even greater?
  7. What is a realistic amount of greatness that might be achievable within your first 4 years as president? What amount of greatness might have to wait for a 2nd term?

A Personal Exploration Of Income, Consumption, Savings and Taxation

I thought it’d be interesting to explore my personal budgeting efforts in broad terms to illustrate some of the problems with mainstream public thinking about personal incomes, taxation and “hoarding” of savings by the rich. Now, I am not rich, but I do alright and I think I am safely in the “productively contributing to society and paying more than my fair share” so I think my example can be illustrative for the principles involved.

I took a look at my budget sheet for the full year, 2015, and in terms of percentages it broke down like this:

  • Personal consumption, 35%
  • Savings, 33%
  • Taxes, 32%

A few things should be noted right away. The first is that these taxes are directly levied on my income at the time I get my paycheck, this doesn’t serve as a comprehensive register of all taxes I paid, such as sales tax, gasoline consumption taxes, etc. The second is that I included my tax refund for 2014 in my income for 2015, which makes my income higher than it would be and raises my savings rate while lowering my tax rate. I’m not going to make a big deal about it, but it is there and it actually makes my tax rate and my savings rate closer to even, if not swinging more toward taxation.

Taking my percentage rates as above, the way to think about it simply is that for every $100 I earn in income, I enjoy personally, in the present, $35 worth of it; I pay $33 to the government; and then I save/”hoard” $32 of it, which we will get into more detail below. But the immediate idea is that I earn $100, but I actually only get immediate benefit from $35– you might already think that is too much and I shouldn’t get to enjoy so much of my own money, but it’s worth belaboring the obvious point that I don’t spend $100 if I earn $100, I spend a fraction of it and for me, that fraction is about 1/3rd, meaning that a majority of my income is not something I personally, immediately benefit from. This principle would extend to any other person based on their rates of consumption, savings and taxation, including “the rich”, and I would imagine for “the rich” their consumption percentage would actually be much lower than mine (because it gets really difficult to spend large amounts of money on personal consumption), while their rates of taxation (assuming they don’t have a sophisticated tax sheltering scheme) and savings are higher than mine.

Let’s look at that tax portion of my income at 32%. One way to look at what I pay in taxes is to say that I derive valuable use of goods and services provided by the government — roads, police and firefighter services, public utilities — and my taxes are a user’s fee for these items. Of course, virtually no government services (not even roads and highways via the gasoline tax!) are 100% funded by direct charge of fees on a pro rata basis, so this is a strange argument. In addition, most governments at the state level, and certainly this is true of my current state, and the federal government, run consistent budget deficits, which means they spend more than they take in on tax revenue. So if we want to look at it as “user’s fees”, it’d be a weird situation where you are charged only part of the cost of your use, and then some financier makes up the difference by lending it to the service provider who plans to charge you for the rest of your use at some date in the future.

Another thing to consider is that some people make use of government goods and services without paying anything for them. In cases of direct welfare subsidy, this is obvious and purposeful, they’re never meant to. In other cases, people simply make more use because of their behavior than they pay into the system, because of their income generation efforts. For example, someone might call the cops all the time, or have ambulances summoned on their behalf with greater frequency, or be a much bigger user of Medicare, than what they pay in to the system. Without making a moral commentary on this, it’s clear that looking at taxation as a “user fee” is not really a reasonable way to considering things because some users aren’t paying anything and using it a lot, and other people are paying a lot and not using much (hint: I’d skew more toward that end of the spectrum, I can’t remember the last time I made use of or was the “victim” of emergency services, I drive on the roads less than most people because I work close to home, hate traffic and spend a lot of time reading on my couch, and I generally pose a lower risk/cost to other members of my community while being more productive than average — based on income).

The point of all of this is to support the idea that, of my annual tax contribution, I do not get 100% of the benefit but only some fraction. It’s not easy to calculate what that fraction is (is it greater than 50%? Less than 50%?) so of the 1/3rd of my income that I pay in taxes, some portion of it doesn’t benefit me but other people.

Now let’s look at the savings portion. This is the part that always trips up the income-worrier crowd. Savings are interesting because clearly, for savings to be accumulated, one must abstain from direct personal consumption in the present, right? To have $1 of savings, that must mean I had the opportunity to spend $1 on my personal enjoyment but chose not to do that. It’s possible that at some future date I will make use of that $1 of savings, and so my savings are a form of “time-delayed enjoyment”– but it’s also possible I never get to, either because I die, or I lose them through increased taxation or inflation, or I simply choose not to do so either to maintain my optionality in perpetuity, or because I want to deploy my savings in an investment.

If I decide to invest my savings, I do so because I have the expectation of earning a return over time. One could argue that earning myself more resources is a benefit to me and thus my savings are providing me personal enjoyment, but again, unless I directly consume the return as future income, it will just end up funding taxes or funding my growing savings (and investment) in which case I get no direct personal benefit from the resources. But if I don’t get any direct personal benefit during this process, who does benefit?

An investment of savings is a method by which an individual or group of individuals with a profitable social project can make use of the saved resources to fund their project. I might make a loan to a company, or buy some of their equity, which they then use to buy supplies, pay workers, cover rent, etc., in the course of providing valuable goods and services to other people. For example, all “public companies” that can be bought and sold in the stock market are funded by the investment of savings provided by people like me, who choose not to spend all their income and instead turn over some of their resources to these companies who use them to: serve people coffee (Starbucks) or hamburgers (McDonald’s) or build housing (Lennar) or provide mobile telecom networks (Verizon), etc. I might be a customer of one or many of these companies myself and thereby earn a small incremental benefit from their existence, but the point is that these companies are primarily serving other people than myself and so my savings, in so far as they are invested, are not being used for my benefit but for other people’s.

So what if we go back to my rates of “spending” (consumption, savings and tax) and start adjusting them. My consumption is lower than it appears, because part of what is baked into my spending is sales taxes I’ve paid on purchases which fund local governments. Although the average sales tax rate is higher than this, some of my spending is comprised of things like rent which do not have an explicit tax component I pay (that is paid as property taxes by the property owner) so it might average out to about 4% of my total income. My consumption is now 31% and my taxation component is closer to 36%. However, some portion of what I pay in taxes I personally benefit from as well. This is really hard to estimate but I think I could conservatively say that I don’t benefit directly from at least 25% of what I pay in taxes. So let’s add back 27% to my personal consumption, so I am at 58% personal consumption and 9% taxation on my income spending. We’ll leave my savings rate alone at 33%, and we’ll simplify our analysis by saying that I invest my entire savings in each period, which is very nearly true. I have good cash management practices so I don’t generally need to fund my personal consumption from my accumulated savings, and while I do keep a balance of cash for emergencies, it’s not under my mattress but in a bank account so it’s being loaned out (for essentially 0 interest!).

Using me as an example, then, we can see that in an annual period, I personally and directly consume about 58% of my income (via my own spending and benefits I derive from government-provided goods and services which I paid for via taxation) while I do not make use of 42% of my income in each period (via savings deployed as investment, and money that is taxed to fund government services for other people). For every $100 I earn, $42 is being consumed by other people.

What’s the problem with “hoarding” in this case? If my savings “hoard” increases, it just pushes the proportion of my income which benefits other people higher.

Also, what is the problem with me earning a higher income? I can only enjoy so much of it myself. As I earn more and more, it is harder and harder to spend it on my own enjoyment and I tend to use less and less government services as a percentage of what I pay in taxes, so the benefits are accruing largely to the rest of society. You might say, “Well, if you’re not using the money anyway, why not have the government tax more of it away from you, or legally restrict your income to a certain cap so others can be paid more?” but that misses the point that, assuming we’re talking about a free and competitive market, I created the value I earn as an income as evidenced by the fact that other people voluntarily give it to me in exchange. If you stop me from earning it, then I stop producing it and it doesn’t simply shift to other people in society to enhance their income, the real value of it disappears altogether!

As I said, I am not rich, though I do alright. But if I was rich, these numbers would just keep skewing further and further toward providing value to other people than myself. If I was earning a billion dollars a year (which is different from saying I am a billionaire based on asset value), would it be reasonable to believe I enjoy even $10M of (1%) my income as direct personal consumption each year? That is A LOT of government services, fine meals, first class air travel, fancy cars, etc. when we’re talking about pure, after-tax dollars. At that point, fully 99% of my annual income is providing benefit to persons other than myself. What is greedy about that?

This isn’t meant to be a defense of any specific wealthy or high-income individual. There might be a lot of people engaged in illicit or corrupt personal gain. I am trying to provide some logic about the general principle of personal incomes and who actually benefits from them. If anyone is “selfish” with their spending, it’s probably lower income people who pay zero to negative taxes and don’t manage to save much if any of their income. People with higher incomes and high propensity for savings are largely funding the enjoyment and well-being of people other than themselves.

The Rape of Russia

During the 1990s, the countries of the former Soviet Union had a unique historical opportunity to move toward a competitive market economy based on private property rights. After decades of “experimenting” with various degrees of totalitarian socialism, this privatization moment would allow hundreds of millions of people to leap ahead in their standards of living and personal well being while fundamentally transforming their political and social relationships. Instead of an economic “miracle”, the privatization era was characterized by a new structure of cronyism wherein the formerly nationalized wealth of the Soviet Union came to be controlled by a small group of “oligarchs” and the people of the various countries were essentially politically repressed. The worst part is that this economic and political travesty took place with direct involvement by various Western and US-backed institutions and individuals, such as members of an elite advisory team from Harvard University. Below are several resources exploring the theory and experience of privatization in Russia and other former communist nations.

How Harvard Lost Russia [PDF]

We learn about the exploitation of the Russian privatization by members of the Harvard Institute for International Development. We learn a couple of interesting facts about the period: the HIID advisors were not doling out pure, fundamental free market theory about how to create a competitive market economy but instead helped to build a “managed” system directly modeled on the US and other crony systems; and, many of the advisors involved in the HIID project made direct investments in industries they were advising, for personal benefit, in direct contradiction to their employment contracts and the laws of the US and Russia at the time (ie, corruption). Deeply involved in the scandal and a close friend of many of the advisors directly involved, the infamous Larry Summers does not come out looking so good.

Two money quotes:

Judge Woodlock found that, while running the Harvard Institute for International Development’s advisory program in Russia in the early 1990s, Harvard economics professor Shleifer and attorney Ha had conspired to defraud the US government, engaged in self-dealing and violated conflict-of-interest regulations.

and,

Harvard University was in a unique position to exert a powerful influence. Post-Soviet Russia turned to the West for help in rebuilding its economy and filling the vacuum left by communism’s fall. In running Harvard’s Russia Project, Andrei Shleifer and Jonathan Hay had an opportunity to preach the importance of integrity, transparency and fairness in shaping a business culture, to work to enshrine those values in the country’s legal and financial infrastructure. Instead, their personal dealings sent a very different message.

This is a horrible tragedy for post-communist European societies, US and Russian foreign relations and for governance and culture in our own society as Shleifer paid a settlement but received no formal judicial sanction and maintained his tenure and social standing at Harvard and in the wider American economic community after playing the role of a miscreant carpetbagger.

Testimony of Anne Williamson Before the Committee on Banking and Financial Services of the United States House of Representatives, September 21, 1999

Anne Williamson explores “the question of the many billions in capital that fled Russia to Western shores via the Bank of New York and other Western banks.” Claiming that “property is the poor man’s ticket into the game of wealth creation” (a sentiment echoed in Hernando de Soto’s The Mystery of Capital) because “the rich… have their money and their friends to protect their holdings, while the poor must rely upon the law alone,” Williamson observes that Russian economist Larisa Piasheva, building on the theory of Austrian school economist Wilhelm Ropke, had designed a “cold turkey” privatization policy which would’ve invited direct foreign investment in Russia; instead, the Harvard cabal and other Western reformers created a weak, US taxpayer-supported voucher system that relied on Western bank lending and led to widescale corruption.

She makes the further claim that “Communism had evaporated by late 1987, the year in which the Russian people were allowed to hold convertible foreign currencies.” She condemns the entire, Western-organized privatization program as a sham and part of a known political formula:

Sell assistance programs on an alleged “free market” and “humanitarian” basis by awarding government grants to those academics who can be relied upon to supply the intellectual camouflage politicians and journalists then repeat ad nauseum to a distracted public, move the IMF and the World Bank to target, induce target to raise taxes, fine tune target’s central banking operations, encourage borrowing and debt creation through the target’s government and its national banks, allowing IMF lending to pay yields if necessary; induce target to privatize national property while building a flimsy, artificial “infrastructure” for an equities market good enough to attract high risk foreign investors. Once the target nation’s government flounders, step back and watch speculators assert discipline through a run on the target’s currency. The subsequent devaluation delivers, in turn, a flood of cheap imports to American manufacturers and producers.

The finishing touch on the swindle is to confiscate more money from G-7 citizens (the lion’s share from Americans) to pay for what is said to be an “essential” IMF bailout; thereby allowing Uncle Sam’s IMF minions to entrench themselves more deeply in the target government’s. Taxes are raised, the population struggles beneath indebtedness, government funding demands and the inevitable domestic inflation and devaluation delivers. Western neo-colonialists then bully the target over its rapidly compounding debt in order to extract yet more property. Once successful, the world’s insiders then turn around and deliver cheap shares from privatizations and initial public offerings into the maw of U.S. mutual funds and portfolio investors. US taxpayers get hit coming (foreign aid) and going (bailouts) and innocent foreigners’ property is finagled away either from, or on account of, inattentive and corrupt leaderships. The big winners are the world’s increasingly corrupt and cozy governing class, international bureaucracies and global banks.

We would be wise to remember her coronation of currency speculators as “the last disciplinarians in the world’s financial system.

Stanley Fischer’s role in piratizing Russia’s wealth

Reminding us of the dictum that “bad men need nothing more to compass their ends, than that good men should look on and do nothing”, Steve Sailer observes that during the Russian privatization,

Fischer was there at the creation. He had numerous chances to speak out publicly about what was going horribly wrong in a Russia that looked to him and his friends for advice.

When a person observes evil and does not speak out, particularly when he shares proximity to it, we have to question whether he is competent to recognize what he is looking at and whether he might be compromised in being a participant in it in some way.

Stanley Fischer is now the vice chairman of the US Federal Reserve System. He wields incredible power and influence over the US monetary system and economy, not to mention the world’s. The Sailer article explores his questionable judgment of the facts-on-the-ground in Russia, which he had a hand in, and his ethics in seeming to overlook the blatant corruption. The article helps us to remember that politicians of the present have a past, and that past is rarely flattering and seems to be easily forgotten. It also reiterates the theme that a golden opportunity to move Russia and other post-communist countries toward true free market thinking was squandered.

George Reisman’s Capitalism (PDF), pg. 290, “From Socialism to Capitalism: How to Privatize Communist Countries”

So, if corrupt self-dealing and crony managed economies are not the solution for privatizing former socialist regimes, how could it or should it be done? Luckily, there are real free market thinkers who have thought of possible solutions for reform. An extended section from George Reisman’s Capitalism lays out one such approach in detail. I have decided to quote it at length:

The advantages of private ownership of the means of production are so overwhelming that it is actually of secondary importance precisely who the initial private owners are and how their ownership is established. Whatever the specific method or methods of establishing private ownership of the means of production, the institution will function to the benefit of everyone—owners of the means of production and nonowners of the means of production alike. It will do so, however, only to the degree that the individual private owners possess full and secure rights of ownership.

The security of property rights means that the owners must be secure both against the possibility of any form of new confiscation by the state and against successful challenge to their ownership by other private individuals claiming to be the rightful owners. To understand the necessity of the security of property rights, the reader should imagine how his behavior would be affected if he were contemplating buying a home that he could not be certain would be his for very long. He would not be prepared to pay very much for it, and, after he bought it, he would not be prepared to put very much into it. Indeed, his incentive would probably be to let the house run down and even to sell off such things as the appliances for the sake of obtaining cash or other assets that would be more securely his. Without the security of property rights, the situation of all would-be owners of factories, farms, mines, and stores in the present-day socialist countries must be exactly the same. Such owners would be in essentially the same position as the state employees described earlier who were supposed to act as capitalists under “market socialism.” The absolute security of the owners’ property rights is essential if people are to be willing to pay proper prices for the various properties and then to stay on and improve them rather than milk them for whatever they can.

An essential aspect of the rights of ownership is the right freely to buy and sell property. This aspect of property rights is especially important in the transition from socialism to capitalism. The combinations of assets of the various enterprises of socialism and thus the combinations of assets of the enterprises that will initially exist under capitalism will almost certainly need radical change. It will be essential for the market to have the freedom literally to redefine all enterprises by changing the combinations of their assets. This means, there must be the freedom both to break up existing enterprises by selling off their assets in the manner of “corporate raiders” and to combine their assets through such devices as mergers and acquisitions.

As I say, these freedoms are essential. For a major foundation of the efficiency of capitalism—ironically, increasingly overlooked in the supposedly capitalist United States—is the ability to create business firms that possess the right combinations of assets. This ability is essential if firms are to be able to produce the right products by the most efficient methods. It must be present at all times, if the economic system is to be able to adjust to changing conditions. It is acutely necessary in the context of putting right the combinations of assets that a socialist government is likely to have thought appropriate for the various enterprises. It would be essential not only for such things as combining manufacturers with the right parts makers, and retail outlets with the appropriate warehouse facilities, but also for changing the uses made of all kinds of existing factories and land sites.

Nothing less than a radical overhaul of the entire apparatus of production inherited from socialism will be necessary if the economic system is to become efficient. Many factories will have to be closed and such of their assets as are still useable, devoted to production in different locations. Most other factories will have to undergo major changes in what they produce and the methods by which they produce. The output of innumerable factories will have to go to different users. The use that is made of innumerable land sites will have to change. All of this requires the freedom to buy and sell and to breakup and combine the assets of firms.

Along the same lines, the market would need the absolute freedom to hire and fire the managers of enterprises. This freedom too is necessary at all times and acutely necessary in the conditions of a transition from socialism to capitalism. Any managers inherited from socialism are likely to need replacement. Many of the initial managers under capitalism will also need replacement. To be effective, the transition from socialism to capitalism will need to be followed by a fall into obscurity of numerous former top managers and rise from obscurity of numerous new managers. Nothing must be allowed to impede the business takeovers and buyouts that are an essential part of this process.

In addition, of course, there must be the absolute freedom to hire and fire ordinary workers. Socialism is characterized by a massive misallocation of labor, just as it is characterized by massive misallocation of capital. This too must be put right if production is to become efficient.

A vital aspect of the transition from socialism to capitalism, that is implicit in all that has just been said and is clearly called for by the nature of capitalism, is the freedom of every enterprise to enter into the industry of every other enterprise, and, of course, the freedom of everybody to form new enterprises. In other words, the full freedom of competition must exist.

In the light of these requirements, the specific methods of establishing private ownership of the means of production can now be considered.

The simplest and most obvious method is that wherever former owners of property or their descendants are still alive, the properties should be returned to those from whom they were stolen, or to their descendants.

In Eastern Europe, this method is somewhat complicated by the fact that many of the private property owners who were dispossessed by the Communists were themselves beneficiaries of expropriations carried out not long before by the Nazis. Here the solution clearly is to return the properties to the earlier owners dispossessed by the Nazis, or to the descendants of those owners.

To the difficulty of settling claims as between two or more private claimants is added the fact that the method of returning property to former owners becomes less and less adequate, the longer is the period of time during which socialism has existed and the more ruthless were the means employed to establish socialism in the first place. This is because it becomes correspondingly more difficult to locate specific individuals with valid claims to ownership. (In many cases, everyone with a valid claim may simply have been murdered.) The major part of the problem, however, is the fact that as time has passed, numerous new plants and machines have been constructed, which no one can now claim on the basis of property rights existing before the establishment of socialism. These observations are particularly applicable to the former Soviet Union, where socialism existed for over seventy years and where over twenty million people were murdered by the Communist regime. The mass murders committed by the Nazis may pose a similar problem to the location of heirs.

In view of these facts, I propose three methods of privatization. First, as far as possible, property should be returned to those from whom it was stolen, or to their descendants. Second, in the case of agricultural land where it is not possible to locate former owners or their descendants, the land should be made the individual private property of those who now work it. That is, all the collective farms and state farms should be broken up into separate, individual private farms. Formulas could be devised allowing for differences in the amount of land individuals received based on differences in the time they had been compelled to work the land. Those who had suffered such forced labor for a longer period, would receive more of the land than those who had suffered it for a shorter period. Individuals who would otherwise receive parcels of land too small to farm might simply receive cash.

Third, in the case of all other property—factories, mines, shops, and so forth—the appropriate principle would be to place the assets on the open market for competitive bidding. Foreigners should be actively encouraged to participate in this bidding and, indeed, the bidding should be carried on in Western currencies and in gold. Foreigners should have the same full rights of ownership as citizens: they should be allowed to buy and sell property of all kinds, to form companies, and to remit dividend and interest payments to their own countries to whatever extent they wish.

Active foreign participation in the bidding creates the possibility of the average citizen of the socialist countries deriving an important immediate benefit from privatization. Namely, as the proceeds from the sale of assets came in, each individual citizen could receive his individual share of the proceeds—that is, the proceeds of the government’s sales could be divided up among the citizens. Thus, during the period of liquidation of state assets, the average citizen could receive one or more checks payable in Western currencies. He could use the proceeds to buy essential consumers’ goods that could be imported from the outside world because the means would be present to pay for those imports. This would help to tide him over during the difficult period of transition during which his country’s economic system was being reorganized and he was unemployed or not in a position to earn a significant amount by working. In this way, for the first and only time—in the process of its liquidation—collective ownership of the means of production would turn out to provide some actual benefit to the citizens: in the moment of its being liquidated for Western cash, it would enable them to obtain something of value to their lives.

It should be observed, incidentally, that the benefit to the average citizen would be the greater, the greater was the prospective security of property. Because to the extent that newly acquired property rights were expected to be upheld, the higher would be the prices that foreigners would be prepared to pay for the assets being offered for sale, and thus the greater would be the proceeds accruing to the average citizen of the formerly socialist country. Economic morality would be rewarded. (The ability of foreigners freely to remit dividends and interest payments is an important aspect of this morality and also an important foundation of the foreigners’ willingness to bid up the prices of the assets offered for sale, and thus of the ability of the average citizen of the formerly socialist country immediately to benefit from privatization.)

[…] Once the transition to capitalism was accomplished and the average citizen of the formerly socialist country was in a position to begin saving and investing on a significant scale, not only would he begin to accumulate capital within his own country, but the capital market of the entire world would be open to him, and he could invest abroad just as others had invested in his country. This is an aspect of what can be called capitalist internationalism.

In order to secure the best prices for assets being sold off, a corps of professional auctioneers and brokers should be employed, who would receive a commission based on a percentage of the sales proceeds.

The principle of distributing the proceeds from the sale of assets equally among the citizens could be modified to give greater compensation to victims of labor camps and survivors of those who have been murdered by the Communist regime. However, the primary compensation for such crimes should probably be left until after the transition to capitalism has been completed and it is thus possible to provide more substantial compensation.

There are, of course, other possible methods of establishing private property. One would be simply to make the various existing enterprises the private property of their present managements. Another would be to turn the various enterprises over to their present employees. Obviously, the two methods could be combined, with the present managers receiving a certain percentage of the ownership and the present employees a further percentage. To some extent, these methods are actually in use.

If, following the establishment of private property in these ways, there really was security of property and full rights to buy and sell assets and shares, to hire and fire managers and workers, and to compete in all branches of industry, these methods would ultimately be effective in establishing private ownership of the means of production. As time went on, all the necessary changes could take place, including changes in ownership, which would be effected by the market, and an efficient economic system would emerge. However, the appropriation of enterprises by their Communist-appointed managers will necessarily carry with it the taint of the old regime and all of its injustices, and is likely also to be accompanied by a continued large-scale ability to use political pull, based on previously established relationships with government officials. Thus, private ownership of the means of production begun in this way will be tainted by injustice, past and present, and by corresponding inefficiency. This would be a legitimate source of resentment and would constitute a potential threat to the continuation of such ownership.

Turning the ownership of each establishment over to the workers of that establishment would at best arbitrarily favor some workers over others. Those workers who happened to work in highly capital-intensive industries, such as electric-power production or steel making, would obtain ownership of far more capital than workers who happened to work in less capital-intensive industries, such as clothing factories and restaurants. The same point would apply within each industry, insofar as some plants were more modern and efficient than others. It is very pertinent, of course, that as the result of socialism’s protracted gross inefficiencies, the value of many factories and other productive establishments would turn out to be altogether nonexistent.

The problem of workers benefitting or failing to benefit by virtue of the accidental circumstances of where they worked would also exist in agriculture. The workers of collective farms with abundant, rich soil would receive more than the workers of collective farms with relatively meager, poor soil. In agriculture, however, apart from the return of former owners or their descendants, there does not appear to be an alternative to the workers’ coming to own the land. Of course, the workers on the relatively poorer lands could be given the option of sharing in the proceeds of the sale of other assets rather than accept land they had been forced to work.

To the extent that workplaces do become the property of the workers employed in them, it must be stressed that it is vital that the workers of each plant be free both to sell their ownership shares while keeping their jobs and to leave their jobs while keeping their shares. In this case, ownership and employment would eventually become almost entirely separate, as under capitalism. The ability to hold ownership and employment separately is essential for the free movement of capital and labor between industries. In its absence, workers would be reluctant to leave their employment, because they would then lose their capital, and they would be afraid to admit new workers into their firm or industry, because they would then have to correspondingly dilute their ownership. There would be no possibility of transferring capital from one industry to another, since the workers of the industry from which the capital came would simply lose it. Furthermore, the rapid separation of ownership and employment is necessary to overcome a bias that might otherwise exist against improvements in efficiency if workers as owners were in a position to reject improvements that might cost them their jobs.

Thus, at its worst, turning ownership over to the workers could mean a state of affairs in which the movement of labor and capital between the various branches of industry was made impossible. In addition, it could mean a situation in which the workers of each industry, by virtue of their possession of a monopoly on employment in their industry, were in a position to practice extortion on the rest of the economic system as the price of providing their services. Obviously, these are conditions which should be avoided at all costs.49

Provided that the essential requirements of security of property, the separation of employment and ownership, and the unrestricted freedoms to buy and sell, hire and fire, and compete, are observed, what remains is to accomplish the transition to private ownership as quickly as possible. Reasonable but strict time limits must be set for the location of former owners or their heirs, and it must be firmly established that thereafter no new claims will be heard on their account. This is an essential part of establishing the security of property. All of the assets in the hands of the state must likewise be disposed of within a strict time limit, so that no one in the market need labor under any uncertainty about what properties will be available and when and thus what plans he can and cannot make. This is essential to making the economic system as efficient as possible as soon as possible.

In the absence of the establishment of private ownership of the means of production, all other reform is meaningless. [emphasis added] For example, decontrolling prices without first establishing private ownership of the means of production and its corollary the freedom of competition, simply means giving arbitrary, monopolistic power to lesser government officials in charge of individual industries and enterprises. It is comparable to giving the postmaster general or the local postmaster the right to set postal rates. Without private ownership of the means of production, there can be no market economy or free market. Divorced from private ownership of the means of production, such notions are a contradiction in terms. Nor, of course, can there be lasting or meaningful reform in the political realm.

Conclusion

These articles are shared as evidence of several ideas:

  • Free markets haven’t been tried, not in Russia, not in the US
  • “Free markets” are a convenient and distracting cover term for what is actually corrupt crony systems because it confuses people who understand the value of free markets and it distracts those who hate them
  • “Economists” are often not economists but political agents, and many of them have flawed ethical frameworks
  • Harvard as an institution, specifically, has a record of questionable ethics with regards to the HIID’s involvement in the privatization of Russia
  • Modern US-Russian relations are a lot more complicated than Good, Liberty-Loving America vs. the Former Red Menace
  • Larry Summers is corrupt
  • Stanley Fischer is corrupt
  • The truth is complicated and unpopular and those who are scandalized by it have a strong incentive to cover it up, ignore it or forget about it

Why Do Former Presidents And Politicians Need “Jobs”? And How Do They Manage To Find Them In Silicon Valley?

I got a good chuckle out of this today, “Obama hints at a future in VC“:

“had I not gone into politics, I’d probably be starting some kind of business,” said Obama. “The skill set of starting my presidential campaigns—and building the kinds of teams that we did and marketing ideas—I think would be the same kinds of skills that I would enjoy exercising in the private sector. … The conversations I have with Silicon Valley and with venture capital pull together my interests in science and organization in a way I find really satisfying.”

The rest of the article contains quotes from VCs good-humoredly sniffing Obama’s jock strap and suggesting candidly that he would make an excellent high risk capital allocator. I don’t even need to provide examples of why these disclosures are a bunch of bald-faced lies. You can make up your own punchlines.

Instead, I am pondering the following: does something like this represent a sign of how crony Silicon Valley is and how dependent upon government privilege it is for the profit it generates? Or does it represent how pragmatic this community of businessmen is in co-opting the enemy that is continually placing new obstacles on its road to riches?

I am not sure I am comfortable with either reality but the latter has merit in that one could at least argue one is acting in self-defense, and that’s more noble than getting behind the guns and pointing them at competitors and customers as in the case of the former.

 

Just How Crooked Is Hillary Clinton?

According to Kristi Culpepper, pretty darn crooked:

If you take the time to dig into primary sources and court proceedings, you learn many things about Clinton, her inner circle, and how the State Department operates that would make most Americans seethe.

First, it is quite clear that Clinton & Co. have been actively misrepresenting their motives in maintaining a private server for correspondence. Second, the State Department’s failure to supply relevant information as required by law raises questions about whether officials there are playing a role in concealing wrongdoing. The State Department has become so systematic in denying journalists’ requests for information about Clinton’s tenure there that the public should be demanding to know if government officials are working in coordination with Clinton’s campaign.

I have struggled with how to organize my thoughts on this topic. Usually I provide a long chronological explanation of events. There is so much bad behavior in this instance, however, that I am going to list red flags that suggest criminal activity was taking place.

It is beginning to look like support for Hillary Clinton can serve as an effective litmus test for whether or not a person cares more about power or principle (such as the principle of nobody being above the law.) I detest all politicians equally.

Notes – The Great Deformation, Part II “The Reagan Era Revisited”

The Great Deformation: The Corruption of Capitalism in America

by David A. Stockman, published 2013

David Stockman was the director of the Office of Management and Budget (OMB) from 1981 through 1985 until he resigned in frustration from the Reagan White House. The desire to set the record straight on a failed political crusade (“The Reagan Revolution”) by a knight who feels betrayed by the politics of the crusade itself is strongly felt throughout Stockman’s polemical revisionism of the Reagan years and the regimes that set the stage for this period and whose stage was set in turn by Reagan’s failed policies.

In Part II, Stockman asserts that the Reagan defense budget process resulted in an unprecedented commitment to real top line growth that was arbitrary in calculation and resulted in almost no creation of additional anti-Soviet nuclear deterrent capability which was the stated need for the top line increase. Instead of getting more nuclear subs and nuclear-tipped ICBMs (which Stockman insists weren’t needed anyway), the Reagan spending was used to green light hundreds of billions of dollars worth of conventional military purchases on DoD shopping lists ranging from naval carrier groups to attack helicopters to tank fleets and front line soldiery. Not only was the supposed Soviet nuclear buildup non-existent due to the Soviet Union’s own decrepit economic system and ill envisaged forays into places like Afghanistan, but this conventional force build-up could do nothing to stop a Soviet nuclear first strike and in time proved to be good for nothing other than projecting American imperial might across the globe via conventional military conquest and occupation of targeted nations. The spending increase accomplished little more than to further exacerbate the problem of federal deficit finance and the future financial bubble of the late 90s and 2000s because the increase in spending was not offset with additional tax increases.

Stockman also challenges the idea that Reagan cut back on welfare entitlements. Stockman argues that he tried but then gave up under political pressure during the failed “Schweicker” gambit. This resulted in Republican acknowledgement that federal welfare entitlements such as the Social Security Administration were political sacred cows, committing the government to continued and growing structural deficits related to their funding and concluding in the short term with a Republican administration stewarding a thinly veiled payroll tax increase under the Greenspan solvency plan. Stockman suggests this was a critical political turning point for the Republican party which led them to shed their last fiscal conservancy feathers in favor of a more Keynesian stance of attempting to juice the economy through periodic tax cuts and business subsidies rather than by imposing fiscal rectitude on the government’s programs by cutting spending.

Now an obvious question at this point is, why didn’t all this spending and deficit finance create hyperinflation in the US as the Fed balance sheet tripled and bank credit expanded by an even greater multiple? Stockman’s answer is that when Nixon screwed the monetary pooch by deciding the freely float the US dollar, he ended up getting a free pass because the major trading partners of the US, especially in Asia (read: China and Japan) engaged in competitive currency devaluation to maintain their currency pegs. And the reason they did this is because their governments and local politics were dominated by mercantilist beliefs and export-oriented structures. Letting their currencies and interest rates rise against the US dollar would have caused painful adjustments to occur in home markets and industries that the various political regimes had no interest in making. The end result is that Nixon’s arbitrary gaming of the US economy via direct monetary manipulation in order to secure an economic boom as he approached reelection did cause problems and inflationary pressures at home (including unprecedented jumps in peacetime cost of living indexes and a commodity price boom) but it did not get completely off the rails because global central banks, guided by their home regimes, wouldn’t let it.

Again, Stockman argues that this was not only a short term economic disaster for the country, but it was also a long term political disaster because the fact that this happened under a Republican administration and was signed off on by the biggest “free market economists” of the day after the meeting with Nixon at Camp David meant that going forward there would be no real political or intellectual resistance to the agenda of perpetual deficit finance and continuous bubble-making in the economy that such a fiscal regime allows for.

Can You Tell The Difference Between Economics And Politics?

These days, it is trendy to practice political punditry under the guise of a thoughtful economist handing out enlightened “economic policy” suggestions.

A recent case in point is the interview with Harvard’s Ed Glaeser with EconTalk’s Russ Roberts, wherein Glaeser shared the following ideas about reforming city governance with respect to “historic preservation districts”:

In the case of the city historic preservation districts I would probably replace the ever-increasing swatch of territories–15% of the land area in Manhattan south, in the bottom half of Manhattan excluding Central Park as an historic preservation district right now–and areas go into historic preservation districts but they rarely come out of them. So, it seems like it’s going to be an ever-increasing swath of the city. I don’t much like the idea of cities being museum pieces. There are a few which are appropriate, like Bruges, but I think it’s good that cities change and that they develop new space, combination of new activities and people. So, I would in terms of preservation–my father was an architectural historian so I do really believe in the value of preserving some old, beautiful buildings–but I would have a fixed number of the total number of buildings that they are able to set aside as being preserved rather than allow them to just keep on getting new areas for preservation districts.

Here is what an economist would say:

Land and property use should be conditioned on “most highly valued use”, as evidenced by voluntary exchanges agreed to by participants in the property market. For some, purchasing historic properties for the purposes of preserving them, perhaps for commercial exploitation as a tourist attraction or simply to be kept out of the hands of the public or those who might privately redevelop them, might be the “most highly valued use” for which a person would exchange their wealth to control these properties. For others, tearing the historic buildings down or otherwise modifying them from their original, historic state, may be the “most highly valued use”, perhaps for the purpose of providing new housing or areas of commerce and industry.

There is no moral reason why future generations should be beholden to the land-use decisions of ancient generations, and even if there was, it is not an economist’s place to discuss such topics.

Notice– Glaeser said none of this, and in fact violated the statement at the end while complementing it all with a bit of arbitrary personal psychological projection, the idea that because his father was an architectural historian he has some kind of special need or special knowledge into the value of preserving historic properties that necessitate the violence of the State to protect such value impositions.

In fact, the closest Glaeser came to say anything “economic” about the subject was his attempt to calculate a “fixed number of total buildings” which would be available for historic preservation. But even here, his theorizing falls flat on its face, for Glaeser does not explain how his arbitrary calculus would be superior to the outcomes of voluntary exchanges between market participants.

How many is a “fixed number”? What constitutes a “building” for purposes of this policy? Which “buildings” shall be a part of this “fixed number” and which shall remain outside it, and how are such decisions evaluated in an objective way?

Such policies are an invitation for gross, arbitrary and wild government intervention and special interest group politicking that Glaeser claims earlier in the interview he is strongly against. Yet, he opens the intellectual door to them in moments like these when he places his economist costume over his political self and attempts to perpetrate a theoretical deception.

Politicians Open The Oil Supply Floodgates Post-Sandy; Lessons Learned Or Lost?

In “Flared Tempers Over Gasoline Lines Prompt Supply Waivers” at Bloomberg.com, we learn that politicians at the state and federal levels of government are temporarily suspending existing rules, regulations and taxes to increase the supply of gasoline  available in storm-stricken areas while simultaneously lowering the price:

The Obama administration said today that it waived the Jones Act, which requires ships moving goods between U.S. ports to use U.S.-flag vessels. The action, which applies only to refined products, will increase the number of tankers available to transport fuel from Gulf Coast refineries to the East Coast.

In New Jersey, Governor Chris Christie suspended requirements that restrict filling stations from buying gasoline from out-of-state suppliers, while New York Governor Andrew Cuomo waived taxes and regulations to accommodate more fuel tankers and process them more quickly.

To the average observer, it may seem that these powerful political leaders are able to work economic miracles. Merely by suspending laws, a vast new supply of much-needed gasoline appears out of thin-air to come gushing forth to the masses, alleviating them of their post-hurricane energy stress.

But did these poles really create these refined oil products themselves? Did they create them and summon them into existence through sheer force-of-will and a few expert penstrokes?

No, of course not! This supply of energy existed the whole time, but it wasn’t able to service the people of the affected East Coast regions because rules, regulations and taxes, imposed and enforced by these very politicians, had forcibly prevented and impeded its efficient and cost-effective arrival!

This is an excellent example of Bastiat’s emphasis on the unseen. When the storm arrived and devastated the normal supply-demand equation, it became transparently obvious to everyone that these interventions impose real, dangerous costs to everyone in society and it became politically necessary to suspend them for the benefit of all. But the costs of these programs and policies do not come and go with the storms– they are with us all of the time, imposing unseen costs because the “margin” of economic activity that is thus proscribed is further and further away from the central attention of the average person.

Because these policies impose costs and undue social burdens all of the time, not just in the aftermath of natural disasters, it follows that if and when — though “temporary” increases in government power almost always prove to be anything but, temporary decreases in government power rarely become permanent — these rules and regulations are reimposed, their costs will return as well. And this means everyone will be the poorer for it.

Who will remember this hands-on lesson with the real economic and social costs of government regulations which senselessly restrain trade and commerce? Who will cry out in anger that the politicians deem it necessary to hurt them once again, having tasted this bit of freedom? How many will stand up and ask, “Why? Why are you doing this to us?”

My guess is almost no one, and the few voices which may sound will quickly be muffled, condemned and ultimately ignored.