The Bear’s Lair: Competition is good for governments, too

It is a well-known economic principle, the central thesis of Adam Smith’s work, that competition between individual businesses produces better outcomes, while monopolies and oligopolies result in inefficiency and conspiracies against consumers’ interests. From the economic principles involved, the same is also true of governments. We should thus welcome nationalism and deplore both movements towards global government and agreements between governments to suppress this healthy competition.

Adam Smith put the central market principle best: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Thus, competition causes producers to sell the best quality goods at the lowest possible price, to maximize their earnings. The one thing that must be avoided is collusion between the producers; to quote Smith again: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Human nature being universal, it is entirely rational to expect the same principle to apply to interactions between governments. Just as competitors from the same trade who meet then seek to conspire against the consumer, so governments who form agreements with other governments conspire against the freedom and well-being of their citizens. The Paris Climate Accords are a prime example of this; policies that would be voted out immediately if adopted unilaterally, because of the economic damage they cause, become acceptable when they are the subject of international agreements, whereby the bureaucrat class can oppress their fellow citizens without fear of democratic correction.

An ideal model for competition between governments would have competing governments each providing a different form of state, so that citizens could choose between capitalism, socialism, anarchism, libertarianism, authoritarianism and so forth, while the governments themselves would be forced to pursue their model in the way that attracted most inhabitants. In this way, the Smithean ideal of perfect competition would exist between governments as between individuals, and overall welfare would be optimized.

In the eighteenth century, this Smithean ideal was close to being realized. There were few formal immigration controls, but travel between countries was very slow and expensive. Thus, people could migrate from one form of society to another without any threat of the recipient country being overwhelmed by floods of immigrants. States enjoyed a wide variety of forms of government, from near-democracies in the Swiss cantons and the post-Revolution United States to autocracies in Russia and China and a theocracy in the Papal States.

States made war on each other, a non-Smithean form of competition. However, those wars were governed by well-understood rules, were undertaken mostly by professional armies rather than by the whole population, and were not very damaging, in terms of lives or property (though armies sent to the tropics suffered grievously from disease.) The Thirty Years’ War’s 1631 Sack of Magdeburg was regarded as a mediaeval barbarity, not to be repeated.

Today we cannot produce ideal Smithean competition between states, with free movement of labor – international travel is too cheap and easy, so budding Utopias can be destroyed by floods of immigrants. However, Smith’s principles of free competition can usefully be applied to relationships between states, and their behavior thereby improved.

To do so, we must first determine states’ motivation. Individuals and corporations have to a first approximation, a simple motivation, that of income/profit maximization (to the extent a substantial fraction of individuals is not so motivated, the Smithean model becomes inaccurate, although it does not break down entirely.)

From James Buchanan’s Public Choice Theory, it is immediately apparent that there is normally no direct equivalent of profit maximization by which the principal actors in a state are motivated. In Sir Robert Walpole’s Britain, where the prime minister took a percentage of all the public sector deals, one can imagine him motivated by profit maximization, thus wanting a lengthy period in power with peace and a large public sector. However, incentive structures in the public sector have moved on since then!

The first criterion when designing a constitution for a new country, therefore, is to ensure that the country’s rulers are motivated to benefit that country’s people. That does not mean necessarily designing a democracy; some non-democratic rulers may be motivated to keep their people happy, thereby prolonging their power. However, theocracies, like today’s Iran or Puritan New England, or absolute autocracies, like the Kims’ North Korea, may well have non-welfare-maximizing objectives.

Conversely, some democratic systems, especially those with heavily proportional electoral systems, where leaders are chosen by parliamentary vote rather than by the people directly, become attuned to perpetuating the bureaucracy rather than the people’s welfare. Replacing the government becomes impossible for the electorate, and all choices of government are made by haggling between insiders. The European Union, where leaders are chosen by bureaucratic fiat except in the European Parliament, where proportionality prevents the people from selecting governments directly, is a bad example of this.

The U.S. political system, whereby Presidents are elected directly and the legislature is constrained by a two-party system, is quite good at keeping popular welfare properly in view, although one could suggest that a greater variety of parties in the legislature would improve it further. Parliamentary systems, even with two major parties and “first past the post” voting can reject new ideas, shunting them aside into minor parties that cannot gain adequate representation and may be treated as unacceptable coalition partners, like Germany’s Alternative fur Deutschland.

Having designed the individual state’s constitutions to represent properly its people’s welfare, and give their governments something close to Smithean incentives, we now need to design the international system of relations between states with the same objective in mind. Looking at international relations from Smithean first principles, it immediately becomes clear that the leftist ideal of a world government is not only a chimera but a nightmare. Any such government would have a vast multitude of political parties, elections with gigantic constituencies where popular opinion was unrepresented, and monopoly power over the entire human race. It is difficult to imagine a more complete recipe for tyranny.

Even short of a world government, we should be highly suspicious of all international organizations and treaties. Like private sector actors, governments have an intrinsic wish to combine, to extract greater rents from the citizenry, or to reduce its choices. Even the most obscure treaty often contains such rent-seeking subsidies; thus the Universal Postal Union treaty of 1969, from which President Trump recently withdrew, contained a massive and entirely spurious subsidy to Chinese shippers from the U.S. postal service.

Thus, the World Bank and the IMF, for example, set up by statists in 1944, seek to impose their view of global development on countries which get into financial difficulty, and on poor countries generally. When credit conditions are difficult, they expend into the vacuum, acting as a monopoly credit supplier to favored borrowers, by this means alone greatly restricting the options open to governments.

The pre-1914 system, where international development advice and to a large extent funding was provided by a range of London merchant banks, was greatly superior. If you did not like one bank’s development model, you were free to change your advisor. Reopening development finance to the private sector, and in particular to the high-IQ private sector represented by merchant banks (and which is being re-created by investment banking “boutiques”) would hugely benefit a large proportion of the world’s people, who are not lucky enough to live in permanently credit-worthy countries.

The European Union, likewise, exists primarily to take decision-making away from the peoples of its constituent countries. It does this very well, and hence should be opposed by those seeking a Smithian world order. Theoretically, the EU could have been effective as a free trade zone without infringing its citizens’ rights, but the failure to hold referenda on the Maastricht Treaty demonstrated that this was not the ambition of those who were putting the EU together. Today’s EU is a massive barrier to the wishes of its inhabitants, as is being shown by country after country electing “populist” anti-Brussels governments of one sort or another.

The only international organization which may have a genuine purpose is the World Trade Organization. Just as a commercial code is valuable to prevent the worst private sector shysters from exploiting consumers, so it is desirable to have a neutral umpire who can call out the worst trade practices. The problem is that such an umpire can quickly aspire to become an international regulator, at which point consumers’ interests are lost and countries can once again conspire together. Nevertheless, the alternative may be even worse: endless bilateral and narrow multilateral trade treaties, full of anti-market, rent-seeking nonsense as was the Trans Pacific Partnership, will be far more damaging to ordinary citizens’ interests than a tariff or two.

The ideal world is one full of small countries, which have different economic and political systems and regard each other with barely concealed suspicion and hostility, without breaking out into open warfare (which is destructive.) Under President Trump and his fellow nationalists in other countries, we fortunately appear to be heading in that direction.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)