Protectionism's insidious appeal to decency

I had a minor argument with an Aussie colleague at work today. We were discussing no-frills brands in supermarkets such as Woolworths' Home Brand and Franklins' (what else) No Frills. I'm all for these brands, by the way, because they give me commodity functionality at a lower price than traditionally branded products.

My colleague stiffened visibly. "I don't buy these brands because I believe in supporting Australian producers," he said, and there was an undertone of reproach in his voice. I should have bitten my tongue, I guess, but I couldn't help expressing my preference for Free Trade. That got me embroiled in an argument with another Aussie co-worker who also believed in supporting Australian producers.

I was a bit saddened by the exchange because these are people I like and respect very much. They're decent blokes, and if they've been conned by the protectionist argument, then it sadly means that protectionism is a tax on decent and patriotic people, just as lotteries are a tax on people who are bad at maths.

So what I understand from this is that it doesn't matter how inefficient and uncompetitive I am as a producer. All I have to do is wrap myself in the national flag, and patriotic people can be counted on to bail me out. Their well-meaning patriotism becomes its own punishment. And they don't seem to realise that their support of products on non-economic grounds does the country a disservice by taking away the incentive to improve efficiency and competitiveness. Over time, the country loses its ability to compete in the world market. Protectionism always hurts those it is meant to protect.

I remember a similar situation in India, where I spent the first thirty years of my life. There was a popular nationalistic slogan that I saw everywhere as I was growing up - "Be Indian, Buy Indian." (Not that it was possible to buy foreign goods, heh. The import tariff on foreign-made electronic goods, for example, was 400%! A pox on Indira Gandhi and her mean-minded, wealth-destroying mindset!)

The only cars available in India for many years were the Ambassador, the Premier Padmini and the Standard Herald. These were based on European designs of the fifties. The Ambassador was based on a British design, while the Padmini was based on a Fiat model. I don't know what the Standard Herald was based on. The interesting thing was that these models never changed over 40 years! Indian car manufacturers didn't even bother to try the old Detroit trick of "innovating" larger tail fins. They just kept making the same models year after year and sold them at exorbitant prices. Only rich people could afford cars in those days. And the cars were gas-guzzlers to boot.

Finally, in the late eighties and early nineties, the Indian economy began to liberalise. Indian companies began to tie up with foreign manufacturers to bring out newer models. Within 15 years, the landscape was transformed. Today, the old models are nowhere in sight on Indian roads, except as taxis (for some reason, taxis are still stuck in nowhere-land). All private cars are now based on modern designs and international brands. What's more, many of the models are affordable by middle-class people. They're also more fuel-efficient.

I feel anger whenever I think of this and similar stories. These car manufacturers took the Indian consumer for a ride for four decades because they were shielded from competition and never felt the need to innovate and compete. They remained stuck in the fifties while the rest of the world passed them by. It was only when the Indian economy was opened up did change happen.

So what did being Indian and buying Indian achieve? Limited choice, stagnant designs, ugly, gas-guzzling monstrosities and high prices. All these problems magically disappeared when the economy opened up and competition appeared (which ties this back to my earlier piece on Liquidism).

Why should we buy a product just because it is Australian-owned or Australian-operated? What is the message we are sending to these people? That it doesn't matter how uncompetitive they are, they can still have our money?

As an obvious aside, I wasn't "Made in Australia" myself, but a free-ish market in labour was responsible for my migrating to this country under Australia's Skilled Migration Program and adding my talents (meagre as they may be) to the Australian pool. At a visceral level, I cannot agree with the "Buy Australian" sentiment, because it would have kept me out. In fact, I find that sentiment personally offensive.

My proposal for a new Australian flag

Yes, I'm proud to be an Australian citizen, but I don't much like the current Australian flag (below). To be specific, I don't like the Union Jack in the flag's canton. It looks like we're (still) kowtowing to the British.

Lots of Australians share my sentiment, and there have been lots of new design proposals that appeal to Australians' sense of self-respect.

I quite like the rest of the flag, I must say, but merely ripping out the Union Jack from the flag would leave it a little bare. So I've been thinking up my own design.

Now, I have a theory about flag design. I have observed a strong correlation between the colours in a national flag and how well-off the country is. In general, countries with only red and white in their flags' designs tend to be rich, or at the very least, middle-income. This rule also applies to countries with blue, red and white, but only if the white is used as a buffer between the blue and red areas. Without white as a buffer between blue and red, countries tend to slide dramatically down the economic ladder. Blue and red with no white at all is deadly (e.g., Haiti).

White seems to be essential. But countries with only blue and white in their designs tend to be low-to-middle-income countries. So blue doesn't seem to attract wealth as well as red.

"Red and white", or "red, blue and white (with white as a buffer)" seem to be the way to go.

Yellow, brown, green and black are the "kiss of death" in economic terms. Countries with these colours in their flags are predominantly from the Third World (135 in all), with only 11 exceptions.

If you don't believe me, check these out for yourself.

Red and white only:
Rich countries: Austria, Bahrain, Canada, Denmark, England (not UK), Japan, Qatar, Monaco, Singapore, Switzerland (10 out of 19 - 52.6%)
Middle-income countries: Georgia, Latvia, North Cyprus, Poland, Turkey (5 out of 19 - 26.3%)
Poor countries: Indonesia, Peru, Tonga, Tunisia (4 out of 19 - 21.1%)

Red, white and blue (white acting as a buffer):
Rich countries: Australia, France, Iceland, Luxembourg, Netherlands, New Zealand, Norway, UK, US (9 out of 16 - 56%)
Middle-income countries: Panama, Serbia Montenegro, Slovakia, Thailand (4 out of 16 - 25%)
Poor countries: Liberia, North Korea, Trinidad and Tobago (3 out of 16 - 18.8%)

Red, white and blue (white not acting as a buffer):
Rich countries: None! (0 out of 9 - 0%)
Middle-income countries: Cuba, Czech Republic, Russia, Slovenia (4 out of 9 - 44%)
Poor countries: Cambodia, Chile, Laos, Myanmar, Samoa (5 out of 9 - 56%)

Blue and white only:
Rich countries: Finland, Scotland (2 out of 8 - 25%)
Middle-income countries: Greece, Israel (2 out of 8 - 25%)
Poor countries: Honduras, Micronesia, San Marino, Somalia (4 out of 8 - 50%)

Red and blue only:
Rich countries: None! (0 out of 1 - 0%)
Middle-income countries: None! (0 out of 1 - 0%)
Poor countries: Haiti (1 out of 1: 100%)

Other colours (especially yellow, green and black):
Rich countries: Belgium, Brunei, Germany, Ireland, Kuwait, Liechtenstein, Oman, Saudi Arabia, South Korea, Sweden, UAE (11 out of 146 - 7.5%)
Not-so-rich countries: Too numerous to mention (135 out of 146 - 92.5%)

The correlations are quite dramatic. Obviously, as a patriotic Aussie, I would like my country to remain rich, with the highest probability. So I'll go with one of the "safe" colour schemes, red and white only, or red, white and blue.

After trying out a few designs, here's the one I feel most comfortable proposing as my candidate for the new Australian flag. It has the Federation Star and the Southern Cross, just like the current flag, so that takes care of the continuity bit.

This is a national flag I could unreservedly be proud of. It's the flag of a sovereign nation, not a former British colony. The only thing left is for the country it represents to become a republic. But that's the topic for another post.

I also toyed with the idea of solidarity with Canada. Australians have a healthy dislike of both the US and the UK, but Canada and New Zealand seem to be OK in our books. So here's another design inspired by the Canadian flag.

And here are two designs inspired by the South African flag (which looks fantastic but uses an economically unwise colour scheme).



P.S. For China to really arrive, all they need to do is change the yellow stars on their flag to white!

Update 04/02/2015:

The Facebook site "Jack Off - Get the Union Jack off our flag" has a number of design suggestions. I have modified the designs of some contributors to produce flags conforming to the colour scheme I support.

This is based on a design from Brian Nedic:

[Check out my later post with more designs.]

Security pact all right, but to protect whom?

I just read this news report about a US proposal for Australia and Japan to include India in a four-way security pact with the US. This is believed to be aimed at containing China by getting powerful democracies in the Asia-Pacific region to encircle the evil dictatorship.

Good idea? Bad idea?

As an Indian-born person who grew up in India just after the Indo-Chinese border war of 1962, I might be expected to welcome this development. That's right, we need to contain the Chinese. They can't be trusted. As a democrat too, I should be happy at the increasing pressure being brought to bear on an illegitimate communist dictatorship.

But something gives me pause, and it's not just the fact that Dick "Trust me, I'm a rat" Cheney wants the deal to happen.

Historically, China and India have been rich countries. In fact, for most of the history of human civilisation, China and India have been richer than the West. In the 16th century, Western explorers were not trying to find routes to the East in order to exploit cheap labour for their rich economies. They were trying to trade with rich economies!

Viewed in this historical context, the last 500 years have been an aberration, and all of us have been caught up in the thinking that China and India are poor countries, always have been, always will be. Nonsense! If anything, the next 50 years are going to see these two countries returning to their position of economic pre-eminence in the world.

There is a power shift happening in the world, and it is happening in this generation. It has a lot of people in the West scared. Globalisation no longer means the comfort of sampling Hokkien noodles or Tandoori chicken in the comfort of a multi-cuisine food court. It means that your children may have to learn Mandarin or Hindi, that they may have to relocate for a while to Shanghai or Calcutta to advance in their careers or even to keep their jobs, that their bosses might have surnames like Chang or Chaudhury, or that they may be spending their working hours making Baoding balls or Saris. It could be viewed as exciting, but to many people, that spells scary. Face it, the scariest thing that can happen to you is that you may change! Change cannot be allowed to happen. If it can't be prevented, it must be delayed for as long as possible.

Now look at the proposal for the security pact from this historical and psychological perspective. What I'm reading is that the Waning Powers are trying to drive a wedge between two Emerging Powers. Should India be flattered by all the attention? Should India view this proposal as just the ticket to help allay its fears of China since 1962? In short, should India rise to the bait?

New Delhi would be wise to ask itself some questions. Whose security is this pact meant to preserve? Who gains by pitting one emerging power against another?

Economic development is not a zero-sum game. A richer East means a richer world. It means a richer West as well. However, suspicion is worse than a zero-sum game. It can escalate into a debilitating spiral that will be self-sustaining. After a while, the Western powers can safely disengage from the security stand-off they have created, because India and China will be helplessly caught in an ever-escalating cycle of suspicion and can be trusted to contain each other.

I think the most appropriate response is for India and China to sign a Free Trade agreement. It will be a snub to the West, but not a destructive one. Because economic development is not a zero-sum game.

"The One-Minute Rain Test"

This came to me in a dream, which shows that I've been reading too many motivational, success-oriented books lately.

Someone in my dream asked me what the One-Minute Rain Test was, and I found myself answering, "It's been observed that when a game of football is temporarily suspended due to heavy rain, the team that continues playing with the ball even off the field tends to win the game."

Obviously, that's meant to hide some deep wisdom about the importance of motivation, focus and determined effort in pursuit of a goal. It also sounds plausible enough to form an urban legend.

The mind is a wonderful thing...

My Economic Philosophy - 4 (Liquidism as "Extreme Economics")

(This is the fourth of n pieces on my emerging economic philosophy called Liquidism.)

In spite of its seemingly revolutionary approach, Liquidism isn't really a radical departure from current "best practice" in economics. The three schools of macroeconomic thought I referred to in my third post on this topic do not really contradict each other, either.

Those who assert that governments must not run deficit budgets are in fact agreeing with those who claim that inflation needs to be kept in the vicinity of 2-3%. Government budget deficits are known to be inflationary, so balanced or surplus budgets greatly assist central banks in their task of controlling inflation through the manipulation of interest rates.

Similarly, those who believe that the most important parameter is low unemployment, and therefore clamour for growth-oriented economic policies are not disagreeing with the other two schools of thought. Growth occurs best in an environment of stable and low inflation. Witness the example of Australia, the clever country (not the lucky country, by the way, because Australia's prosperity is the result of smart management, not undeserved good luck). Australia has enjoyed an unprecedented 15 years of nonstop growth, while the rest of the world has seen periods of both growth and recession. Unsurprisingly, during this period, the Australian federal government budget has been largely balanced or in surplus, and inflation has been vigilantly maintained in the 2-3% range by an alert and active central bank.

So we seem to have stumbled upon the magic formula that reconciles seemingly different schools of macroeconomic thought. Keep inflation low by constantly tweaking interest rates, avoid contributing to inflation by running budget deficits, and you will achieve steady growth that will keep unemployment low.

Liquidism only carries this argument one step further, because all the above techniques, impressive though their results may be, do not succeed in driving inefficiency out of the system. Inefficiency, in the terminology of modern software development, is a "smell" that suggests that something is wrong somewhere.

Lest anyone think that I'm a blind devotee of The Australian Way, take a look at the Australian banking sector. It's an oligopoly, with only four major banks. I have a unique inside view into the functioning of these organisations, having worked in two of them. I will not jeopardise my current employment by going into specifics, but most activities in these organisations are highly wasteful, compared to similar activities in organisations in more competitive industries. And yet the big four banks remain highly profitable! If organisations can show huge profits year after year while being extremely inefficient and wasteful (as is obvious to an insider), it's a "smell". Something is rotten in the system, and it's not a problem with the banks themselves. Their inefficiency is a symptom, not the problem. The problem is with the competitive environment. Less competition, less efficiency. Wealth is vanishing from the system, being eaten by the friction of inefficiency between its wheels. In the case of the banks, customers are picking up the tab and paying more than they should, while shareholders are earning less than they should.

What do we do? Let's take a leaf from the software development industry, specifically, a recent methodology called "Extreme Programming", called XP for short. The father of XP, Kent Beck, explains the technique in these words:

"When I first articulated XP, I had the mental image of knobs on a control board. Each was a practice that from experience I knew worked well. I would turn all the knobs up to 10 and see what happened. I was a little surprised to find that the whole package of practices was stable, predictable, and flexible."

We now know that certain economic practices work well. Keeping inflation low is one of them. We also know that competitive (liquid) markets are efficient, while oligopolistic or monopolistic (illiquid) markets are inefficient. How do we, in Kent Beck's words, turn all the knobs representing good macroeconomic practice up to 10?

1. Turn the fiscal knob up to 10 (manage spending and income to avoid a deficit budget at all costs)
2. Turn the monetary knob up to 10 (actively manage money supply through the interest rate vehicle and keep inflation within 2-3%)
3. Turn the market efficiency knob up to 10 (aggressively enforce antitrust and keep markets liquid)

I believe that Liquidism represents the "complete" macroeconomic philosophy, with its inclusion of the final leg in the triad of macroeconomic policy.

It's not a rejection of current economic thought, but merely the next necessary step in our thinking.

It's "Extreme Economics", if you will. And if the vaunted results of Extreme Programming are anything to go by, it could be wildly successful.

My Economic Philosophy - 3 (Les droits inaliénables)

(This is the third of n pieces on my emerging economic philosophy called Liquidism.)

Pardon my French, but if we're going to talk about two distinct definitions of freedom, and the first is called laissez-faire (a freedom without restrictions), what do we call the second (a freedom that cannot be taken away)? Droits inaliénables (inalienable rights)? Quite a mouthful, so I'll tell you what. We'll call it Liquidism.

Why? Because as any student of economics knows, the system where no individual player has the power to force any other player to act against their will is called Pure Competition. A market that demonstrates Pure Competition is said to be liquid. Oligopolistic and Monopolistic markets are highly illiquid.

Want a system where players' rights can never be taken away? You're basically asking for Pure Competition. Is that too idealistic?

Look at the Free Software/Open Source ecosystem. The GNU General Public License (GPL) guarantees a freedom that cannot be taken away. Most other licenses (BSD, MIT, X11, Apache, etc.) represent freedom without restrictions. Which is the more successful in practice? About 68% of all software projects on SourceForge (the world's largest repository of Free/Open Source software) have adopted the GNU GPL, which shows that most Free/Open Source software developers seem to believe that a freedom that cannot be taken away is in fact the greater freedom.

I think this latter view of freedom is an idea whose time has come. Economists of every shade have been brandishing their single favourite economic parameter. Some claim that a balanced government budget is the holy grail, with government controlling both spending and taxation to achieve this goal. Others claim that inflation must always be contained within 2-3%, with the central bank flicking interest rates up or down to keep inflation in its place. Yet others claim that full employment is the state to be aspired to, with all economic parameters primed to encourage constant growth.

So let me throw my hat in the ring. I want a free market, and I don't mean a laissez-faire free market. I mean a free market whose freedom cannot be taken away. And that means an activist government unafraid to wield a powerful instrument - Antitrust.

Liquidism's distinguishing feature is a highly competitive market, maintained if necessary, by aggressive antitrust enforcement on a hair-trigger.

I know it sounds radical, and it conjures up a vision that may be deeply disturbing to some.
See an emerging monopoly or oligopoly? Break 'em up!
Receive a merger proposal between major players? Deny permission.
Detect a pricing cartel? Throw the bosses in jail and ban them from holding similar office in future.

It may seem like a wild-eyed, revolutionary and ultimately impractical idea, but is it? In the fourth piece on Liquidism, I will argue that this is merely the next evolutionary step in modern macroeconomic thought.

My Economic Philosophy - 2 (The Limits to Rand)

(This is the second of n pieces on my emerging economic philosophy called Liquidism.)

I was a latecomer to the philosophy of Ayn Rand. I completely missed reading her novels in college, when everybody else seemed to have their noses stuck between the pages of "The Fountainhead" or "Atlas Shrugged".

Then one day, when I was almost 40, I stumbled upon the website "www.capitalism.org", and the ideas I read there almost blew me away. This site is dedicated to spreading the philosophy of Ayn Rand, Objectivism, which Rand believed was the capitalist ideal.

I was gobsmacked as I read the material on this site because I had till that point always thought of Capitalism as an economic system, as something to do with money and who controlled it. Wrong, it turned out. Capitalism is a political philosophy, and the economic system that is often confused with it springs naturally out of this philosophy.

And what is this political philosophy?

In two words, individual freedom. That's the core value of Ayn Rand's capitalist ideal. At this level, she doesn't talk about money. She does talk about "wealth", but wealth at this level means much more than just money. It is the sum total of all the kinds of satisfaction that one can derive.

There's more.

Reason is the source of all "wealth", and everyone is entitled to the wealth generated by the exercise of their reason. The only thing one may not do is restrict the freedom of others. The initiation of force is prohibited, and one may only acquire the wealth of another by one of these means - willing gifts by the other, through persuasion (not coercion), or through trade. Of these, trade is the best. Coercion and deception are taboo.

To say that I liked this philosophy would be an understatement. It resonated deeply within me. It struck me as the fairest of all possible systems. I even wrote an article defending the Capitalistic credentials of Free/Open Source Software called "The Capitalist View of Open Source", demonstrating the software model's scrupulous adherence to the principles of Ayn Rand.

But even at the height of my admiration for Rand, I was never completely in agreement with her.

She claimed animals had no rights, and I beg to disagree. I in fact expected her to extend her philosophy to include any living creature, not just humans.

She stoutly upheld the right to life as a fundamental right of every human being right from their birth, that no one had the right to take, but instead of expressing honest ambivalence about abortion, she glibly claimed that foetuses were not human and therefore had no such right. The mother, according to her, had the "right" to abort her foetus and this freedom could not be denied. I found this sophistry a little intellectually dishonest. Abortion is a tricky subject and I'm not sure there are any "right" answers. At what point exactly does a foetus with no rights turn into a new-born baby with full rights? For Rand to proclaim one viewpoint with an air of moral certainty didn't do much for her credibility in my eyes.

And then there was the ultimate "What was she thinking?" moment. When I read about Ayn Rand's essay "America's Persecuted Minority - Big Business", I knew that she had either lost her marbles or been coopted by that persecuted minority into advocating their cause.

So I remained stuck with an intellectual model that was almost perfect, but not quite. Until I read the other article, the one that posed the question about the two types of freedom.

My Economic Philosophy - 1 (The Definition of Freedom)

(This is the first of n pieces on my emerging economic philosophy called Liquidism.)

I won't lay claim to the following piece of wisdom - I remember reading someone's article (dashed if I can remember who it was!) where he asked a most profound question:

"Which is the greater freedom? A freedom without restrictions, or a freedom that cannot be taken away?"

He was asking this in the context of a big argument among advocates of Free Software and Open Source. Though Free Software/Open Source software is "free" (and I mean freedom, not price), there are actually two very different kinds of freedom implied by the term, and the two major categories of software licences tend to reflect this dichotomy. One set of licenses grants users full rights to do anything at all that they want with the software. The other set allows them to do anything except make proprietary enhancements to it. That's because such a right will give a one-way benefit to those making the proprietary enhancements and always place the users and developers of the original, free version at a disadvantage.

[I won't discuss the software issue in greater detail because this is not a technical blog, but I can't help citing another brilliant document at this point. This one is a highly technical software critique, by the way, which may go over the heads of even techies (I had to read it a few times to understand it), but the best thing it did for me was introduce me to the phrase "usefully contrary trade-offs" (See the section titled "The API Fallacy").]

The two definitions of freedom we talked about make usefully contrary trade-offs in what they offer to recipients of such freedom, but my eyes didn't open until I read the question posed in this way.

A freedom without restrictions is a laissez-faire system. Anything goes, as long as fundamental rights are not violated. One side-effect of giving freedom to all players is that, through entirely legal means, some players will ultimately end up with much more power than others. Then those others will find that they have very little freedom, after all. They are left with only their fundamental rights, but without much economic freedom, they must pretty much agree to any conditions imposed on them, "of their own free will".

Contrast this with a situation where basic economic freedom is guaranteed to all, so that no one can be forced to do anything against their will. This goes beyond fundamental rights, by the way. Obviously, to protect such freedom, restrictions must be placed on all players to prevent an aggrandisement of power such as what would happen under a purely laissez-faire system. So some freedom is being denied to all, in order to preserve a minimum of freedom for all. By way of example, most countries have a Restrictive Trade Practices Act or the equivalent, which limits what market players can do, in a bid to protect the freedom of others.

That's the crux of the issue. Both systems claim to value freedom, but they are talking about subtly different concepts. One is a freedom without restrictions (with the risk of that freedom being taken away by other players through entirely legal means). The other is a freedom that cannot be taken away under any circumstances (with some consequent restrictions being placed at all times on what players can do).

We will return to this dichotomy again and again, because understanding the philosophy of Liquidism requires an understanding of these two usefully contrary trade-offs. Before you read further, think for a moment about the difference. Which do you think is the greater freedom?

Should the coalition withdraw from Iraq?

I thought I had the answer to that one.

We never had an excuse to invade Iraq in the first place, so we shouldn't stay there a second longer. That's obvious. Bring our boys home!

But now I'm not so sure. If you walk into someone's house, trash everything in sight, blast their doors and windows wide open, restart some old family feuds, burn their money and grocery supplies, you can't suddenly say, "Oops, sorry, wrong house," and leave.

Who's going to pay for the damage? Who's responsible for the safety and running of the household after you leave? Can you just dust your hands and walk off? Or do you have responsibility for ensuring that everything is put back together the way it was (well, almost) before you go?

To put it very mildly, George Bush, Tony Blair and John Howard have led their countries down a morally suspect path. We (as citizens of these countries) will be compounding their offence if we blindly insist on a withdrawal from Iraq. We were wrong to go in, but now that we've ended up totally destabilising that country, we can't just walk away and let it completely collapse. It's our moral responsibility now to stay as long as necessary and set things right.

Call it the morality of sin, if you're religiously inclined. If you get your girlfriend pregnant, you stand by her. You don't run away and leave her to face the consequences alone.

So I'm surprised to see my own position on this issue -- Send more troops to Iraq!