encourage and emphasize innovation and progress. They reward
innovators, entrepreneurs, non-conformism and conflict. They spew out
patents, designs, brands, copyrighted material and other forms of
packaged human creativity. They derive most of their income from
licensing and royalties and constitute one of the engines driving
globalisation. Still, these economies are too poor to support the
complementary manufacturing and marketing activities. Their natural
counterparts are the "Industrial Bases". Within the former Eastern
Bloc, Russia, Poland, Hungary and Slovenia are, to a limited extent,
such generators. Israel is such an economy in the Middle East.
Industrial Bases - These are economies that make use of the
intellectual property generated by the former type within industrial
processes. They do not copy the intellectual property as it is. Rather,
they add to it important elements of adaptation to niche markets, image
creation, market positioning, packaging, technical literature,
combining it with other products or services, designing and
implementing the whole production process, market (demand) creation,
improvement upon the originals and value added services. These
contributions are so extensive that the end products, or services can
no longer to be identified with the originals, which serve as mere
triggers. Again, Poland, Hungary, Slovenia (and to a lesser extent,
Croatia) come to mind.
Consumer Oriented economies - These are Third Wave (Alvin Toffler's
term), services, information and knowledge driven economies. The
over-riding set of values is consumer oriented. Wealth formation and
accumulation are secondary. The primary activities are concerned with
fostering markets and maintaining them. These "weightless" economies
concentrate on intangibles: advertising, packaging, marketing, sales
promotion, education, entertainment, servicing, dissemination of
information, knowledge formation, trading, trading in symbolic assets
(mainly financial), spiritual pursuits, and other economic activities
which enhance the consumer's welfare (pharmaceuticals, for instance).
These economies are also likely to sport a largish public sector, most
of it service oriented. No national economy in CEE qualifies as
"Consumer Oriented", though there are pockets of consumer-oriented
entrepreneurship within each one.
The Trader economies - These economies are equivalent to the
cardiovascular system. They provide the channels through which goods
and services are exchanged. They do this by trading or assuming risks,
by providing physical transportation and telecommunications, and by
maintaining an appropriately educated manpower to support all these
activities. These economies are highly dependent on the general health
of international trade. Many of the CEE economies are Trader economies.
The openness ratio (trade divided by GDP) of most CEE countries is
higher than the G7 countries'. Macedonia, for instance, has a GDP of
3.6 Billion US dollars and exports and imports of c. 2 billion US
dollars. These are the official figures. Probably, another 0.5 billion
US dollars in trade go unreported. Additionally, it has one of the
lowest weighted customs rate in the world. Openness to trade is an
official policy, actively pursued.
These economies are predatory in the sense that they engage in zero-sum
games. A contract gained by a Slovenian company - is a contract lost by
a Croatian one. Luckily, in this last decade, the economic cake tended
to grow and the sum of zero sum games was more welfare to all involved.
These vibrant economies - the hope of benighted and blighted regions -
are justly described as "engines" because they pull all other
(scavenger) economies with them. They are not likely to do so forever.
But their governments have assimilated the lessons of the 1930s.
Protectionism is bad for everyone involved - especially for economic
engines. Openness to trade, protection of property rights and
functioning institutions increase both the number and the scope of
markets.
Return
Market Impeders and Market Inefficiencies
Even the most devout proponents of free marketry and hidden hand
theories acknowledge the existence of market failures, market
imperfections and inefficiencies in the allocation of economic
resources. Some of these are the results of structural problems, others
of an accumulation of historical liabilities. But, strikingly, some of
the inefficiencies are the direct outcomes of the activities of "non
bona fide" market participants. These "players" (individuals,
corporations, even larger economic bodies, such as states) act either
irrationally or egotistically (too rationally).
What characterizes all those "market impeders" is that they are value
subtractors rather than value adders. Their activities generate a
reduction, rather than an increase, in the total benefits (utilities)
of all the other market players (themselves included). Some of them do
it because they are after a self-interest, which is not economic (or,
more strictly, financial). They sacrifice some economic benefits in
order to satisfy that self-interest (or, else, they could never have
attained these benefits, in the first place). Others refuse to accept
the self-interest of other players as their limit. They try to maximize
their benefits at any cost, as long as it is a cost to others. Some do
so legally and some adopt shadier varieties of behaviour. And there is
a group of parasites - participants in the market who feed off its very
inefficiencies and imperfections and, by their very actions, enhance
them. A vicious cycle ensues: the body economic gives rise to parasitic
agents who thrive on its imperfections and lead to the amplification of
the very impurities that they prosper on.
We can distinguish six classes of market impeders:
1. Crooks and other illegal operators. These take advantage of
ignorance, superstition, greed, avarice, emotional states of mind of
their victims - to strike. They re-allocate resources from (potentially
or actually) productive agents to themselves. Because they reduce the
level of trust in the marketplace - they create negative added value.
(See: "The Shadowy World of International Finance".)
2. Illegitimate operators include those treading the thin line
between legally permissible and ethically inadmissible. They engage in
petty cheating through misrepresentations, half-truths, semi-rumours
and the like. They are full of pretensions to the point of becoming
impostors. They are wheeler-dealers, sharp-cookies, Daymon Ranyon
characters, lurking in the shadows cast by the sun of the market. Their
impact is to slow down the economic process through disinformation and
the resulting misallocation of resources. They are the sand in the
wheels of the economic machine.
3. The "not serious" operators. These are people too hesitant, or
phobic to commit themselves to the assumption of any kind of risk. Risk
is the coal in the various locomotives of the economy, whether local,
national, or global. Risk is being assumed, traded, diversified out of,
avoided, insured against. It gives rise to visions and hopes and it is
the most efficient "economic natural selection" mechanism. To be a
market participant one must assume risk, it in an inseparable part of
economic activity. Without it the wheels of commerce and finance,
investments and technological innovation will immediately grind to a
halt. But many operators are so risk averse that, in effect, they
increase the inefficiency of the market in order to avoid it. They act
as though they are resolute, risk assuming operators. They make all the
right moves, utter all the right sentences and emit the perfect noises.
But when push comes to shove - they recoil, retreat, defeated before
staging a fight. Thus, they waste the collective resources of all that
the operators that they get involved with. They are known to endlessly
review projects, often change their minds, act in fits and starts, have
the wrong priorities (for an efficient economic functioning, that is),
behave in a self defeating manner, be horrified by any hint of risk,
saddled and surrounded by every conceivable consultant, glutted by
information. They are the stick in the spinning wheel of the modern
marketplace.
4. The former kind of operators obviously has a character problem.
Yet, there is a more problematic species: those suffering from serious
psychological problems, personality disorders, clinical phobias,
psychoneuroses and the like. This human aspect of the economic realm
has, to the best of my knowledge, been neglected before. Enormous
amounts of time, efforts, money and energy are expended by the more
"normal" - because of the "less normal" and the "eccentric". These
operators are likely to regard the maintaining of their internal
emotional balance as paramount, far over-riding economic
considerations. They will sacrifice economic advantages and benefits
and adversely affect their utility outcome in the name of principles,
to quell psychological tensions and pressures, as part of
obsessive-compulsive rituals, to maintain a false grandiose image, to
go on living in a land of fantasy, to resolve a psychodynamic conflict
and, generally, to cope with personal problems which have nothing to do
with the idealized rational economic player of the theories. If
quantified, the amounts of resources wasted in these coping manoeuvres
is, probably, mind numbing. Many deals clinched are revoked, many
businesses started end, many detrimental policy decisions adopted and
many potentially beneficial situations avoided because of these
personal upheavals.
5. Speculators and middlemen are yet another species of parasites.
In a theoretically totally efficient marketplace - there would have
been no niche for them. They both thrive on information failures. The
first kind engages in arbitrage (differences in pricing in two markets
of an identical good - the result of inefficient dissemination of
information) and in gambling. These are important and blessed functions
in an imperfect world because they make it more perfect. The
speculative activity equates prices and, therefore, sends the right
signals to market operators as to how and where to most efficiently
allocate their resources. But this is the passive speculator. The
"active" speculator is really a market rigger. He corners the market by
the dubious virtue of his reputation and size. He influences the market
(even creates it) rather than merely exploit its imperfections. Soros
and Buffet have such an influence though their effect is likely to be
considered beneficial by unbiased observers. Middlemen are a different
story because most of them belong to the active subcategory. This means
that they, on purpose, generate market inconsistencies, inefficiencies
and problems - only to solve them later at a cost extracted and paid to
them, the perpetrators of the problem. Leaving ethical questions aside,
this is a highly wasteful process. Middlemen use privileged information
and access - whereas speculators use information of a more public
nature. Speculators normally work within closely monitored, full
disclosure, transparent markets. Middlemen thrive of disinformation,
misinformation and lack of information. Middlemen monopolize their
information - speculators share it, willingly or not. The more
information becomes available to more users - the greater the
deterioration in the resources consumed by brokers of information. The
same process will likely apply to middlemen of goods and services. We
are likely to witness the death of the car dealer, the classical retail
outlet, the music records shop. For that matter, inventions like the
internet is likely to short-circuit the whole distribution process in a
matter of a few years.
6. The last type of market impeders is well known and is the only
one to have been tackled - with varying degrees of success by
governments and by legislators worldwide. These are the trade
restricting arrangements: monopolies, cartels, trusts and other illegal
organizations. Rivers of inks were spilled over forests of paper to
explain the pernicious effects of these anti-competitive practices. The
short and the long of it is that competition enhances and increases
efficiency and that, therefore, anything that restricts competition,
weakens and lessens efficiency.
What could anyone do about these inefficiencies? The world goes in
circles of increasing and decreasing free marketry. The globe was a
more open, competitive and, in certain respects, efficient place at the
beginning of the 20th century than it is now. Capital flowed more
freely and so did labour. Foreign Direct Investment was bigger. The
more efficient, "friction free" the dissemination of information (the
ultimate resource) - the less waste and the smaller the lebensraum for
parasites. The more adherence to market, price driven, open auction
based, meritocratic mechanisms - the less middlemen, speculators,
bribers, monopolies, cartels and trusts. The less political involvement
in the workings of the market and, in general, in what consenting
adults conspire to do that is not harmful to others - the more
efficient and flowing the economic ambience is likely to become.
This picture of "laissez faire, laissez aller" should be complimented
by even stricter legislation coupled with effective and draconian law
enforcement agents and measures. The illegal and the illegitimate
should be stamped out, cruelly. Freedom to all - is also freedom from
being conned or hassled. Only when the righteous freely prosper and the
less righteous excessively suffer - only then will we have entered the
efficient kingdom of the free market.
This still does not deal with the "not serious" and the "personality
disordered". What about the inefficient havoc that they wreak? This,
after all, is part of what is known, in legal parlance as: "force
majeure".
Note
There is a raging debate between the "rational expectations" theory and
the "prospect theory". The former - the cornerstone of rational
economics - assumes that economic (human) players are rational and out
to maximize their utility (see "The Happiness of Others", "The
Egotistic Friend" and "The Distributive Justice of the Market"). Even
ignoring the fuzzy logic behind the ill-defined philosophical term
"utility" - rational economics has very little to do with real human
being and a lot to do with sterile (though mildly useful) abstractions.
Prospect theory builds on behavioural research in modern psychology,
which demonstrates that people are more loss averse than gain seekers
(utility maximisers). Other economists have succeeded to demonstrate
irrational behaviours of economic actors (heuristics, dissonances,
biases, magical thinking and so on).
The apparent chasm between the rational theories (efficient markets,
hidden hands and so on) and behavioural economics is the result of two
philosophical fallacies which, in turn, are based on the misapplication
and misinterpretation of philosophical terms.
The first fallacy is to assume that all forms of utility are reducible
to one another or to money terms. Thus, the values attached to all
utilities are expressed in monetary terms. This is wrong. Some people
prefer leisure, or freedom, or predictability to expected money. This
is the very essence of risk aversion: a trade off between the utility
of predictability (absence or minimization of risk) and the expected
utility of money. In other words, people have many utility functions
running simultaneously - or, at best, one utility function with many
variables and coefficients. This is why taxi drivers in New York cease
working in a busy day, having reached a pre-determined income target:
the utility function of their money equals the utility function of
their leisure.
How can these coefficients (and the values of these variables) be
determined? Only by engaging in extensive empirical research. There is
no way for any theory or "explanation" to predict these values. We have
yet to reach the stage of being able to quantify, measure and
numerically predict human behaviour and personality (=the set of
adaptive traits and their interactions with changing circumstances).
That economics is a branch of psychology is becoming more evident by
the day. It would do well to lose its mathematical pretensions and
adopt the statistical methods of its humbler relative.
The second fallacy is the assumption underlying both rational and
behavioural economics that human nature is an "object" to be analysed
and "studied", that it is static and unchanged. But, of course, humans
change inexorably. This is the only fixed feature of being human:
change. Some changes are unpredictable, even in deterministic
principle. Other changes are well documented. An example of the latter
class of changes in the learning curve. Humans learn and the more they
learn the more they alter their behaviour. So, to obtain any meaningful
data, one has to observe behaviour in time, to obtain a sequence of
reactions and actions. To isolate, observe and manipulate environmental
variables and study human interactions. No snapshot can approximate a
video sequence where humans are concerned.
Return
Public Procurement and very Private Benefits
In every national budget, there is a part called "Public Procurement".
This is the portion of the budget allocated to purchasing services and
goods for the various ministries, authorities and other arms of the
executive branch. It was the famous management consultant, Parkinson,
who once wrote that government officials are likely to approve a
multi-billion dollar nuclear power plant much more speedily that they
are likely to authorize a hundred dollar expenditure on a bicycle
parking device. This is because everyone came across 100-dollar
situations in real life - but precious few had the fortune to expend
with billions of USD.
This, precisely, is the problem with public procurement: people are too
acquainted with the purchased items. They tend to confuse their daily,
household-type, decisions with the processes and considerations, which
should permeate governmental decision-making. They label perfectly
legitimate decisions as "corrupt" - and totally corrupt procedures as
"legal" or merely "legitimate", because this is what was decreed by the
statal mechanisms, or because "this is the law".
Procurement is divided to defence and non-defence spending. In both
these categories - but, especially in the former - there are grave,
well founded, concerns that things might not be all what they seem to
be.
Government - from India's to Sweden's to Belgium's - fell because of
procurement scandals, which involved bribes paid by manufacturers or
service providers either to individual in the service of the state or
to political parties. Other, lesser cases, litter the press daily. In
the last few years only, the burgeoning defence sector in Israel saw
two such big scandals: the developer of Israel's missiles was involved
in one (and currently is serving a jail sentence) and Israel's military
attaché to Washington was implicated - though, never convicted - in yet
another.
But the picture is not that grim. Most governments in the West
succeeded in reigning in and fully controlling this particular budget
item. In the USA, this part of the budget remained constant in the last
35 (!) years at 20% of the GDP.
There are many problems with public procurement. It is an obscure area
of state activity, agreed upon in "customized" tenders and in dark
rooms through a series of undisclosed agreements. At least, this is the
public image of these expenditures.
The truth is completely different.
True, some ministers use public money to build their private "empires".
It could be a private business empire, catering to the financial future
of the minister, his cronies and his relatives. These two plagues -
cronyism and nepotism - haunt public procurement. The spectre of
government official using public money to benefit their political
allies or their family members - haunts public imagination and provokes
public indignation.
Then, there are problems of plain corruption: bribes or commissions
paid to decision makers in return for winning tenders or awarding of
economic benefits financed by the public money. Again, sometimes these
moneys end in secret bank accounts in Switzerland or in Luxembourg. At
other times, they finance political activities of political parties.
This was rampantly abundant in Italy and has its place in France. The
USA, which was considered to be immune from such behaviours - has
proven to be less so, lately, with the Bill Clinton alleged
election-financing transgressions.
But, these, with all due respect to "clean hands" operations and
principles, are not the main problems of public procurement.
The first order problem is the allocation of scarce resources. In other
words, prioritising. The needs are enormous and ever growing. The US
government purchases hundreds of thousands of separate items from
outside suppliers. Just the list of these goods - not to mention their
technical specifications and the documentation, which accompanies the
transactions - occupies tens of thick volumes. Supercomputers are used
to manage all these - and, even so, it is getting way out of hand. How
to allocate ever-scarcer resources amongst these items is a daunting -
close to impossible - task. It also, of course, has a political
dimension. A procurement decision reflects a political preference and
priority. But the decision itself is not always motivated by rational -
let alone noble - arguments. More often, it is the by product and end
result of lobbying, political hand bending and extortionist muscle.
This raises a lot of hackles among those who feel that were kept out of
the pork barrel. They feel underprivileged and discriminated against.
They fight back and the whole system finds itself in a quagmire, a
nightmare of conflicting interests. Last year, the whole budget in the
USA was stuck - not approved by Congress - because of these reactions
and counter-reactions.
The second problem is the supervision, auditing and control of actual
spending. This has two dimensions:
1. How to make sure that the expenditures match and do not exceed
the budgetary items. In some countries, this is a mere ritual formality
and government departments are positively expected to overstep their
procurement budgets. In others, this constitutes a criminal offence;
2. How to prevent the criminally corrupt activities that we have
described above - or even the non criminal incompetent acts which
government officials are prone to do.
The most widespread method is the public, competitive tender for the
purchases of goods and services.
But, this is not as simple as it sounds.
Some countries publish international tenders, striving to secure the
best quality in the cheapest price - no matter what is its geographical
or political source. Other countries are much more protectionist
(notably: Japan and France) and they publish only domestic tenders, in
most cases. A domestic tender is open only to domestic bidders. Yet
other countries limit participation in the tenders on various
backgrounds: the size of the competing company, its track record, its
ownership structure, its human rights or environmental record and so
on. Some countries publish the minutes of the tender committee (which
has to explain WHY it selected this or that supplier). Others keep it a
closely guarded secret ("to protect commercial interests and secrets").
But all countries state in advance that they have no obligation to
accept any kind of offer - even if it is the cheapest. This is a needed
provision: the cheapest is not necessarily the best. The cheapest offer
could be coming from a very unreliable supplier with a bad past
performance or a criminal record or from a supplier who offers goods of
shoddy quality.