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Discovering Cuba: Economics, Entrepreneurship, and the Future

Discovering Cuba: Economics, Entrepreneurship, and the Future

HAVANA, SEPTEMBER 6, 2016 — “I’m not a big fan of Fidel,” our guide Jorge* says. We have known him for less than ten minutes. The driver, who speaks little English, nods approvingly. “His name is Fidel, too” says Jorge, patting the driver on the back. “This is the good Fidel.”

The first assumption I had about Cuba was shattered. I had assumed the people would be reticent to discuss their feelings about the regime, the party, or their leader. They were not. Almost all the Cubans we met were all too eager to relate their stories of living under the regime, in the past and in the present. Those that weren’t explicit spoke about Castro the way that a coworker might diplomatically criticize an underperforming boss. Our questions were often answered as if no other explanation were necessary: “Es Cuba.”

Es Cuba indeed. From the moment we landed in Havana the day before, direct from Panama City, it was immediately apparent we were not in Kansas anymore. The airport is an exemplar of Soviet-era architecture with brutalist concrete pylons, stretches of burnt orange tiles and adornments and long hallways with low ceilings and dim lighting. Where other airports might offer shop after shop of bookstores, coffee shops and restaurants, the Havana airport shops only have an abundance of certain items we will see many times: foreign candy imports, tobacco, tourist paraphernalia, and alcohol. Everything else is scarce, including food, water, soft drinks, snacks, magazines, books, toiletries, and medicine, none of which can be found. In the restroom, only half of the toilets have toilet seats, and there is a conspicuous lack of soap in the dispensers, no paper towels, and non-functioning hand dryers. To suddenly find ourselves in a place with plenty of cigarettes but no soap was a jarring experience, and it would not be our last.

“Fast Food” at the airport–so fast you can’t see it.


Upon arriving, our first task was to change our money. The local currency is two currencies. The convertible peso (CUC) functions as their hard currency—roughly 1:1 with the dollar—and is the only Cuban peso that trades for foreign currencies. Cuban pesos (CUP) are what the government spends, and are accepted at state-owned businesses, which until recently were all businesses. Not surprisingly, Cubans prefer to transact in CUC, and as we understand, they associate the two currencies with two different conceptions of quality. A “CUC place” will invariably deliver higher value, whereas a “peso place” is a euphemism for a shoddy, cheap, state-run service. It didn’t take us long to figure out that CUC was not only the currency of the tourist economy, but of the fledgling private economy as well, as some businesses who only cater to locals will still accept CUCs. As we will find out, more and more Cubans are breaking into this CUC economy and entering an emerging middle class with disposable income.

Upon leaving the airport the first thing to strike us was the cars. We felt immediately thrown back to a movie from classic Hollywood, complete with a lineup of 1950’s luxury automobile brands: Chevrolet, Oldsmobile, Buick, Cadillac, DeSoto, and Ford. And of course, there was an array of Soviet-era utility cars from Lada and the like. The few modern cars scattered about stuck out painfully. We also could see quite a few 1990’s-era European cars: Volkswagens, Peugeots, and so on. It was quite the hodgepodge.

Cuba’s car economy is unique in the world, a natural outcome of a state-run economy that only provides rationed cars to the political elite and some of those in select professions (like doctors), and has no legitimate market in automobiles. We find out later that the black market value of a new car is north of $260,000 and can be as high as $700,000 (that’s US dollars). The worst used car can be got for $7,000. It’s not surprising that Cubans value their cars above all else, which has translated to the plethora of 1950’s American cars on the roads, missing seatbelts, poor gas mileage and all. These are cars that have been preserved far beyond their natural lives and the age shows on most of them: from gutted interiors, non-functioning door handles, nubs where the window cranks used to be, rusted frames, cracked fenders, sputtering engines, creaking gears, torn and faded original leather seats, cracked paint, and every other car malady imaginable. Frequently we see a local car owner performing repairs, with the car jacked up, hood splayed open and parts strewn over the sidewalk. I would not be surprised if most Cubans are better mechanics than most mechanics anywhere else in the world.

A pretty typical scene in Old Havana. Lots of old cars everywhere you look. A pretty typical scene in Old Havana. Lots of old cars everywhere you look.


Cars have also transformed into a new business opportunity in the last couple years, as Raúl Castro’s government has relaxed controls on transportation enterprises, in addition to restaurants and hotels. Many of the cars we see have been restored to their former glory, down to new paint jobs, new stereo systems, air conditioning and modern engines swapped in. We find out that a driver of these retrofitted old cars can make up to $50 per hour from tourists, not bad for a country whose average monthly salary is $23.

Retrofitted convertibles waiting for fares. Retrofitted convertibles waiting for fares.


We spent our first day exploring our neighborhood, Vedado, which we will later find out is the most modern and one of the wealthiest neighborhoods in Havana. It’s hard to believe it. Many houses on our street would be considered condemned by the standards of any major American city. Those that aren’t abandoned outright are in late stages of decay, held together by decades of do-it-yourself fixes we see Cubans performing constantly. It’s common to see lead paint peeling, door and window frames warping, and exposed concrete, rust and wiring. Many of these houses are former mansions stripped of their pre-revolution glory, overgrown with weeds, foundations literally crumbling before our eyes. It’s hard to believe there are people living in the crevices of these stone ruins, but we see them through windowless window frames. Some of these houses are completely gutted, down to the studs, or collapsed altogether.

Vedado was lively with activity: children coming home from school, parents and babies, cats and dogs wandering about, men pushing hand carts with construction supplies, women carrying bags from the fruit market down the street. We rented an Airbnb (recently allowed to operate in Cuba) whose owner has renovated half of her house for guests, which in turn is the top floor of a pre-revolution duplex. The bottom floor looks abandoned with its doorless entryways and unlit interior, but is occupied.

Grand old house in Vedado. Grand old house in Vedado.


We walked to the Meliá Cohiba, a luxury hotel on the seaside Malecón esplanade, taking in its tacky oversized marble lobby (it actually reminded me a lot of the Trump Taj Mahal in Atlantic City). Meliá Cohiba is state-owned, along with the glorious old hotels and nightclubs of the past: Hotel Nacional, Hotel Parque Central, the Tropicana, the Floridita. These were hotels and clubs once owned and frequented by American millionaires and mobsters, the center of a thriving and prosperous economy which brought celebrities, artists, writers, wanderers, sunbathers and entrepreneurs to these sunny shores. When Castro took over in 1958, the state nationalized all of these tourist destinations. Today, they are shadows of their former glory, sharing many of the same misfortunes as the houses and mansions we saw.

One gets the sense that Havana has been lost in time, frozen in 1958 at the dawn of the most successful half-century in world history. The rest of the world has seen largely peace, prosperity, global trade, new technologies, the internet, cheap travel, a renaissance of architecture and music and literature, an explosion of democracy and expression, the shattering of international borders, economic stability and a new world order based in theory if not always in practice on human rights and dignity. Cuba just introduced heavily censored 56k dial-up internet, only available to the political elite and tourists, with some slow hotspots to the public available as of 2015. SMS still does not work for locals.**

img_6728 Old Havana street; late afternoon.


In Europe and America, we speak of “prewar” and “postwar.” These wars are often the defining moments in our history across which so much changed they create two distinct periods with different moods, politics, economies, social orders, and realities. In Cuba, the moment that matters most is the moment when Castro, Che and their ragtag band of Marxist revolutionaries upended the Batista dictatorship and marched, guns blazing, into the presidential palace. From that moment on, every Cuban speaks of “pre-revolution” as if it were an era lost forever.

* * *

It is Havana’s Plaza de la Revolución we find ourselves with our new friend Jorge.

As any student of Communism will tell you, the Revolution never ends. It is critical to the policies of the regime that there is always a capitalist enemy to defeat. Legitimacy is achieved by representing the upending of a social and economic order where the elite control the means of production, to one where the people do through nationalization. Of course, once nationalized, the economy becomes taken over by a new elite whose methods of control are even more violent and regressive. That is why the Revolution must never end—because if a status quo of unilateral power becomes established, it invites a new revolution based on the same principles. This is why the Cuban constitution states, for example, that “artistic creativity is free as long as its content is not contrary to the Revolution.”

A common sight on Havana streets. Old car repairs–a common sight on Havana streets.


That is also why, for 54 years until he handed the reigns of power to his brother, Fidel Castro lectured on the ongoing revolution and its benefits to crowds of millions in this very revolutionary square. It is a brutal place, the size of two football fields paved entirely in white concrete baking under the Caribbean sun. Portraits of Che Guevara and Camilo Cienfuegos are displayed on government buildings surrounding the square, with an imposing memorial to Cuban national hero José Martí keeping watch from the center. Images of Fidel and Raúl Castro are not displayed, apparently because of a Cuban law that prevents public iconography of living revolutionaries (interestingly different from the norm in Mao’s China and Kim’s Korea).

Jorge is telling us about Fidel Castro’s 4- to 6-hour political rallies at this square, which would be broadcast on every television channel. “Everyone in Cuba watched it,” Jorge says, “Because we didn’t know how long the speeches would last, and the soap operas would come on afterwards.” We laughed. He continues. “We would keep the volume down so that Castro would become background noise. When he said ‘¡Patria o Muerte, Venceremos!’ [homeland or death, we will overcome], that’s when we turned up the volume. That’s when we knew the speech was almost over.”

A Lada taxi rumbles past a apartment building; central Havana. A Lada taxi rumbles past an apartment building; central Havana.


Jorge is, like many Cubans we will meet, a multi-entrepreneur who has active businesses giving tours, selling cigars, teaching English and French, and helping Cubans with their immigration paperwork, all under the table of course. That’s the way the economy operates here. On our walk through Havana, we see street vendors selling tortillas, bananas, ice cream, makeshift barber shops and beauty salons in the empty shells of former houses, makeshift restaurants (paladars) and bars serving food and beer off of porches. In the last couple years, many of these businesses have been allowed to start operating legally; previously, they were all underground. Jorge explains to us that the official salaries offered by the government for services—such as driving garbage trucks—are laughably small, so almost everyone with an official job will have several jobs on the side. Those garbage truckers, for example, will siphon the valuable fuel left over from their routes and sell it on the black market, where customers will pay half of what they would pay for gas from the state-owned gas stations. And of course, Jorge is telling us this as we drive around in a car operated by Fidel, another entrepreneur whose beat-up 1955 Chevrolet Bel Air makes him far more money than he would make operating a state-owned, air conditioned, brand spanking new yellow taxi.

To give us a sense of just how low official salaries are, Jorge tells us that last year, the government raised the salary of doctors to $50 per month, after sending 4,500 doctors to Brazil to help with a medical crisis in 2014 and having many of them never return. It’s not surprising that even doctors in this economy look for any opportunity to make ends meet. Jorge’s doctor, we find out, sells Jorge his extra phone line for $60 per month so Jorge has access to 56k dialup internet (internet in private homes is currently illegal). Another doctor we hear about sells bootlegged movies from his bicycle to scrape together more cash. And they must, because they cannot afford to do otherwise. Monthly rations of rice and beans provided by the government amount to only one week’s worth of food. That means the other three weeks the people are forced to fend for themselves. It’s no surprise that enterprise has flourished underground, in the most unlikely places. Cuba might have more entrepreneurs per capita than anywhere else in the world.

Tourist market, by the wharf. Tourist market, by the wharf.


Jorge and Fidel took us around the city to point out more Havana peculiarities, including “Coney Island,” which despite its name is more of a small-ball kiddie park like you would find in an underwhelming tourist town. We saw the classic nightclubs of prohibition-era Havana, now all but abandoned, and the ex-Soviet, now Russian, embassy, which squats imposingly and palatially across several square blocks, epitomizing the concrete brutalist architecture of that era. And we drove past the estate of Fidel Castro, completely hidden behind overgrown brush, but bigger than anything we had seen so far.

We went for lunch at a CUC restaurant in Old Havana. The recently opened restaurant, Jorge explained, was funded by American capital, most likely through a family member as only Cubans can own property here. As a private business, this restaurant must provide better service and quality in order to stay afloat, something Jorge reminded us of after coming back from the bathroom. “This is the first year restaurants have had clean toilets in Cuba” he said matter of factly, and proudly. “They even have toilet paper.”

A brand new private ice cream shop in the old town. Delicious. A brand new private ice cream shop in the old town. Delicious.


When a country is deprived of so much, so little becomes luxury. We are reminded of this constantly. Jorge needs to take one aspirin per day for a medical condition. He hasn’t had any in three months. It can’t be found (we gave him ours). We spent the meal getting a history lesson.

As Jorge explains it—and like everything else in this country, his view must be taken with a grain of salt—Batista was a petty dictator with a corruption streak who got caught in a Marxist fervor sweeping Latin America in the postwar period. He gave up with barely a fight, fled to Spain with $42 million in a suitcase and left the country to be taken over by Castro and his thugs. It became apparent very quickly that overthrowing one dictatorship does not mean another dictatorship won’t displace it, and Castro immediately went about practicing the normal Marxist playbook: seizing billions of dollars of private property, nationalizing all industries, and implementing the trifecta of communist control: stifling of dissent, rationing of all goods and services, and monopolizing of all labor. It didn’t take long for the best and brightest of Cuba to be driven underground and, if they were lucky, to flee to America, Mexico, and elsewhere, leaving behind an empty legacy of wealth: buildings and goods with no human capital behind them.

Typical street in Old Havana. Prime real estate, too. Typical street in Old Havana. Prime real estate, too.


As Jorge takes us for a walk through Old Havana, a mountain of salt wouldn’t hide what we can plainly see. Early 20th century condominium and apartment buildings in disrepair. Entire blocks of pre-revolution townhouses in ruins. Street after street of potholes, rusted fences, graffiti, peeled paint, uneven sidewalks ripped up by tree roots, crumbling concrete facades, abandoned shops, restaurants, movie theaters, boarded up doors, broken windows. What were once beautiful facades and lively pedestrian streets are caked in layers of filth and grime and dirt. The smells of exposed food, cigar smoke, sewage, rotting trash, and burning diesel all mix in a powerful cloud of odor wafting around every corner.

It could be a war zone. But it’s not—it’s merely the result of decades of neglect, imposed upon a country by a man whose face is plastered on every official poster and whose accomplices adorn t-shirts in every tourist shop. It’s the expected consequence of a state-owned economy that prevents Cubans from providing basic needs for each other.

Typical paladar in Old Havana. Typical paladar in Old Havana.


I have many times been in a developing country. Never have I been in a de-developed country.

There is something uniquely sad about Cuba. Unlike other poor countries in the Caribbean, Cuba had everything, and it was turned into a trash heap of human and material misery. The people who did it have not been held responsible; in fact, they’re still in power. And the people who have suffered for decades have been robbed of their wealth, their human capital, and worst of all, their time. “You can’t get time back” Jorge sighs. “We lost 58 years. We went backwards in time. And the saddest thing for me,” he says, “is the potential we could have had.”

* * *

We met Daniel the next day, through a mutual friend. Daniel speaks no English but was happy to be our driver and guide for the day. We left at 7:30 in the morning and before long we were bumping down the pothole-ridden highway to Pinar Del Río, the western tobacco-growing region where many of Cuba’s legendary cigars are cultivated and rolled.

On the two hour trip, we had plenty of experience with the countryside. Hitchhikers were everywhere. It turns out that, unsurprisingly, any semblance of public transportation in the country is broken. In the cities, people can wait up to 3 hours for a bus, whereas in the country city-to-city transport is nonexistent. Since a car is a luxury most Cubans can’t afford, they’ve adapted their own ‘sharing economy’ where all cars offer ride shares for a price, as well as private busses which are essentially pickup trucks and vans whose drivers will sell rides.

Man selling tortillas. Like much of the commerce in Cuba, underground and makeshift. Woman buying tortillas from a street vendor. Like much of the commerce in Cuba, makeshift and likely black market.


There’s only one main highway in Cuba (it’s a long and narrow country), and on this particular stretch of road, we encountered only one gas station/rest stop about halfway. Some prepared food was offered here—nothing we could eat—but they were out of many items. Long cabinets with a smattering of baked goods were mostly empty. Some foreign imports were available though—candy, chocolate and the like—so we were able to stock up on ‘food.’ We had started noticing a pattern where stores would have an abundance of some types of goods and a shortage of others. This shouldn’t be surprising for any student of economics.

In Cuba, in cases where the official price of a good is lower than market value—for example cars, public transportation and most food—scarcity and rationing are the norm and long lines form when no other options are available. We have seen lines for all kinds of goods including bread, medicine, and ice cream. One woman we met, Rosa, has to wait more than a year to see a doctor for her condition, and she still has no idea how serious it is.

Where's the meter for the horse cart? A common sighting in Pinar del Río. Where’s the meter for the horse cart? A common sighting in Pinar del Río.


Where private enterprise is not allowed, a black market has emerged to offer higher prices but guaranteed availability across a suite of goods and services. The gas station we were at was state owned, so there was a shortage of most of the food on offer. Of course we didn’t know how to access the black market in this area, but one undoubtedly exists.

In those cases where the government price sits above market value—for example with taxi fares, hotel rates, tobacco and alcohol—other private enterprises and black markets have developed to deliver equal quality goods at a fraction of the cost. There will also be, as expected, an abundance of these goods in state run stores, as there was at the airport, and in this gas station. There was no problem here getting candy, chocolate, alcohol and tobacco, although right now we only wanted the first two.

We drove through Pinar del Río which seemed to be doing pretty well. Perhaps there were fewer pre-revolutionary buildings and materiel to notice relative decay. In any event, a communist government may end up supporting the people in the countryside better than those in the city. We saw a lot more revolutionary advertisements in the country, more statues of party leaders, more proclamations. We also saw more lines for food. So it’s hard to tell whether rural support for the regime is actually higher, or whether, perhaps, the country is favored by the regime because of the necessity for food only the country provides, and tobacco which is such a critical state-owned industry. In any event, it was important to see another side of Cuban life, where Castro and his allies may not be universally despised.

All gas stations are state owned. It's rare to see people filling up; the car at the pump has government plates. All gas stations are state owned. It’s rare to see people filling up; the car at the pump has government plates.


One thing we did see in the country that I haven’t seen since my time in post-Soviet Romania: horse-drawn carriages have replaced cars for much of rural Cubans’ industry and transit. That was astounding to me—whereas Havana has regressed to the 1950’s, the countryside has regressed to the dawn of the automobile.

At the first tobacco plantation we visited, we met Nardo. Like Jorge, Nardo taught himself English from American TV shows and music, supplemented by paying a private tutor. When I asked him if he learned any English in school, he shook his head and answered: “School is free here. You pay for nothing, you get nothing in return.” It was interesting to get Nardo’s perspective, as someone who interacts frequently with foreign tourists but also grew up in the countryside where access to foreign capital is limited. I asked him if he thought American tourists would be good for the country, and he said “It will be good, but it won’t change anything about the country.”

One of my assumptions about Cuba before coming here was that the people would blame America for their misfortune. As it turned out, quite the opposite was the case. Not only do the people love America and Americans, but signs of American fandom are everywhere. Flags adorning windshields and coffee shops. American flag t-shirts and tank tops. This is not just for our benefit. Many Cubans have relatives in the US and unsurprisingly there has always been a close unofficial relationship between the two countries. Americans send over $2 billion every year to Cuba, person to person, making America perhaps the largest subsidizer of the Cuban people, who depend on that money to survive. One worker at the plantation, when I admired his brand new leather shoes, smiled and said “de mi familia en Miami.”

One of the boys didn't want to take a picture. One of the boys didn’t want to take a picture. In central Havana.


We learned that Cubans long ago realized that Castro’s long-standing scapegoating of the American embargo*** for the poverty in the country was a tactic to justify his own incompetence, much in the same vein as Hugo Chávez. It turns out that when a government says something is true over and over again, and the evidence in front of their eyes says otherwise, people tend to believe the evidence over the rhetoric. When Obama came to visit post-revolution Cuba—a first for American presidents—Cubans celebrated for weeks and lined the roads on his arrival route, waving American flags. It probably isn’t a thrill to the Cuban government that Fidel and Raúl Castro are half as popular as Obama amongst Cubans according to a 2015 poll, enough so that Fidel published a lengthy editorial slamming Obama after his visit.

Of course Cuba’s misery is the fault of Cuban government policies. Cuba has been cut off from American tourists and capital and products for the last 56 years, but it has had the ability to trade with almost every other country in the world. Of course there is no way that a well functioning economy with trade routes to the outside world would suffer because of one trade embargo with one country, when all goods Cubans could possibly want are available from many other countries as well. The evidence is all around—there are non-American brands for every major product here, from cars to candy to retail to alcohol to hotels. Cuba is not suffering because it doesn’t have access to US products and capital. Cuba is suffering because every import is controlled by the state and those controls lead to misappropriation, inefficiency, shortage and graft, when such imports are allowed in the first place.

America bling everywhere. America bling everywhere.


However, it is unsurprising to me, at least, that the relaxation of the American embargo is coinciding with the letting up of price controls and restrictions on free enterprise here. I suspect that Raúl Castro and company know that it’s only a matter of time before free markets emerge in Cuba, and the only way to retain legitimacy through the transition is to take charge of the change. If the embargo, the justification for misery, is lifted around the time when free enterprise and free flow of capital is allowed back into the country, Castro can continue to tell the biggest lie his government tells while guiding the country away from state-owned industry.

That’s all speculation of course. But when I asked Nardo about whether the lifting of restrictions on free enterprise in the last couple years has been good for the country, he said “Yes, for some people. And that’s good enough for the government.” From the countryside, it must be hard to see the all-too-slow dismantling of this failed and broken system from a distance. The government can’t let up too quickly, or it delegitimizes itself.

In the state-owned tobacco industry, planters like Nardo are allowed to sell 10% of their crop privately while the government buys 90% at a fixed price. The 10% goes for much more on the private market, where it is turned into cigars for consumption at even lower prices than the government charges for finished cigars. Where the massive spread goes between what the government pays for tobacco and what it sells cigars for, I wasn’t able to suss out, but I suspect it has something to do with the size of Fidel Castro’s mansion and the $260k new cars driving around the city with government plates.

Old Havana street. Old Havana street.


Until a couple years ago, planters like Nando had to ‘sell’ 100% of their crop to the government, but the new rules have allowed for some limited maneuvering. That ultimately will be a good thing for the farm economy, and seems to have already made a difference. Jorge told us that until a couple years ago even common fruits like mangoes, papaya, and pineapple were not to be found on any market, for any price. He also told us there are some fruits he still hasn’t seen in more than 20 years.

We learned a lot about the condition of agriculture in Cuba. Before the revolution, Cuba was a world famous exporter of mangoes, sugar cane, coffee and tobacco, among other tropical fruits. When Castro took over—again, not surprising to students of communism—he mismanaged the farmland into the ground, literally. At one point, according to Jorge, he razed thousands of hectares of lush orchards to make room for cattle grazing. And yet, according to the Economist, “in a place that before 1959 boasted as many cattle as people, meat is such a scarce luxury that it is a crime to kill and eat a cow.” Years later, as we drive down the highway, we see miles and miles of barren land. Right now, Cuba imports over 70% of its agricultural consumption.

As a result of the revolution, the best planters and rollers moved abroad to other tropical countries like Dominican Republic and Nicaragua. This has resulted in other cigars catching up to Cubans on quality. Fortunately, unlike with coffee and mangoes, Cuba has retained its reputation for the best cigars in the world. But it isn’t hard to see how stifled the industry has become since coming under state control. For instance, despite there being a near infinite combination of cigar varietals that can be created by combining different species and fermentations of tobacco in different ways, only a handful of official state brands of cigars are permitted to be sold. So the creativity of the planters and rollers in coming up with new cigars is lost, for now, to the global market. But they certainly enjoy inventing new kinds of cigars for themselves.

Highway watermelon "store." $1 per melon. Highway watermelon “store.” $1 per melon.


Daniel drove us back to Havana, on the way stopping for watermelons on the side of the road: $1 per melon. These makeshift enterprises are how most Cubans get by. He hid the watermelons below the floor of his trunk, with the spare tire. He wasn’t taking his chances with the checkpoints; on the way west, we had passed a random inspection, as officials are always looking for people smuggling food. Daniel wasn’t taking any chances that his watermelons would be confiscated or he would be fined or worse, imprisoned. He has two kids to feed.

If there was ever an example of the brutality of a Marxist regime, this was it. That one can’t even carry fruit without committing a crime—that the crime is betraying the revolution, not preventing people from feeding themselves—is too much to bear. Cuba has made its population criminal because they want things that improve and sustain life. It should not be a crime to want these things, but here it is a crime. “Crime is different here,” Jorge had told us. “We are all criminals in Cuba.”

* * *

When I told people I was going to Cuba, the reaction was predictable. I was told I was lucky to witness Cuba because it was “untouched.” I was told something along the lines of: “Oh, you get to see Cuba before Starbucks and McDonald’s go down and ruin it all.” I heard the same thing from some Americans I met at El Floridita. I confess part of me shared in this naive romanticism about Cuba, that somehow there is a ‘purity’ to Cuba that will soon be ‘corrupted.’ I was wrong about this. Not only because of my naiveté about the condition on the ground in Cuba, but because of the insidiousness such a belief implies about what the Cuban people want and deserve.

“Untouched” is a romantic way to look at the poverty that Cuba has become. There is nothing romantic about poverty. Poverty is sad. Poverty is sick children and malnourishment. Poverty is no books or school supplies. Poverty is no toilet paper, no soap, no toothpaste, no clean water, and unmet basic needs. Poverty is constant exposure to punishing heat and humidity. Poverty is torn up shoes and broken cars. Poverty is dangerous tools and equipment. Worst of all, poverty is wasted human capital: time spent waiting on lines for food instead of producing goods and services to better society. Poverty is unwritten literature, unsung music, unconducted experiments, undiscovered breakthroughs, and unfulfilled ambition.

Apartment building in decay; central Havana. Apartment building in decay; central Havana.


There is nothing pure about revolutionary Cuba. The Cuba of Fidel and Raúl Castro is a wasteland of broken people and broken dreams. For 58 years, Fidel Castro has bled the wealth of this country dry intentionally, prepared to let his people die rather than acknowledge the inadequacy of his broken political ideology. We know this firsthand now, since we have actually met people who lived through it. We met one Cuban who worked in a graveyard in the 1990s, the decade Cubans refer to as the “Special Period.” It was in the haze of post-Soviet collapse that Castro refused to allow foreign imports and, of course, with local production at miserable lows, it didn’t take long for people to start starving. Rather than betray the principles of the Revolution, Castro was preparing teams of body collectors to tour Havana and haul the dead back to the graveyard to be buried in mass graves. That is the legacy of making a country poor, and the wounds won’t be healed for decades after the regime is out of power.

Of course, the Revolution needs to keep people poor, because poor people can’t fight back. Poor people can’t afford to agitate. Poor people need to keep showing up to their jobs to collect their pitiful paychecks. Poor people need to keep waiting on line for their less-than-subsistence rations to keep from starving. If poor people aren’t allowed to fend for themselves, they must wallow forever. The only thing poor people can do, if they’re lucky, is escape. One woman, Donna, who sells local art, told me, “We love America. I wish we could go there.”

img_6951 Car comparison: party member vs. regular citizen. The blue striped license indicates the car belongs to a party official or VIP. EDIT: apparently it’s state owned tourism vehicle, not a VIP. Blue just means state owned, but they can come in different varieties. In any event the blue plates are almost always on nicer cars than the white plates. Thanks, commenter.


Wealth is an anecdote. Wealth gives people power to fight back, to challenge the status quo, to create jobs and opportunities, to invest in food and clothing and productive capacities. Cuba needs wealth, and not wealth that goes to the apparatchiks and officials in their $260k cars and mansions. Wealth that actually goes to the people, in the form of jobs, industry, and investment.

The sadness is not that Starbucks is coming to Cuba. The sadness is that Starbucks has never come to Cuba.

The sadness is that no foreign brands have come to Cuba. No Austrian coffee shops, no Japanese dollar stores. We’re finding some limited foreign retail brands, apparently only recently allowed in. But even Coca Cola is hard to come by. These foreign franchises represent jobs, investment, and opportunity for the Cuban people. The Cuban people have been cut off from the world, from not only the cheap high quality goods and services that improve quality of life, but the freedom and the disposable income to improve their own lives and pursue their own happiness.

All-but-abandoned complex in old town Havana. All-but-abandoned complex in old town Havana.


Starbucks and McDonald’s will not ruin Cuba. Cuba is already ruined. As American tourists, what we wanted—-desperately wanted—is some way we could help the people rebuild. The answer is not lifting the US embargo, although extra American tourist dollars would be good. But if those dollars go immediately to waste, it won’t change the country fundamentally. We heard many times from many people that the system is the problem. They need more liberalization, more private enterprise, more allowance of foreign imports. And that can only happen if Cuban communism goes the way of Chinese and Vietnamese communism: embracing free markets, allowing foreign investment and free capital flows, and letting the people get to work for themselves.

Waiting on line for bread. Central Havana. Waiting on line for bread. Central Havana.


And according to Jorge, whose reading on the subject is far better than mine, this won’t happen until the ‘old guard’ of the revolution—Fidel, Raúl and other party leaders, all over 80 years old—are no longer in power. He tells us with a guilty whisper: “We must wait for the biological solution.”

That night, we walked the ramparts of Havana, on the ocean, where just 80 miles over the horizon is Key West, Florida. We mingled with hundreds of local young people who spend their nights looking out into the blackness that in any other country would be thriving with lights from incoming and outgoing ships representing the entirety of the world’s commerce and nations.

* * *

As we toured the old town of Havana, we took in all we could. We shopped at an official tourist market right off the wharf where the cruise ships come in. We discovered gems of old Havana: the church of San Francisco, the old Partagás cigar factory, the capitol building. We had daiquiris with the bronze statue of Ernest Hemingway at the Floridita. We saw one of the oldest cathedrals in the hemisphere.

As we explored the city of Havana, we discovered that the bleakness of Cuba’s past is fast giving way to a prosperous future.

Recently, the regime started allowing private enterprises to operate here on a limited bases. They started with cars, hotels, and restaurants, but opened up over 200 occupations. Now Cubans can become barbers and salon professionals, bus drivers, floor polishers, electricians, and computer programmers as well, all without having to hand over 100% of their work product in exchange for a measly ‘salary.’ Many Cubans can now work for themselves, to the tune of over 20% of the workforce now in the private sector.

Art market on the bay. Art market on the bay.


Signs of a Cuban renaissance are everywhere. As recently as two years ago, according to friends of mine that visited, there were no restaurants or bars outside of the tightly controlled state-owned hotels. Now, restaurants, hotels, bars, and shops are popping up all over the place, offering better service and sometimes, better prices. We ate at some fantastic new restaurants and were able to patronize private ice cream shops, our private Airbnb, and of course private cars. We visited a new boutique hotel opening soon, completely renovated (although they imported everything, from the tiles to the tables to the business cards, from Italy). People fixing and renovating storefronts and houses, limited advertising on the sides of buildings, a plethora of new businesses servicing tourists in the old town. Music pouring out of every restaurant beckoning people in. We see a fortune teller who charges $200 per reading, 10 times the average Cuban monthly salary, to tourists. She’s probably one of the richest people in the country. This is all new to post-1958 Cuba.

As Nardo told us, these changes are only helping some people for the time being, which makes sense. Only those with money to spend can afford to invest in, and buy products from, non-state owned business. But these businesses create more people with money, and this money forces its way not only into the industries opening up, but the myriad of industries which depend on them. For instance, allowing a private restaurant to operate freely must mean allowing the vendors who provide the restaurant with food, tables and chairs, ovens, deep fryers, kitchen utensils, and uniforms to operate freely as well. Allowing a private barbershop must mean allowing private scissor sellers and shaving cream manufacturers. Not allowing these dependent industries and imports to develop would mean asking businesses, like the people, to circumvent tight controls to acquire the goods and services they need on the black market, which they will do, but at great cost to society.

We were fortunate to be at the home of a local for some drinks when our host took delivery of that week’s paquete, something I had read about and was excited to try firsthand. The paquete is a hard drive smuggled in from the outside world with weekly updates from all major Mexican and US TV shows and soap operas, music, news, sports, software updates and patches, and even iPhone & Android apps. Locals pay $1 to get paquete delivered for a couple hours where they have a chance to download whatever they want. It’s basically a black market for culture and entertainment, and allows Cubans to know everything about the US election, watch Game of Thrones and Netflix shows, stay updated on baseball, and pirate music. We also frequently see Cubans connecting to the internet near state owned hotels where there are slow, but working hotspots, though they have to buy from the state’s internet monopoly and it is heavily censored. Some Cubans we met are even on Facebook. They are able to keep in touch with relatives abroad, which means they are in touch with the outside world.

The only internet available to most Cubans is around hotspots like these next to state-owned hotels. Only 30% of Cubans have some access to the internet. The only internet available to most Cubans is around hotspots like these next to state-owned hotels. Only 30% of Cubans have some access to the internet, although having internet in a private home is illegal.


So, with economy and society, it’s clear that the floodgates are being forced open. As new businesses flourish, they are creating jobs and a new influx of capital, which will be spent in turn on more goods and services. As Cubans get connected to the outside world more and more, they are able to access cultural capital abroad, as well as foreign markets and international trade partners. This will create new business opportunities. Cuba is starting to emerge again.

That night, we dined at La Catedral, a new restaurant in Vedado, where we were the only foreigners. Two young musicians, whom I had a chance to talk to about their budding musical careers, played jazz standards on piano and violin they had taught themselves. The mood was upbeat and one could easily think we were in a Argentinian bistro. The place was packed with local Cubans, enjoying a night out, probably aware that they are at the forefront of a new revolution in Cuba. For a moment it seemed that it was only a matter of time before the rest of the country can rejoin the world.

* * *

The only museum we visited was the Museo de la Revolutión. There, we were spoon-fed details of the brutality of the Batista regime and the noble heroes who overthrew it. We met the young, handsome revolutionary leaders who, full of optimism and certainty about their ideology, sought to bring the world forward by creating a Marxist utopia. We learned about the evil of the US embargo and how it has brought untold suffering on the Cuban people. We learned that the Revolution will last forever.

One can’t help but think about Orwell when confronted with such stone faced hypocrisy and deceit. His vision of the dystopian world of 1984 is eerily prescient here; a place where war is constant, where truth is fiction and history is erased. Where Fidel, the man himself, is incapacitated, and yet is still invoked as the moral authority of the nation and its prime political and ideological figurehead.

History crushes you here. We are walking amongst the carcass of Marxism-Leninism, 26 years after most of the world has abandoned this folly. Only in Venezuela, Cuba, North Korea, Zimbabwe, Myanmar, and a few other holdouts do people have to suffer this way any more.

img_4662 Busy old town sidewalk.


You get the sense that politics, society, economy and history are all intertwined and the forces that have shaped this country and others like it are human and inhuman at the same time—human because they come from a profound sense of responsibility and desire to do good, inhuman because they result in so much evil and destruction of human lives and potential.

As we wandered the streets of Havana, our helplessness was overwhelming, not only out of our desire to want to better the condition of the people around us, but out of our shared experience, if even briefly, with what Cubans go through every day in even worse circumstances. There is a conspicuous lack of basic services found in abundance elsewhere. Grocery stores are a rarity; we only found two and they lacked fresh produce, household items, and any non-prepared foods. There are no bodegas or quick marts or soda fountains. Pharmacies are few and far between with little supply, only available rationed to those with permission. Even if I wanted, I don’t know where I would find toothpaste or toilet paper. The ability to pay a fair a cheap price for something I want, like a bottle of water or an apple, isn’t widely available, even to people with money. It is surreal to be in a place where dollars didn’t demand immediate service. Even in the poorest countries I’ve been to, markets are allowed to exist that provide these services.

Abandoned bar, maybe soon to be revitalized? Prime real estate in old town Havana. Abandoned bar, maybe soon to be revitalized? Prime real estate in old town Havana.


All the while we were keenly aware of the luxuries that only we as tourists could afford. Air conditioned rooms to escape the punishing heat and humidity. Limited and slow access to wifi on occasion. Access to the international cell phone network–a real connection with the outside world even at $2.99/minute. If we are the most privileged in the country with foreign capital and currency, what hardships must normal Cubans endure?

If there were ever a doubt about the morality of markets over their criminalization, Cuba would be it. Markets are moral because they provide services and solve problems. They derive their morality from the fair exchange in value created, from the voluntary nature of every transaction. Certainly if markets were evil, as the revolutionary laws would have you believe, people would not risk life and limb to engage in them. There wouldn’t be a broad spirit of cooperation and subversion from the people to circumvent the laws to get what they need. People wouldn’t risk their lives sailing makeshift rafts to Florida or lining up at border crossings across South America.

Makeshift parking lot for jitneys in the old town. Makeshift parking lot for jitneys in the old town.


Where is the morality of taking food away from people at highway checkpoints, of banning foreign investment and imports, in forcing people to work for meager wages and insufficient rations? Where is the morality of making medicine impossible to find, food impossible to procure, cars impossible to afford? What insanity allows such a system to stay alive for so long, and what must the Cuban people suffer before it is undone?

We spent our final night with Jorge in his flat. He and his wife are the face of the new Cuba. Born in the 50’s, their whole lives have been spent in the shadow of the revolution, but now they are bursting at the seams. As Cuba opens up and relaxes its policies, entrepreneurs like Jorge will lead the charge, providing tourists and locals services that will create wealth for him and his family, as well as well paying jobs and wealth for others.

Dinner was a panoply of local Cuban specialties, which have been scraped together from various sources: carrots and rice from rations, mangoes and pineapples from the local market (remember: these fruits are newly available in the last couple years), and homemade pancakes made from shaved root vegetables and spices. And we had fish, a real luxury, which we were appreciative they provided for us.

Over rum and cigars, we discussed politics, history, and of course, Cuba, with Jorge. He is well read by any standard. His bookshelf has hundreds of books, a full examination of political economy across Europe, Asia, and of course the Americas, with a focus on the history of war and totalitarianism of all stripes, including religious fundamentalism. He has the Black Book of Communism, books on North Korea, and many other banned works—all smuggled in by friends and entrepreneurs catering to a population hungry to read everything they can.

Jorge is, of course, everything that is contrary to the principles of Cuban revolutionaries, which is what made him such a fast friend: educated, self-employed, entrepreneurial, well read in liberal ideas, aware of what’s happening in the world despite the censorship, one of the few Cubans with internet in his own home thanks to a back alley deal with his doctor. I couldn’t help but thinking that our entire conversation, if recorded or reported on, would land him in prison immediately. He had no problem openly discussing Fidel, explaining to us that the real risk is taking a public stance. Protesting, which happens occasionally, is treated harshly, and results in no change.

The one grocery store we found. It was impressive to see so much food in one place. The one grocery store we found. It was impressive to see so much food in one place.


We spoke freely and openly about the injustices that have been brought upon his people, soaking in the lessons to be learned from history about the futility of the very ideology considered sacrosanct by the leaders of his country. “To think that we have all suffered for 50 years,” Jorge said, “All because of a man in a funny hat and a funny beard, thinking he knows the answer to everything.” And he’s right.

This family is, or will soon become, part of the nouveau riche of Havana, thanks to the enterprising Jorge and his ambition. But even with money to spend, they struggle to get the things they need, which means wealth that wants to find new owners is struggling to break through. The toilet seat, we found out, was just purchased, after weeks of searching for one. Our “napkins” came from a Russian-branded packet of tissues. Our wine was a cheap bottled sangria from the state market. We couldn’t help compare this last meal with our first dinner, at a restaurant owned by a “friend of the party” whose family still lives in the 8-bedroom, 5-bathroom house on the property. After that dinner, we took a tour of the 1930’s mansion, and were proudly shown their Baccarat crystal chandelier. Comparing the party member who has built nothing with a $5,000 chandelier to the productive, hard working family with no real napkins is enough to make your blood boil. These are the fires that real revolutions are made of. The Cubans have it, and they practice their subversion quietly, but one day the full force of Cuban potential will be unleashed on the country, and the world.

Prime real estate, right next to the capitol building. Prime real estate, right next to the capitol building.


Take a mint condition 1950’s Cadillac. Drive it off the lot. Drive it to and from work for 50 years. Getting a new car isn’t an option. When it breaks, the owner must repair it out of pocket with improvised parts. New parts aren’t allowed. As the car gets louder, rustier, dirtier, and less reliable, depend on the charity of your friends to help repair it to keep it going. Eventually every part of the engine has been replaced. Limping along on hacked together fixes and the help of others, the car breaks down slowly over time, but thanks to the quality of manufacture, long shelf life of its fundamentals, and care of the driver, the car still putters along, though it can’t last forever.

So it is with a country. A country that represented the best if its time, the envy of the Caribbean, a jewel of prosperity and productivity and culture and music and history. This is the country that continues to limp along, engine sputtering, but with a strong engine and a good driver—it just needs to be let free. Let the Cuban people onto the open road, and it will be a marvel to witness.

* * *

Now that I am safely on American soil, after spending the week swimming in Orwell, I’m only now starting to think about what Americans can learn from Cuba.

Aside from the obvious, as in: don’t run a country based on the misguided theories of a 19th century Hegelian with no real world experience in economics. I can’t imagine that even the die-hard Bernie Sanders supporters want a state run economy; they just want to see a democratic socialism like in Europe, where economic perversions are democratically imposed and thus carry more legitimacy. Fine. Our mountain of unnecessary regulations and price fixing and tariffs aside, America isn’t going the way of Cuba any time soon.

One lesson that Cubans can teach us is something they understand intuitively; that the line between a job and a business is blurred to nonexistent; the skills are offered for cash each way and the important distinction is whether one is free to trade labor for a price acceptable to both sides, or forced to work for less than subsistence wages because the government is the only employer. When we were told, proudly, that “a private business means that a person works for themselves, and the government can’t make them go down to the revolutionary square to cheer on the party,” that’s what we’re being told—that working for oneself is sacrosanct. It not only is a bulwark against poverty, it’s a bulwark against totalitarianism as well. The best weapon against tyranny is wealth. Not Bill Gates wealth, but “being able to feed one’s own family” wealth—a country where owning one’s own destiny is the norm gives sovereignty to the people, not the government.

The next generation. A boy helps his father repair their Oldsmobile. The next generation. A boy helps his father repair their Oldsmobile.


The other important lesson from Cuba is the importance of allowing entrepreneurs to operate, because entrepreneurs provide goods and services that people want, and even those that people need. We shouldn’t cherry pick how we define an entrepreneur—an entrepreneur can be anybody, working alone or working together with others, who solves problems for people. We glorify entrepreneurship in the US as an avenue for creating jobs, but jobs are secondary. The real benefit of entrepreneurship is the availability of more and better goods and services for a better price. An entrepreneur can have a business employing only one person—the entrepreneur—and still make a difference.

The best and captive market in the world for entrepreneurs is that market where the most basic needs are not being met, which means Cuba has become, and will continue to be, a haven for entrepreneurship in the years to come. How can we as Americans support this? I have been researching a lot into questions about owning property, importing basic things like aspirin and t-shirts, allowing for easier communication to and from Cuba, helping with language education—these are all things that people need. As America opens up to Cuba, we’re in a privileged geographical position, not to mention a cultural one, to help invest in this country.

* * *

* I changed most names and some details to protect people
** I’m still trying to verify this as it relates to Cuba-to-Cuba SMS. Was told by two people separately that it isn’t possible, but there’s nothing about it online.
*** Incidentally, if there were ever an example of the futility of embargoes and trade sanctions in order to change a regime, the Cuba embargo would be it. It clearly did nothing to change Fidel’s grip on power, and may have even extended it, by giving Fidel an excuse to continue impoverishing his people

September 12, 20166 commentsRead More
Why Government Spending is not the Answer

Why Government Spending is not the Answer

Since Obama just won (congrats btw), we have some time to accept that America just made a resounding endorsement of Keynesianism. This is not a good thing. I can only assume that most Americans don’t understand the danger of government spending, or that Mitt Romney was an exceptionally bad messenger for liberalization. The latter is certainly true; the former is probably mostly true. Excuse this post for its generalities, but what matters here are the concepts.

There are two main arguments against government spending.

The first argument is that governments tend to spend money much less efficiently than individuals do. To paraphrase Milton Friedman, very few people spend other people’s money better than they spend their own. There is an undeniable truth to this matter. Think about market efficiency with distributed buyers and sellers, all trying to maximize utility individually, as opposed to purchases made by consensus, whether it’s on textbooks or social spending like welfare. It is impossible for a consensus of buyers to maximize utility for all individuals in that group as effectively as each individual can maximize utility for him/herself. The sellers of whatever it is being purchased only have to sell to one customer, which greatly lowers their incentive to create a consistently good product. Especially if that one customer comes with an exclusive contract, and you can create political pressure to keep the customer if jobs are at stake.

So whereas the money might very well end up in the pockets of contractors who hire workers and create jobs, these jobs don’t necessarily have to be productive. It was Keynes who gave the example of the government paying people to dig holes and fill them up. Certainly, this would be government spending that created jobs, but would it be good for the economy? If you take a labor theory of value, that the wealth of a society is the sum value of the goods and services the society produces, then that isn’t the case. It is also apparent from a historical perspective that command economies are far outperformed by free ones. People simply work harder and produce more if they are working for themselves and not for others. This generates more value which generates more wealth which generates more growth, prosperity, and jobs.

The second argument against government spending is that there really is no such thing as government spending. The government doesn’t have any money on its own; it only has money that it borrows through debt, raises in taxes, or creates via inflation. For the government to spend money in the economy, it needs to get money from the economy. No additional value is created; the cycle is only perpetuated. Frederic Bastiat, who developed the notion of opportunity cost, said it best in his essay That Which is Seen and That Which is Not Seen. It is easy to see the benefits of government spending when it arises (contracts going to construction workers, teachers, etc), but much harder to see the tradeoff of where that money is not being spent: money that would have circulated through the economy had it not have been paid to the government in taxes. The exact example Bastiat used, in fact, was of a natural disaster sweeping through a town and destroying buildings. Arguments will be made, he said, that the economy will be helped by the jobs necessitated by the cleanup and rebuilding. But these arguments ignore the money that would then not be spent on the economy had the disaster never come through in the first place. The fact is, a natural disaster destroys value, and that’s that.

Public spending is not really good for growth, and anything that can be taken care of by the private sector should be. There are obviously public goods that cannot be efficiently managed privately, like roads and bridges, but these make up a fraction of the actual government spending today on growth. In general, increased public spending does not create growth, it merely recirculates money through the economy much less efficiently.

What private individuals “hoarding” all their money and not spending it (as during a recession)? Doesn’t that necessitate government spending to stimulate the economy? Well, even if the money is sitting in someone’s bank account, it is still part of the US economy–it is leant out by banks to small businesses, it is invested in pension funds, bonds, etc…unless the money is under a mattress it is being useful. But should we decide to tax “non-useful” money, I certainly wouldn’t want to be the person who had to figure out which money was being useful and which wasn’t for each individual, would you? Mind you, a lot of people save money for retirement, or to pass on to children, and that’s not money I would call non-useful; I would consider it quite immoral to tax that money. Yet tax it we do, since our tax code considers all taxable income to be fairly fungible. The so-called “cash pile” exists because of a credit crisis–people with money are hesitant to invest it or lend it or spend it because they are unsure what the future of the economy will be. Certainly, the government stepping in and starting to tax the cash pile will not make investors more confident to start spending again; more likely, people will start stashing the money overseas.

What about things that people absolutely need? Doesn’t the government have an obligation to provide these things if the market can’t? Well, let’s look at what we mean by “need.” The fundamental concept of economics, that of scarcity, takes as a supposition that society doesn’t have the resources to meet our wants and needs. In other words, our wants and needs are unlimited. For example, it is hard to see a refrigerator as anything less than an absolute necessity today, yet it did not exist for most of human history. The brilliance of the free market is it allows individuals to maximize their own utility, to trade for the things that they want and need the most, trading off with the things they don’t need as much. When the government steps in to provide for solutions to “market failures,” it can have the adverse affect of creating market failure.

November 12, 2012Comments are DisabledRead More
What Adam Smith Really Said About Government

What Adam Smith Really Said About Government

I am a little late to the party, but I read Adam Gopnik’s piece on Obama’s “you didn’t build that” comment, and I am a little disappointed that he fails to understand Adam Smith’s message, or if he does, he has failed to represent his position correctly.  Gopnik should know this, having reviewed Nicholas Phillipson’s Adam Smith: An Enlightened Life (a book I happen to have read just two weeks ago), with its elucidation of the humanistic tradition of the Scottish enlightenment where Smith had his intellectual genesis.  Although Gopnik is correct on one front–that Smith’s theory of free markets was really not a theory of free markets at all, but a sweeping indictment of the British mercantilist class, whose unprecedented wealth and prosperity was founded upon the control of the levers of government commercial policy–he is wrong on another, that “Smith was for a government that intervened regularly and actively on behalf of consumers and against the natural tendency of “producers”—i.e., very wealthy people, whether aristocratic landowners or manufacturers or, perhaps, financial-leverage experts—to band together for their own benefit.”  Just because Smith opposed a government that was in the pocket of the monied classes, it does not follow that he advocated an activist government to oppose the monied classes in the interests of consumers.  His genius was to recognize that a government of this nature would very quickly become virtually identical to the one it was originally created to prevent, as we can very clearly see in our society today.

It didn’t take a genius in Smith’s time–nor does it take one now–to recognize the crass oligarchy of the mercantilists and the guild system’s merchant class opulence at the expense of the poor.  Their monopolies were enforced and guaranteed by government fiat–only approved vendors could trade in tobacco, for example, and these vendors came from the monied class who regulated their own industry’s rules.  This monopoly was what Smith sought to break.  But Smith’s prescription for the madness of the plutocrats was to increase the freedom of the marketplace and thus decentralize their power.  He did not advocate a greater role of government in the economy; in fact, the breakthrough for which he is most famous–first examined in the Theory of Moral Sentiments and then analyzed in Wealth of Nations–was the recognition that people organized voluntarily and privately for their own interests create more wealth and prosperity for society on the whole even though such a result was never part of their intention, whereas individuals who “affect to trade for the public good” often cause great harm to society even though such a result was never part of their intention.

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

The latter (highlighted) part of this invisible hand–called by Milton Friedman the inverse invisible hand–is often ignored by critics of liberalism when they pursue an active government intervention in the economy.  The solution for the unfair distribution of wealth caused by government-created monopolies and trade restrictions was not the re-assignment of this distribution to a different entity led by different interests.  Smith’s solution was the opposite: to lesson the undo influence of monied interests who would “affect to trade for the public good” and thus cause greater economic harm to society on the whole.

The America of today is one that closely resembles 18th century Britain. We, too, have our trade guilds, but we call it “lobbying.”  Almost every industry has a lobbying group that seeks to pass favorable legislation to benefit it, whether it be in the form of subsidy or tax breaks (corn and oil lobby) or in the form of restricting competition from similar industries (tobacco lobby).  Our biggest guilds are, for some reason, immune in the public sphere from criticism, such as the National Education Association, also known as the national teachers’ union, which exists solely to break any competition in the education industry, or our vaunted trade groups such as the American Medical Association or American Legal Association, who determine the legal status of their own practitioners and thus restrict innovation and competition and crush dissent.  Trade associations function as legal cartels–in the US mostly not violent ones, but cartels nonetheless.  Smith saw much the same problems in Britain, and prescribed a wide-ranging set of reforms to address these problems, including, among other things, the elimination of barriers to free trade, both inside and outside national borders.  Jobs and wages, he wrote, should be commensurate with experience and skill, and relate directly to the relationship established between the buyer and seller, not established by fiat, often enforced by thuggery and violence.  (Meanwhile, do you know what happens in the US if you try to open a hair salon without approval from your competition in the hair salon industry?)

Smith’s prescription for today’s America would not be to increase the influence of monied interests.  His prescription would be to decrease their influence by opening up the markets to competition.  This opening up necessitates the absence of government, not its expansion.  To the claim that the government is necessary to open the market–or that such a thing is even possible–Smith’s inverse invisible hand quite clearly shows us the folly of such magical thinking.  In the efforts the US government has made in the last century–ostensibly under the influence of Keynesianism–to make the market “more free” have only resulted in less freedom, and often at the expense of the very people the markets are supposed to help.  The late Interstate Commerce Commission is a good example of this notion–known as regulatory capture–but examples can be found almost everywhere regulatory bodies exist.  The government’s role in the markets provides a perfect opportunity for monied interest to control these regulatory bodies and ultimately use their power for their own advantage.  We have seen, under the proliferation of banking regulation, the number of banks decrease–not increase–and thus the options available to consumers in order to better protect their deposits shrink.  This was probably not the intention of the regulators attempting to improve competition, but it is quite apparently the result.

Gopnik is right that Smith envisioned a role for government included very many things that could be called public goods–roads, bridges, etc.  But this is not where the US government spends most of its money, and this is not what people mean when we say “regulation.”  Regulation for its own sake is not the solution–that sort of assumption leads to justifying every intervention in the so-called service of any constituency.  Price supports to benefit farmers.  Tax breaks to benefit oil companies.  And yes, entitlements to pay for healthcare and old age annuities at the expense of the public at large.  The very things that Gopnik criticizes–for example, the situation that causes “people with undue influence on the government to have a lower tax rate than people who don’t”–is a result of regulation.  We have a pretty giant regulation–the Internal Revenue Code–which was constructed originally to benefit the public at large but has since been hijacked by special interests who use it to their advantage.  Or we can look at the biggest bonus of all, the $1.6 trillion in taxpayers’ money that was spent to impoverish American citizens to the benefit of a few bankers on Wall Street, who have since used their magic security blanket to gamble more money in the markets.  They have achieved this bailout and these results as the result of a revolving door of regulators, treasury secretaries and finance CEOs that have worked with each other to reinforce their own wealth and power at the expense of the public at large.  This is the definition of plutocracy, and it is an outrage that the forces most in favor of bailing out the banks are the liberal elite who most bemoan the undue power and influence of bankers.

We need a government that will guarantee fair adjudication of contracts, protect private property, keep law and order, protect our borders, and, in rare instances, protect those common resources which we all use and thus have a common obligation to pay for.  If Smith truly was a believer in the good of all people–which he was–he would want us to depend on our common morality and decency to support each other in times of need (which we do) and share the fruits of our labor for our own benefit as well as that of others (which we do) and to trust government to protect us from harm (which we do).  But the goodness of people is not so much in question as much as the danger of giving good people the power to do things that they think are good for the public and in doing so, harm society on the whole.  Diagnosing this problem and prescribing a solution–that was the genius of Smith.

July 29, 2012Comments are DisabledRead More
The Problem with Free Water Bottles

The Problem with Free Water Bottles

I was at Budapest-Keleti this morning for one of my weekend trips out of town, and I had a couple minutes to kill before boarding so I pulled out my current book, Catch-22 (I know, I haven’t read it yet).  Reading about Yossarian and his zany flight squadron while waiting for a train, I had the occasion to look up from the book and idly glance around the station, and lo and behold, someone was setting up a FREE WATER BOTTLES table. I snapped a picture, which you can see here.

Now, I don’t know for sure if this was a government operation or not. I assume it was because one of the guys giving out bottles was wearing the reflective vest that civil employees wear here. The table and its environs had over 30 cases of water bottles. People going to and from their trains were snatching them up like hotcakes. After all, the temperature today was 34˚ C–real sweaty balls weather.

But this simple vignette represents everything that’s wrong with government spending, and it does it so perfectly I’m surprised there wasn’t a Fox News crew there to document it.

What’s wrong here? Well, first of all, these are clearly not free water bottles. Someone had to pay for them, and in this case, that someone would be the taxpayer. The people receiving the water bottles, however, aren’t paying for them–or, if they are taxpayers, they are paying far less than the cost of the water bottle for their contribution. So these people are getting water bottles at the expense of people who are not getting water bottles, which doesn’t seem very fair to me at all.

What about the service being provided? There’s no question that the consumers get a great deal. It’s a hot day, and there’s the city right there to relieve their discomfort, and possibly even save them from real dangers like dehydration and heat stroke. But what about all those people who aren’t passing through the train station today? What about everyone else in the city living through the same hot weather who pays a portion of their income to subsidize these water bottles? They are paying for someone else’s protection from these same dangers, which gives them less money to protect themselves by buying their own water. While this service may be good for some, it takes away those same benefits from others.

And speaking of buying their own water, why can’t these commuters buy their own water? After all, water is one of the cheapest commodities there is, and most of these people are either getting onto, or getting off of, a train whose ticket costs 30-100 times the price of a bottle. Are these people so poor and helpless that they can’t, if required, buy water for themselves? Is the government really needed to provide this “free” relief?

Now, I can hear some of you say, what if there is a market failure that prevents them from getting water they desperately need? Well, it just so happens that there are 5-8 vendors in the station who sell water bottles. They sell water bottles all day, every day, winter or summer, rain or shine. If the government continues to provide “free” water bottles right next to their stalls, can these businesses really compete? Of course not. They will go out of business. Plus, to add insult to injury, the vendors have the privilege of paying taxes being spent to undercut their own business. Handing out free bottles and driving vendors out of business is a sure way to cause market failure, not solve it.

I have no doubts of the sincerity of the intentions of the city planners or government officials (or perhaps private donors) who came up with this scheme to hand out free water. There is no question that some nameless individual wanted to help people, wanted to provide a good service for citizens, and maybe even help protect against dangerously hot weather. But even this simple act of goodwill can have profound economic consequences and real victims.

It’s not just Hungary. In the United States, there are countless examples of these so-called “free” programs that undercut the hard work of entrepreneurs and result in money being directed from people who don’t benefit to people who do. New York City has regularly scheduled helmet fittings where bicycle helmets are provided for “free” to people in the name of bike safety. Now, bike safety? Great! And if New York wants to spend taxpayer money to tell people to buy helmets, that might be considered a good use of public funds. But to actually spend taxpayer money to give helmets to some people at the expense of others, while simultaneously competing with local businesses at an impossible-to-beat price? Not cool.

To be fair, this problem is not just reserved for government spenders. Private capital mobilized for “good” can do quite the opposite. For example, the National Fitness Campaign built a free workout gym in the Marina in San Francisco, one of the wealthiest neighborhoods in the country. I don’t think that the NFC is publicly financed, but either way, I have no doubt that these people want to encourage fitness and weight loss in one of the fattest countries in the world. But providing fitness equipment free of charge in the same neighborhood as half a dozen gyms, to be used mostly by people who could more than afford to pay for the service, seems to do the exact opposite of what was intended. If enough people use “free” gyms instead of private ones, gym services will decline and overall gym access will go down.

The most tragic example of this phenomenon for both private and public spending is foreign aid. I don’t want to get into the particulars of foreign aid right now, since that’s a whole other thing, but suffice it to say that there are serious problems with giving foreign “aid” to poor countries, even that aid which circumvents corrupt governments. Foreign aid in the form of food, clothes, medicine, or anything else has a deleterious effect on foreign economies, where local entrepreneurs can’t compete with handouts. This study says that between 1981 and 2000, employment in the African textiles industry decreased by 50% due to the influx of donated clothing from well-intentioned Americans. Dambisa Moyo has an excellent book on the subject. There’s a reason why poverty in the third world has only gotten worse the more people try to “help.”

Despite the fact that the same phenomenon can occur from private or public spending, I would reiterate the problem with public spending in particular. Because while private philanthropists have to convince donors to voluntarily give money to provide a potentially destructive “free” service, a government can compel taxpayers to provide the same service, and only requires a simple majority, or in many cases, a very vocal minority, to do so. There is a larger post, perhaps essay, to be written about the downstream effects of the “water bottle problem,” as it represents a massive failure of well intended people to do good using other peoples’ money. Water bottles are only a small piece of the pie. Large-scale programs like Social Security can probably be tackled on the same principles.

Until then, I have something to say to the City of Budapest: STOP GIVING OUT FREE WATER.

July 1, 20125 commentsRead More
Too Little Central Control in the EU?

Too Little Central Control in the EU?

“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” – Alexis de Tocqueville, misattributed

I had the extreme displeasure of reading Paul Krugman’s latest excretion today. He begins by complimenting (nay, sucking up to) the Greek people and ends by making a specious claim about the relationship between a strong central government and the success of the dollar vs. the Euro. He’s clearly not even trying to make a cogent argument anymore. I am neither a Nobel laureate nor a syndicated New York Times columnist, but I will try to respond in kind, by frothing at the mouth and seeing what comes out.

First off, I am able to begrudgingly come to common ground with Mr. Krugman on some points: One, that the Euro is responsible for Greece’s woes. Mr. Krugman, like George Soros, is right that the Eurozone is a terrible idea in the way it’s currently constructed. As a friend of mine recently emailed me, “Where were all these people 15 years ago when the Maastricht Treaty was signed? How did ANYONE think a monetary union without a fiscal union could work?”  Two, Mr. Krugman is right that austerity has been devastating for Europe. He gets no points for making obvious statements. Where he gets me every time is his continued advocacy of democratic socialism and big government spending at a time when the consequences of decades of such rampant opportunism and irresponsibility are clearer than they have ever been.

When times are good, people routinely credit whatever proximate cause they can, and for Europe for the last three decades, the cause célèbre has been “democratic socialism.” It is that wonderful post-Stalin Marxist ideal that attempts to solve the historically failed experiment of socialism by putting a friendlier face on it: we’ll do it Marx-style, but make sure we vote for it first. Thus the people retain their political sovereignty and, fingers crossed, economic productivity as well. Although, of course, we know that the economic productivity part is a joke, since it is based on the notion that people are A) fiscally responsible, B) more fiscally responsible in larger groups and C) able to spend other people’s money better than they can spend their own. But we know that when times are good, there’s no problem.  Political parties coming to power promising to lower the retirement age, shorten the work week, fund hefty retirements and guarantee low cost loans are always going to win elections against those parties that tout the boring virtues of hard work, discipline and fiscal responsibility.

But then times get bad, and the bill comes due, and austerity hits. No one wants to blame themselves, of course, so they turn to the scapegoats. The most wealthy and productive are a favorite of the democratic socialists. Mr. Krugman gets in on it when he complains about “the arrogance of European officials, mostly from richer countries.” Of course, when Mr. Krugman proposes that European governments continue to spend money they don’t have on social programs and entitlements that don’t work, where does he suggest they get the money if not from richer countries like Germany, that have not only singlehandedly funded the entitlements and social programs Mr. Krugman supports and have prevented much worse austerity which he opposes, but have kept the entire Eurozone afloat?

Europe is not suffering because of a lack of strong central government that can coerce the German people to paying for Spanish mismangement. It’s suffering preciely because it has too much power centralized in the hands of too few, a large central monetary union that has done precisely what Mr. Krugman wants it to do: increase spending in poor countries at the expense and risk of rich countries. The problem is, bailouts don’t work in the long term, and now Europe is just staving off disaster one close call at a time. The markets know the danger of moral hazard and contagion, which is why bond yields in Spain shot up well before Spain was in crisis.  And that’s why no one is surprised when Spain’s banks fail, and then Spain has to borrow more money from the EU (read: Germany) to bail out the banks. And when Spain needs to pay off those debts, they will need to borrow more. It’s a pyramid scheme to the tune of hundreds of billions of dollars with the taxpayer money of productive Europeans, people who don’t deserve to have their lifestyles turned upside down by coercion into an economic and political union in which they have no voice. Why should an olive grower in Spain have to pay–dearly–when the Greeks vote for one party over another?

On Sunday, as you recall, there was an election in Greece, and perhaps no time in recent history has so much of the fate of the world economy hinged on one election in such a small country. If anything is needed to demonstrate the folly of this system, it is the idea that 50,000 votes swinging the other way in Greece could have created a global recession. Mr. Krugman wants a bigger political union–a stronger European central government–in order double down on this vulnerability. Why would anybody put power over the economy in the hands of so few? And why would Mr. Krugman, knowing full well the danger of economic collapse, advocate a system whereby economic power is further centralized making a greater collapse even more likely?

And yet Mr. Krugman wants more of that.

June 17, 2012Comments are DisabledRead More
Morning in Vienna

Morning in Vienna

Sunday mornings are silent in Vienna, punctuated only by the dull hum of a tram or the chirping of birds in the hundreds of parks in the city.  The wind coming out of the Danube valley rushes down the wide boulevards, amplifying their desolateness.  I am in Burgengarten, looking at the backside of the Hofburg palace with HIS • AEDIBUS • ADHAERET • CONCORS • POPULORUM • AMOR emblazoned in Latin across the frieze.  As far as European palaces go, Hofburg is pretty disappointing.  Tour groups wander in and out of the grounds, following their herders with disconnected interest.  One group removed itself even more from human contact by donning headphones which were all connected to the tour guide’s microphone.  This group can’t even interact with each other in person, let alone the drone at the front of the pack leading them through a sanitized history lesson with practiced monotony.  In Michaelerplatz, horse-drawn carriages shuttle tourists around the roundabout.  Students are dragged by invisible leashes through the grounds as their eyes remain fixated on their phones.

I got in yesterday evening, after deciding on a whim to visit this city I once visited ten years ago.  There hasn’t been much change, and my feelings about it remain the same.  It is sprawling, scrubbed down, impersonal, and boring.  Classical German romantic façades make carbon copies of each other on street after street, with the occasional rusted dome popping up above the fray.  When I got in, I took the metro right to Landßrase where I thought, mistakenly, there would be something to see or do.  Instead I was among residential complexes, so I decided to walk to the Danube, not anticipating my journey across less than 10% of the city would take two hours.

On the way there, I saw a park that would be a convenient shortcut to the water.  The door was labeled “Hundezone,” and I saw a couple dogs inside with their owners, but thought nothing of it.  I walked into the park, and almost immediately the dogs, who were calm and playful before, started barking angrily and going for me.  I made it halfway up the hill before I had one dog right on me, with another dog, that came up to my chest, sniffing at me aggressively.  The owner was yelling in German, and I couldn’t tell if he was yelling at the dogs or at me.  I didn’t feel very safe, and he wasn’t doing much to dispel my fears, as he just stood there and let his dogs threaten violence on me.  I’m glad I don’t understand German because I don’t want to know what he was saying.  Was he egging them on?  His family was picnicking 30 feet away, and they were watching the spectacle but didn’t seem to pay it much mind.  Meanwhile, I’m about to have my limbs torn off by at least five dogs, none of whom were nicer than your average French waiter.  I quickly turned tail and got out of the dog zone, which I thought might have led to a misunderstanding.  Maybe it was specifically for ill trained dogs?  But I couldn’t find anything out about it online later.  By the time I reached the Danube, the sun was just about to start going down and I realized, against all intuition, the Danube is an urban wasteland in Vienna.  There is an office park across the way, one high span bridge every two miles, and nothing but bike paths along the shore.  It took an hour to walk back to the nearest metro stop.

One thing I did notice on my walk through the back streets of Vienna was the abundance of graffiti.  I feel you can tell a lot about a society through its rogue artwork, and it is not surprising that a land where certain thoughts of an Aryan nature are not permitted by law, the Nazification of the urban landscape would be close at hand.  Vienna does not disappoint.  It is one of those cruel ironies of free speech that the less free the speech, the more in bursts to the surface, and in this case, it is clear how the fringe (at least I hope the fringe) of Austrian society finds its outlet, how the stormy, angry undercurrent shows through cracks in the stony, impersonal, buttoned-up façade of the city.

After checking into my hostel (itself far on the outskirts of the city with a gorgeous view of the valley), I took the bus back into town and checked out a couple of the popular metro stops.  I once met a girl in Moscow in 2010 who told me her philosophy on travel was to “go where the party was at,” so I hopped onto the subway and got off at where the most people got off, in this case Stefansplatz.  This was a charming area, with a cathedral, several open squares in close succession, with music, restaurants and fountains sharing one crowded space on the cobblestones.  I ended up in a bar talking with high schoolers from an American school in Vienna, and at one point shots of lemon vodka got passed around.

I hopped on the metro again and went to Schwedenplatz, where I was told there would be “an assortment of good and bad places.”  I don’t know what good places there were to be had.  It was worse that Wrigleyville in Chicago for its drunkenness and worse than Las Vegas for grittiness.  I was glad to hop back on the train and go to Thaliaßrase where I was told there would be a series of arcades under the train tracks with bars and clubs.  There were, with Viennese and foreigners mixing in an orgy of popular music, booze and lights.  The party capital of Austria is no different from the party capital of Anywhere…in the cities of the world, all humans party the same.

After getting back to my hostel, I met a couple from Mexico City doing a tour in Europe on their way to Budapest, and a couple from Arizona doing a tour in the other direction.  Hostels are one of those rare places where you are always destined to meet people with interesting stories, shared experiences, and there is always an element of fate.  Every day the crowd changes, and thus every day new possibilities about who you can meet anywhere in the world.  In one night’s stay at a hostel I made new “friends” in Canada, Mexico, and Arizona.  My new “friends” from Canada were interesting. They were a couple from Vancouver Island who lived on an organic dairy farm.  I asked them if they ate organic in Europe, and they said that ignorance was bliss.  The guy, Jeremy, said there were two kinds of non-organic contaminants: crop-specific, which are added by farmers deliberately to their crops (and can be chosen out by conscientious consumers) and environmental, which affect all crops in the form of air, soil and water contaminants, which he was more concerned about.  I found the distinction interesting because it’s basically a choice between free choice and neighborhood effects, always an interesting problem in economics.

Which brings me back to Burgengarten.  The “free” wifi is spotty at 1 KB/s max, clearly a tragedy of the commons.  Every family in the park has 2 kids, one boy and one girl.  No one raises their voice above a whisper.  Every dog is football sized and on a leash.  The grass is immaculate.  The park is square and the fountain in the pond makes perfect ripples which radiate outwards rhythmically.  It is the same feeling you get throughout this city.  The subways and trams and busses arrive the second they are supposed to and are cleaned by hand so they glisten, even in the underworld.  Viennese pedestrians wait for red lights at empty intersections.  Every cobblestone in this city is in perfect place with its perfect purpose, although that purpose remains, as so many things in this city, beneath the surface.  I’m fairly certain that no one here poops.

Yet even with the concerted effort for utopian sameness, there are signs of decay in the republic.  Scratched paint at the bus stops. Public garbage bags stretched open. Puddles left undrained in the road.  The air is stale, the food has been bland and the people have been mildly entertaining at best.  It has copied the cultural milieu of Germany with none of its work ethic, proud history and heritage, or national heroes.  There is an undercurrent of national arrogance, reminding me of that old joke about Austria:  “The Austrians have only accomplished two things: to convince the world that Hitler was German and Beethoven was Viennese.”  In short, I remain, as before, underwhelmed with what Vienna has to offer.

I will be glad to get back to Budapest tonight.

Why We Pursue Freedom

Why We Pursue Freedom

Recently I was having a spirited debate with a friend whom I suspect to be a libertarian sympathizer.  His big criticism of libertarianism–a very fair one–was that libertarians tend to value Freedom as an end in itself, not more tangible and perhaps more measurable goals such as social mobility, humanitarianism, or even wealth creation.  What good is Freedom if the fruits of that freedom for some are poverty, sickness, or despair?  In particular, the criticism here is utilitarian.  Like any ideology, libertarianism proposes a social and economic ideal and lets the policy makers work out the kinks.  Of course, then one is left with the same problems:  addressing poverty, homelessness, trade deficits, human trafficking and Justin Bieber.  Regardless of your ideological positioning, your imperative is to find utilitarian solutions to real world problems.  If wearing seatbelts lowers the risk of death in accidents, why not require the wearing of seatbelts?  If hamburgers increase the risk of heart attack, why not tax burgers?  Etc, etc.  Says the jaunty liberal, here we are trying to solve problems and you don’t care:  all you care about is the principle of Freedom, but not the problems themselves.  Says the social conservative, we agree in theory that Freedom is good, as long as gays and Muslims are just slightly less free than everyone else.

So to the question that was posed to me, which I try to answer here, was this: Why do libertarians promote Freedom as an end to itself?  I can’t speak for all libertarians, but I can speak for myself.  I pursue Freedom as an end goal in itself because:  A) Freedom is a philosophically pleasing concept, one which is, and should be, a satisfying end to itself, B) Societies organized around a political and economic system of Freedom happen to be those that are extremely beneficial for the growth and wealth of individuals, families and society, and C) Free(er) societies also score higher and better for the general welfare, particularly for those indicators which I value as a humanitarian:  diversity, equality, opportunity, tolerance and peace.

Now, I must digress and first establish that I do not think that free societies exist in reality, although certainly it can be said that some societies are freer than others.  Certainly even the freest economies, like Singapore and Hong Kong, exist under less than optimal political regimes, while the high social freedom of the Netherlands is combined with an almost masochistic suppression of economic freedom.  And certainly, the United States, as my main interest, has many free aspects, although on the whole our country has become less and less free economically.  Although much social progress has been made in the twentieth century, this progress has come at the expense of the Fed, the Income Tax, the New Deal, the Great Society and countless other bloated expansions of state power, from tariffs to occupational licensure, that have marred the promise of economic freedom that has been synonymous with America for two centuries.  In fact, one of the great fallacies of the American right is to continue to claim against mounting evidence that America is still the “land of opportunity.”  The fact remains that our stratifying social classes, hardening economic regulations and explosion of the rentier class have made this opportunity dwindle for most and swell for a select few.  Conservatives do themselves no favors by denying the obvious instead of working harder to right the ship, making government smaller and pursuing sensible economic deregulation instead of inexcusable social regulation.  That said, I look forward to a liberal party that is more interested in social deregulation than economic regulation.

Freedom as a Philosophically Pleasing Concept 

I am surprised by how often people tend to discount the central tenant of libertarianism:  the Freedom is important.  It isn’t important like belief in God or being a vegetarian is important.  Freedom is important precisely because it is, in human history, probably the most evasive desire for most people.  I have been reading Nell Irvin Painter’s History of White People, and aside from a compelling critique of the creation and hardening of American whiteness in the last 200 years, she goes into the history of race and slavery in general, establishing a long history of forced labor that reaches every expanse of the globe for most of the middle ages.  Americans today tend to think of slavery as being that particular institution that existed in the Americas for the planting of cotton and cane with slaves imported from Africa.  Painter shows us that not only was African slavery the tail end of an epoch, but a relatively minor part of a much larger epoch than anyone realizes, especially for Europe.  This slavery–white slavery–in Europe not only has a legacy, but an extremely powerful legacy in the Enlightenment when the fundamental philosophical disruption about freedom concerns the plight of not just enslaved foreigners in Europe but enslaved Europeans themselves.  The legacy of slavery in Europe extends well into the 18th century, such that Robinson Crusoe was not only slave trader and owner but was once a slave himself.  By the time of the settling of the new world, Painter estimates that before the boom in African slaves in the 18th century, one-half to two-thirds of the white immigrants to America came in chains.

Why is this important?  It tells us that slavery still had a resounding effect on America’s founding fathers, not in the way that you would expect (in that they mostly all owned black slaves) but in that it was a part of their recent cultural memory as well.  They may have denied humanity to blacks, but they were not immune to fear of their own servitude as well, as many of them, I’m sure, were descendants of white slaves.  Hypocrisies aside, this gives us a very interesting insight into the minds of the founding fathers who had not only utilitarian but personal and cultural reasons to see to the fact that they would never be slaves.  Today, Freedom is often presented from an original position, whereby we know that as citizens we are generally free to pursue a living, have a family, do and say what we want, and these are all freedoms guaranteed to us by our constitution.  But we forget that the constitution was itself a radical leap forward, and even though it gives us an original position of freedom from which we can write our historical narrative as Americans, we should not take it for granted, and realize that Freedom is extremely vulnerable, even in free societies, even today.

Like all things, people don’t realize how important Freedom is until it is taken away.  The discourse of Freedom is often presented as whether or not video games can be sold with obscenities, or whether gays can serve in the military, or even whether having a choice between a low paying job and no job is no choice at all.  Very little do we expand our historical frame and realize just how fundamentally secure our freedoms actually are, not only in comparison to the last generation, or the last century, but even our own so-called free contemporaries today.  In France, for instance, the rights doctrine not only permits, but encourages, the government to ban burqas in the name of freedom.  In Switzerland a similar ban has been placed on minarets.  In Germany, antisemitism is illegal, and in Austria, David Irving was actually put in jail for daring to promote a historical opinion that was deemed untrue by the authorities (as untrue as that opinion is, it does not justify jail time in a free society).  Of course, in America these laws would never work, but we have our own peculiarities, such as an abhorrent anti-drug regime that has imprisoned millions of people for recreational activities, probably the worst violation of freedom of our time.  And we can’t forget the 170 prisoners continuing to be held without a trial at Guantanamo.

Freedom is obviously a specious philosophical concept with many definitions.  Some will say that it is primarily a social concept, a basic form of organization where each individual is free to pursue his own relationships and activities.  Still others will insist that the economic cannot be ignored in pursuit of the social: by what means do we pursue our own interests if not economical?  For me, I will adopt the philosophical paradigm of J.S. Mill, interpreted through the lens of Oliver Wendell Holmes:  My right to swing my fist ends at the other guy’s nose.  Such is an ideal system for social and economic organization.  Since the trade is the basic unit of economic organization, the economic corollary, of course, is that my right to trade freely shall not interfere with your right to do so.  Trades undertaken by free people must be A) Bi-laterally voluntary and without coercion, B) Informed and not based on fraud.  A slave is not free because his labor is coerced and his work is not voluntary.  A snake oil salesman is not free because he lies about the effectiveness of his product.  In both cases, the buyer and the seller of a commodity must be informed and without coercion.  In this way, people do not trade unless each person feels they have something to benefit from the trade.  The great thing about free trade in this manner is that both people can benefit; i.e., it is not a zero-sum game.  Now, as to how we define informed (a sticking point with liberals) and coercion should not distract us from the general principle.  It is interesting to note that the areas where Freedom is most controversial is exactly where the definitions of coercion and fraud factor into the discussion.  In abortion, a fundamental question exists of whether the fetus constitutes an agent of choice free from coercion.  In healthcare, a fundamental question exists of whether adequate medical knowledge is possible for a layperson.  But in general, the principle is sound.  If we can agree on the terms coercion and fraud, the general paradigm of Freedom should solve itself.

The fundamental concept that Freedom is that wonderful system whereby people are able to pursue their own ends for their own purposes, without it being at the expense of others, is not only philosophically satisfying but unquestionably good.  I don’t see how any interlocutor–ignoring the specific questions above–can say that Freedom is morally repellent from a purely philosophical perspective.  I think Americans, whatever their persuasion, recognize this, which is why our cultural memory is shaped most often by those people who fought for more freedom–Martin Luther King, Abraham Lincoln–and those people who defended freedom–Franklin Roosevelt, Ronald Reagan–and those people abroad who fought their own battles for freedom–Mahatma Gandhi, Nelson Mandela.  Even our movie icons are freedom lovers, from John Wayne to Braveheart.  And of course, Freedom is a strong philosophical tradition in its own right.

Still, it is hard to believe today that despite this cultural and philosophical legacy there are many, from all sides of the political spectrum, who want to deprive citizens of their Freedom.  This is why to this end libertarians devote themselves:  To defend Freedom, not as a means to any economic or humanitarian end, but as an end itself.  Although, as I establish below, there are economic and humanitarian benefits to Freedom that more than justify its preeminent position as a philosophical standard bearer.

Freedom as a Means to Greater Wealth

If Freedom were achieved only for its philosophical ends, it would be enough.  But it just so happens that Freedom is a necessary prerequisite of those other elusive human desires: wealth and welfare.  We must distinguish between wealth and welfare.  Wealth is individual, relative and mobile.  Welfare is societal, regresses to the mean, and moves with the lot of society.  Now, it just so happens that Freedom is a boon to both.  In this section I will talk about wealth, and in the next, welfare.

Wealth is an individual concept.  One man’s wealth, speaking strictly economically, is defined by what he is able to purchase and trade, not how his wellbeing is defined in relation to others.  Wealth is also a relative concept.  Poor Americans are materially richer than most people in the world, and yet still find themselves at the bottom of a tremendous spectrum of wealth.  We have abject poverty contrasted with insane amounts of wealth in fictional sounding quantities.  Much has been made about the growth of the gap between rich and poor in Western countries in the last half century, but not nearly as much has been proclaimed about the growth of the lot of the poor, especially in those regions of the world only recently freed from the chains of communism and socialism, the eastern bloc European countries and of course India and China.  Putting that aside for now, we can see that the discourse is very quick to point to relative wealth instead of absolute wealth.

I just finished reading Barbara Ehrenreich’s Nickel and Dimed.  It is a wonderful little book, not so much for its economic content (it has none) but for the narrative it casts over that little scandal in American society we term the working poor.  Of course, the existing of the working underclass is no secret but Ehrenreich brings it to light in an honest and provocative way.  But its lack of economic content leaves the reader wondering–why are the poor people she writes about so thoroughly disfavored by the system, and what can be done about it?  The immediate answer from most liberals is a higher so-called “living” wage, which is academically lazy.  Yes, more money would be great (I would like more money too, thank you very much), but the economic question that the book begs, and she fails to answer is not why workers don’t make enough but why is everything so goddamn expensive?  An economist would be ashamed to propose a fix to the demand side without the supply side, and Ehrenreich talks at length about the obstacles faced by the working poor–housing and lodging costs, cost of food, medical costs, gas–without once questioning when and why the prices have jumped as they have.  Why a pill that can be made for 10 cents costs $10 a pop.  Why gas is almost $5/gallon in some places and rising.  Why the demand for housing from the urban poor has not been met with adequate supply.  And while this book has been met with an immense amount of critical review from proponents of increasing the minimum wage, no one I have found has approached the book as a guide to those truly horrendous treatments our society gives the poor through curtailing the Freedom of society, and that’s the real scandal at play here.

What do I mean?  Well, let’s look at a disadvantaged poor 20-something male in an inner city like Chicago.  From where have his disadvantages come?  First, he has been “educated” in a governmental school: an atrocity where pupils are churned out with no regard to individuality and dumped on society at larger with no skills are training.  He has grown up in public housing, where people of lower socioeconomic status are not only segregated from the public, but are segregated in groups that make it more likely for children to grow up around gangs, drugs and violence. He has a criminal record due to the possession of marijuana, because of puritanical drug laws that increase criminality rates with no discernible effect on drug use.  Occupational licensure has restricted his access to stable middle class employment.  He has been unable to acquire on-the-job training from a young age–the most important path out of poverty–because minimum wage and child employment laws have prevented him from getting a job at a relatively low wage and younger age to acquire skills he would need to get a higher wage later on in life.  Finally, to add insult to injury, he is enrolled in a government welfare scheme that controls where he can live, what size family he can have, what jobs he can take and how many substances he can ingest.

When he works, he has to pay a portion of his income toward a required annuity at sub-market rates that he may never live to receive (Social Security).  His cost of living is significantly increased by a host of regulations:  commodities like clothes and tools face tariffs coming in from China, raising their cost.  Anti-big box store legislation has made it more expensive to get necessities of life from places like Walmart (which isn’t even allowed in Chicago).  The cost of gas has gone up because our government restricts drilling and piping making us vulnerable to foreign markets.  The cost of medical care and drugs has skyrocketed thanks to regulations running the gamut from medical licensure (restricting entry into the profession) to FDA rules (preventing the importing of lower cost drugs or drugs that aren’t available on the market in the US) and regulation of the insurance markets.  And then, the rent situation: virtually anywhere he can live is steeped in housing regulations, from rent control policies which raise rents to building codes which require over-engineering, to hotel codes which raise the cost of bookings.

And this is all before taxes and inflation.

Now, whether or not one agrees with these regulations or believes them necessary (I will be happy to take up any one of these points for further inspection), it cannot be denied that these disadvantages are not inborn but a result of a system of governmental controls that prevent economic mobility and keep poor people poor.  The problem of poverty in wealthy countries has nothing to do with wealth distribution and everything to do with wealth suppression; i.e. active government policies which suppress the accumulation of wealth for those who need it most.  It just so happens that a philosophy of Freedom also applies to economic freedom and ridding society of these pesky regulations–there is no conflict and most importantly, we have historical evidence that the pursuance of these policies are not only infringements on Freedom but destructive to wealth in general.

Throughout history, societies with larger private sectors and greater economic freedom have contributed to greater wealth for the society on the whole.  Can there be any doubt that the bloated public sector of India until the liberalization of the economy in the 1980’s led to poverty, widespread depression and lower wellbeing?  Can there be doubt that the redistributionist policies of Mao led to widespread famine and poverty in China until the private sector was unleashed in the 70’s?  Finally, what is to be said for the paragon of socialism today, the relatively wealthy countries of northern Europe?  Even with a large public sector, certainly, the standard of living has dramatically increased in Europe in the last 50 years.  But I venture to say that such economic gains have been made with short term investments with no regard for long term consequences.  The current financial crisis will cripple Europe for a generation, precisely because far too much borrowing and expansion of the public sector at the expense of future generations was undertaken.  Of course, countries like Sweden are doing very well since they have liberalized in the last 20 years, whereas countries like Greece that have not are stagnant.

So although the US as well as Europe and many other free market societies continue to fail in alleviating poverty, the biggest scandal is that instead of trying to fix the problem by liberalizing, we turn to solutions that have not only been demonstrated ineffective but cause more poverty.

Freedom as a Means to Greater Welfare

Of all the desirable effects of Freedom on a society, perhaps none is as easily attainable–and yet still so widely out of reach–as general welfare.  In unfree societies, many people can become wealthy and thrive.  I attended a very elite university with many of the offspring of these wealthy individuals from unfree societies, individuals who, for the most part, attained their wealth and status by extorting their people’s labor or nationalizing their country’s natural resources.  Robert Mugabe is known for his lavishly expensive birthday celebrations.  The King of Swaziland has a reported $100M fortune.  Certainly tyrants and their cronies know how to enrich themselves at the expense of their people.  What you don’t have in these societies, on the other hand, are thriving economies of ordinary, non-endowed people who likewise are able to acquire wealth for themselves and families.  Societies where a middle class exists and betters itself.  Societies where the general welfare is on the whole greater through cooperation and non-coercion.  So one must distinguish between wealth and welfare, insofar as wealth is a yacht, and welfare is a rising tide that lifts all boats.

Now the phrase itself, “general welfare,” is perhaps misleading because it connotes wealth more than less intangible indicators like happiness, health, human development, safety and security, and peace.  General welfare is about eliminating the restrictions on a society’s opportunity to grow, flourish and succeed based on the merit of individuals–restrictions that have almost exclusively happened at the hands of state power.  Thus the third pillar of Freedom is to support the pursuance of Freedom in the name of welfare, or, as I like to approach the problem, humanitarianism.  The indicators of humanitarianism grow in free societies not out of control but out of voluntary cooperation.  People are happier in mutual partnerships with other people provided that a framework exists to foster free trade, free discourse and free religion.  It is the societies that depart from these fundamental values that find themselves at the short end of the Freedom spectrum.

It is beyond debate that the societies that embrace values consistent with freedom–free trade, free speech, freedom of conscience, and freedom of person (subjected to imprisonment only under the due process of law)–are demonstrably better societies, even if we are talking in just degrees.  There is no question that the quality of life in liberalized France is better than the quality of life in post-communist socialist Slovakia.  There is no question that people are healthier in Singapore than in neighboring Malaysia.  And most importantly, we have three amazing accidents of history in which countries once united factored along lines of economic organization and showed us just how important Freedom is to the welfare of a society:  the Two Koreas, the Two Chinas and the Two Germanys; all showing us that the society with freer trade had freer people, and freer people were not only more productive but happier, healthier and materially richer.  Now of course, as Milton Friedman so often said, free trade is not a sufficient condition for freedom, but it is a necessary condition.  Free trade is philosophically consistent with the basic purpose of Freedom, which is to allow the individual control over her own life and property.

What’s more, the humanitarian values of free societies are consistent with the core philosophies of Freedom:  mutual respect for another’s individuality.  Diversity.  Self-reliance and self-responsibility.  Helping others through voluntary altruism instead of forced wealth distribution (it isn’t charity if you’re doing it with other people’s money).  The very historical heroes of humanitarianism are those people who advocated freedom in the face of government oppression: Mahatma Gandhi, Martin Luther King, and Nelson Mandela, whereas many heroes of socialism insult the values that humanitarianism represents:  Che Guevara, Vladimir Lenin, and Fidel Castro.  This is without mentioning those socialists who actually came to power in a real way, and in doing so destroyed tens of millions of lives:  Joseph Stalin (30-60 million), Mao Zedong (40-70 million), and Pol Pot (a paltry 2 million), to name a few.  Socialism has such a bloody and painful history, it is a wonder that any serious disciple of philosophy or history advocates socialism at all with any qualification, “democratic,” “libertarian” or otherwise.

Socialists thrive in free societies where their voices are unburdened and they find willing listeners among a population that has lost its perspective on what freedom actually means.  When so much material wealth exists around us, one often hears phrases like “a country that is as wealthy as the United States should take care of its citizens with ‘free’ healthcare, ‘free’ tuition, and more.”  This turn of phrase does not take into account that the reason the United States is as wealthy as it is is because it largely did not “take care of its citizens,” i.e. it did not abuse the levers of state power to distribute wealth or take on the mantle of paternalism (while, I might add, the now-collapsing European socialisms did just that).  The United States is a great historical example of the benefits of Freedom.  Of course, it is not a perfect model.  The framework of a constitution written by slaveholders who claimed all men are created equal–as long as they were white and male and owned land–is of course fundamentally flawed, and this directly violates the liberty, at the hands of government, of everyone who doesn’t fit this narrow criteria.  And this goes way beyond access to resources.  This is about human liberty and the dehumanization of blacks, women and Indians from the national project.  Thus our constitution from its very onset was, to a degree, anti-freedom, even though it was arguably more pro-freedom than any framework set up before it.  But we can’t change the past, only look to the future, and we want to improve liberty, we need to look to the problems of today and fix them.  Certainly, today, there are major problems; if we had made it to the ideal of liberty (that libertarians seek), then we wouldn’t be constantly frustrated about how much the government does to destroy Freedom.  So I do not pretend to claim that we have reached the pinnacle of human freedom, or any time in the past was necessarily better for freedom than today.  Of course, in some ways it was and in other ways it wasn’t.  But even a casual observer of history has to recognize the path of progress, and how we’ve slowly gained freedom, for the most part, as a nation, even if we haven’t reached that ideal yet.

There is a final point to be made about peace.  Another elusive political and humanitarian goal, peace is so often on the standards of leftists who simultaneously promote policies that undercut Freedom in its basic sense, and rightists who promote peace with the imperialist sword.  The hallmark of peace is a society without war.  So a fairer question is, not “what can we do to achieve peace” but “what can we do to avoid war,” a question which receives too few answers from the pacifist left and the war-mongering right.  I would certainly side with the leftists in that going to war seems hardly the best way to avoid war.  But I would side with the rightists in that fostering cooperation and trade between nations is the best way to not only avoid war, but to make people in both countries personally invested in a state of peace.  Free trade, like all aspects of Freedom, is about lowering the barriers to competition, letting people mutually cooperate across boundaries of ethnicity, race and class, and more importantly leave nationalism at the door.  When people shop at Walmart, they are shopping for products that were produced by fishermen in Peru and loggers in China.  They are using shopping carts made of metals mined in Angola with wheels made of rubber harvested in Brazil.  The very experience that so many Americans live every day has been shaped by millions of nameless people, all cooperating despite the fact that their mutual religions, races, languages and philosophies may be at odds with each other.  A world at peace is a world where people grow from mutual cooperation, not destroy each other with competition, trade or otherwise (it is one of the main points in support of free trade–the intractability of trade wars).

There are many other points that could be made here:  how Freedom is a proxy for opportunity, how Freedom is favorable to education and learning, how Freedom creates communities that are dependent on each other out of choice and support instead of malice and desperation.  There are so many good points to be made, but for the sake of brevity (I jest) I have given a basic outline of Freedom as a means to general welfare.  But in short, a proper libertarian reading of history views humanitarian injustices as infringements on human freedom.  Our goal is to expand human freedom which requires recognizing the source of past problems (namely, the government being established on the basis of, and then for a long time–and still today–restricting human Freedom), and correcting those problems by pursuing good changes like the Nineteenth Amendment which move the cause of liberty forward, and opposing bad changes like the Eighteenth Amendment which move it backwards.

In Which I Concede Some Ground to the Utilitarians

Above I have tried to answer why Freedom is the goal that libertarians seek, for its undeniable philosophical ends, for its economic ends, and its humanitarian ends.  If he has read this entire essay, a utilitarian will immediately jump on the fact that I have not responded to his concerns that sometimes a government can promote Freedom and sometimes a government can promote wealth and sometimes even a government can promote humanitarianism.  I will concede this point to the utilitarians:  that nothing is perfect; that Freedom is not a perfectly attainable goal given the current political climate, that no true lover of Freedom would be interested in pursuing violent means to achieve the ends of Freedom listed above.  Thus, Freedom lovers must embrace the enemy, so to speak, and work within the bounds of a structure, highly entrenched society like the United States in order to arrive at the conditions conducive to maximum Freedom piecemeal.  It means that lovers of Freedom, however reluctantly, must support some legislation to see their work accomplished.

The Civil Rights Act of 1965 is an excellent example of Freedom coming to opposition with government power, without resulting in evil for society.  There is no question that segregation (itself a result of racist, anti-humanitarian and unfree government legislation) needed to end.  And there is no question that the only thing more powerful than the state of Mississippi in 1965 was the federal government.  We must applaud the political tact of Lyndon B. Johnson in his ability to maneuver a vote on the Civil Rights Act which at least created a reprieve in bad government regulation for an oppressed population.  But lovers of Freedom must also question those parts of the Civil Rights Act that might have done more harm than good in the long run.  Regulations that set the precedent of establishing how a private citizen may spend his money are dangerous to the economic welfare of society.  Regulations that forcibly integrate schools are nominally no different than regulations that forcibly segregate schools.  We benefit from those regulations that support our concept of equality and fairness, but we lose when those regulations create an environment rife for abuse and tyranny.  With schools, especially, we have an atrocious system of education that penalizes the poor, lowers the quality of schooling, and often ends up ironically being more segregated than meeting the public educator’s vision of diversity in education.  But libertarians would not gain credibility or political capital by outright opposing long-held tenants of American progress such as Public Schooling and the Civil Rights Act.  We must be pragmatic in our pursuit of Freedom, even if it means sometimes sacrificing principle in the name of progress, as many progressives and socialists have done in the United States in the past.  With schooling, for instance, support of a voucher program is much more likely to gain support than support of outright privatization.

There is also the question of the utilitarian harm of radical economic change.  For instance, no libertarian worth his salt supports the minimum wage law, but we must not pursue the abolition of the minimum wage before we have pursued other low hanging fruits with a better positive utility for all Americans instead of a negative utility for the poor.  There is no question that if the minimum wage were abolished tomorrow, before the economic benefits of eliminating other burdensome government regulations listed above, the poor would suffer disproportionately more from lower wages and no change in the cost of living.  This would not be progress.  But we also should not shy away from pushing for progress on all fronts:  the minimum wage law could be opposed on a federal level without harming its impact on a state level (where it is often higher).  Another example is healthcare regulation:  most libertarians oppose occupational licensure, but there are benefits to keeping licensure of physicians in place while we push for more structural changes to free up the healthcare market and liberalize hospitals, medical practices and insurance companies.

So the utilitarians are right in their general criticisms toward libertarians, in that we are mainly an ideology of principle.  Let us use our common ground to blur our differences, however.  Libertarians still have a duty and an obligation to be a voice of reason against the radical calls of the socialists on the left and the neo- and social conservatives on the right, with utilitarians often apologists for both, and consistent with Freedom, we should make our case in the marketplace of ideas and not force others to believe as we do against their will.  A devotion to Freedom should not, as a friend of mine has suggested, reach a level of religiosity whereby  we forget ourselves and real utilitarian concerns, but nonetheless libertarians should remain devoted to principle and should always do more to spread the gospel of Freedom to anyone who would hear it.


Unfortunately in this essay I have not done much to define Freedom or ease the concerns of non-libertarians that our definition of Freedom might ignore the very real perils of freedom for people living in free societies: for example, a low wage worker who must choose between working for a corporation that abuses him or starving is not really free by any reasonable definition.  There is an ethical approach to this problem, and to the question of Freedom, that I would like to cover in another essay.  The rough outline of the argument is defining Freedom as a societal problem, not an individual problem, and those solutions which might improve the freedom of the individual often do the opposite to society, and in many cases, the cure is worse than the disease for all parties involved, and still yet in many cases the disease itself is a result of the worker not even living in a truly free society.  But as that essay is an ethical one and this one is a political one, I will leave those points elsewhere.

Hopefully what I have done in this essay is touched on the main concerns of libertarianism as it comes to pursuing Freedom, and make it clear why it is that libertarians pursue Freedom for its own ends, as a means to greater wealth and a greater welfare.  With the goals of Freedom in mind, libertarianism is not only a means to an end, but an ideology committed to those human values which have plagued us from the dawn of civilization.  It may be difficult to convince others, but that does not mean we should shy away from the fight.

June 10, 2012Comments are DisabledRead More
The Economics of Pride

The Economics of Pride

I had an interesting conversation today.  I was waiting for a friend to meet me in Wrigleyville, and not wanting to pay for a seat in a restaurant I sat down outside on a public ledge next to the sidewalk and started to answer some work emails.  I struck up a conversation with a man who was also taking a free respite from standing and asked him how he was doing, where he was from, etc etc.  I assumed–correctly, as it turned out–that he was one of the many beggars who hang around Wrigleyville at night asking for money.  He did ask me if I could “help him out” about 1/3 of the way into our conversation, but other than this brief interlude we had a pleasant interchange, mostly consisting of small talk about origins and the weather.

I did, however–and this was to confirm my suspicions about his circumstance, but also out of curiosity–ask him what he did for a living, and he told me that he drives a forklift and works in warehousing.  “But I got laid off this year,” he said, and proceeded to tell me about his layoff and how he has been out of work for a year.  This started a conversation about the economy, how it’s bad for a lot of people, and I’m sure he’ll be able to find work soon.  Then he said something interesting, but first background:

I had recently had a conversation with a friend about minimum wage, one of my favorite thought experiments in humanitarian socialism and economic progress.  I believe, like many economists and social theorists, that the benefits of minimum wage are not justified by the economic cost; that is to say, minimum wage creates a barrier to employment by people whose skill sets are unemployable at that high a wage.  Yes–for some (un)skill sets and abilities, minimum wage is too high, and employers will rather outsource those jobs to foreign countries at those skills’ worth than pay too much for them here at home.  The result is people who can’t get jobs because no one will pay them as high as minimum wage to work for them.  I think that in a free market of labor with freedom of contract and competition, all jobs have a price.  Employers may like to pay workers less and less, but if they do that they will lose those workers to competitors at some price point where their added value to the company outweighs their compensation.  It is the same reason employers pay people more and more for better and harder work–because they acknowledge and require better skills at higher levels.  Certainly most people with good paying jobs are not having their wages reduced to the minimum wage level arbitrarily, so why would employers of people currently at minimum wage reduce wages lower than the worth of those jobs without a legal barrier?  Anyway, the economic argument against minimum wage is sound and is worth reading, but it is besides the point.

The obvious counter argument to this economic reasoning, however, is the belief that a minimum wage is necessary for sustenance and it is inhuman to underpay people for jobs.  This belief is supported by a belief in social welfare and the idea that with a job, one should have a base level of security.  Both arguments are good, but I obviously lean to the side of helping the economy as an engine for individual growth.  It doesn’t matter, because no politician could or would get rid of minimum wage because it’s a fairly established policy and would be deeply unpopular to overturn.

This discussion I had with a friend about minimum wage ended up coming to a proposed thought experiment where I had no money and was put on the street with no friends or family to support me.  The proposed “zero start” idea was created to challenge me to think about what I would do in this situation, a situation that I (or most people) have never been in.  My answer, at the time, was I would walk into every McDonald’s I could find once a day asking for a job.  Since Maslow’s hierarchy requires that I have an income, McDonald’s–a notoriously low-paying and low-satisfaction employer–would be a good place to start.  I would definitely beg, but I would beg for a fishing pole, not a fish.

Back to my conversation with John, the man I met on the street, whose employment status was known but whose homelessness status was not (I never asked).  He told me, unprompted, that “I could go get a job at McDonald’s but who wants to work at McDonald’s?”  I found that interesting.  Here I am, two weeks ago thinking about the first thing I would do as a desperate, homeless and jobless individual, thinking that in my desperation I would beg for a job at McDonald’s until I got one, and here John is telling me that, despite his joblessness he would not get a job at McDonald’s.  Who wants to, after all?

My first thought was, how desperate is John?  I would assume that his level of desperation is not yet at the point where he is seeking every available job possible.  After all, if you are truly desperate, then you have to take what you can get, right?  Doesn’t this make basic, logical sense–survival is the most important thing?

But if John is not desperate, and can easily get a job somewhere if he wanted, why is he begging on the street?  What is his game?  Without a job, is he really making enough money begging to support himself?  Does he want to be a beggar, and is this a better option in his mind than working at McDonald’s?

Clearly John is someone well spoken, with a skill set and a very personable demeanor, who doesn’t want a particular job, so instead of working somewhere he doesn’t want to work (which is certainly his choice), he is on the street begging for money.  This made me think of several things.

One, is Pride an economic factor?  Is there some model that accounts for peoples’ unwillingness to take jobs that they can take, but are too proud to take?  There must be, because I know friends I graduated with who could take a job at any retail store or restaurant, but refuse to do so because their college degrees render such jobs beneath them, in their opinion.  There is also the argument that “If I take a job like that, someone else will be out of a job who really needs it,” which is sort of hypocritical and assumes that people desperately seek any job offered to them, which is exactly what they refuse to do (pride, pride, pride).  Also, jobs are not zero-sum: the more people in jobs, the better for the economy, and the more jobs that are created.  If anything, they should be saying “With my education and skills, I will do exceptional work at a job like that, and make my employer enough money that they can hire someone else.”

Two, is John somehow violating a fundamental principle by choosing not to work?  It is his choice not to work, of course, just like it is my friends’ choice not to take a work at the Gap.  He clearly is taking care of himself and is still eating properly, shaving and brushing his teeth (this I all observed).  So are my friends.  He probably has some savings to make his situation not desperate–so do my friends.  What makes him different?  The fact that he is begging on the street.

So this is the conclusion I came to, and please tell me if I’m wrong.  He’s not begging on the street because he needs to be, he’s begging because he wants to be.  I have a problem with this.  I have always had a problem with begging on the street, mostly because of the uncertainty of the beggar’s circumstances, and the belief that donating to homeless shelters and jobless centers is a lot more effective of an investment in homelessness and joblessness.  John has taken the lowest job on the totem pole–something that isn’t really even a job–and turned it into a job with two tiers: those who choose to work at that job, and those who have no choice.  What about the people who can’t get a job anywhere, and have to beg? What about truly destitute people with no options?  What is left for them?

It seems that in the economy, even beggars are competing with each other.  And beggars like John, because of pride, are preventing people from taking a job like that who actually need it.  The cycle continues, even down to the lowest rung on the ladder.

September 1, 20102 commentsRead More
Mongolian Economics

Mongolian Economics

So being in Mongolia has been a bit of an affirmation of Friedman economics for me, not that I had such a problem with them before but Mongolia takes the models to such an extreme that it provides a willing test subject and performs very well.

We pulled into Ulaanbaatar (UB) by train at about 6 in the morning and we got off with a bunch of Mongolians from the north (we were the only car coming from Russia, read: Westerners), who all got off with various barrels and boxes and other goods they were presumably bringing to market. UB is a giant, sprawling city that has literally grown out of nowhere since independence in 1990. The Soviets built some housing and some government buildings, but post-1990 the city has been a conglomeration of impromptu homes from immigrants from the countryside. Our guide, Ganz, met us at the train station and we right away got something to eat and then started our 5-hour drive to the south desert to spend the night in a yurt with a nomad family. Ganz explains to us that the city has doubled in population in the last 10 years, and in the next 10 will double again. More interestingly, he says that 10 years ago there was no word in Mongolia for “traffic jam”–in other words, the growth of the conglomeration has outpaced the construction of infrastructure. We leave the city and less than 10 minutes outside of it there is an open steppe…literally miles and miles of empty land with an occasional yurt and herds of sheep, goat, cows, horses, and even camels, every once in a while. The massiveness of the land compared to habitation is hard to describe. In a 5 hour drive from the biggest city in Mongolia, we passed 2 villages on the road (there’s only one paved road from the city south), and saw maybe 5 people apart from that. In a country of 3 million people, 1.5 million live in UB and the rest in a countryside stretching 600,000 square miles—thats 2 people per square mile. So you can imagine how empty most of the land is.

When we’re in the car during the 5 hour trip, I start asking Ganz about the land, how people buy land, what the role of the government/taxation is, etc. Of course I’m thinking summer home/real estate. He told me that no one owns any of the land, except in UB where you have to have permits to build. I asked him if I could build a fence anywhere I wanted on the land, and call it my own, and he said theoretically I could, but no one does that. Why not? Well, 30% of Mongolians still are nomadic herders, and move 4 times year with the seasons to herd their flocks and provide meat, dairy, skins, etc for their needs and sell to others. The economy of Mongolia in 1920 was 95% herding and 5% other (manufacturing, etc), but the Soviets, to their credit, started a centralized system of education, governance, and industrialization which led to 30% of herders today, and within 10 years probably 15% of Mongolians will be herders. To encourage the “Traditional” Mongolian lifestyle, the government subsidizes herding, essentially, by not requiring the nomads to pay taxes. As a result, a fair number of herders still exist, but they still, if they can, go to UB or another city and pitch their yurts on the outskirts looking for jobs. You can see in UB, the further outside the center you go, the higher the ratio of temporary (yurt) housing to permanent housing, as it is apparent that the city is a very new, very fast growing, conglomeration as people move in from the countryside to find jobs.

So I had a couple questions for Ganz, some of which he answered and some of which he didn’t. First, I wanted to know how much land cost in Mongolia, and his answer suggested that it didn’t cost anything, but you have to pay taxes if you have permanent claim to any land. I figured that in a place where land was a nearly unlimited resource, it essentially had no value, and no one felt that they owned any land except in places, like UB, where land was in competition. In other words, within the same country you can see the extremes of land ownership and value (the city) contrasted with the extremes of non-land ownership and value (the countryside), based on the same basic economic principle. Foreigners can go to Mongolia and pay the government $50/year per hectare to “own” land–although the government only allows “leases” for foreigners. The government thus extracts revenue on the valueless land (is this right?) through taxation. So that was interesting.

We spent the afternoon and night with the nomad family, who spoke no English but Ganz translated. One of them asked at what age in the US do we learn how to ride horses, which I found amusing–horses, to Mongolians, are like cars in the US, it’s a right of passage to be a good rider. The kids in the countryside start riding at age 5. The business of this nomad family was herding, like all other nomads, although, as Ganz explained, they are more successful than most. They have an above-average number of animals (2 or 3 hundred) and sell surplus meat, dairy and wool, making money to buy provisions, more animals, and a cool satelite TV hookup in their yurt which gets 18 channels. They have 3 children, 2 of whom talked to us about wanting to move to the city when they finish school and get a job in UB…their parents support them. The only reasons the parents haven’t done it is because they have no skill set outside of herding that they could sell in a labor market, like many of the unskilled laborers who go to UB every year to find jobs. This family also supplements their income from hosting tourists like us. So for herders, they have an above-average income. What I found interesting was that their “lifestyle”–which you could really call a job–existed, as Ganz said, for them and for their own. They did not have ambitions toward stable production, or a desire to make five times as much money staying in one place, settling down and doing a western ranching model. I asked Ganz why, and didn’t get a straightforward answer, but my guess is that with the government subsidizing nomadic herding, there’s no reason for people to do anything to cover expenses aside from their basic needs. The greater needs of the economy aren’t being met.

Which brings me to my ultimate surprise: In this country of 5 million animals for 3 million people, 70% of meat is imported! That tells you that Mongolia isn’t producing at the capacity it should, and it has ultimately to do with the unwillingness of people with a herding skillset to setlle down in a production-oriented industry like ranching. Why is this? Ganz told me that some farmers, in particular, have started to adopt western crop models and have been increasing their yields and their wealth–clearly the stationary farming model is more productive. Why haven’t herders realized the stationary herding (ranching) model? Certainly, if I told my ranching friend in Montana that he could move his ranch to Mongolia for one tenth of the price, hire ten times as many herders and quadruple his profits, he would jump at that opportunity. Why hasn’t a clever nomad decided to undertake such a ranching model? And spare me the romance of the noble nomad, loving the culture of the herd and embracing glorious Mongolian culture. Clearly most herders or their children, when given a choice, choose to move to UB and get a job.

I haven’t figured out the answer yet, but Ganz speculated that eventually there will be ranches and the herding model will stabilize. It helped, he said, that two years ago there was a giant animal blight and 20% of animals in Mongolia died–he said it was a tragedy, but ultimately proved that nomadic herding is unsustainable and helped to move people to establish sustainable careers. Ganz is a bit right wing, and has his own tourism business with 8 employees and makes, by his estimation, a middle class wage. His parents were nomads, but he went to the city after school and learned English, eventually becoming a tour guide. He’s quite the Reaganite as well, which is humorous. His Uncle makes and sells ornate jewelry and is pretty good at it.

When we came back to UB, we discovered the raw growth of the city–how traffic laws aren’t enforced because no one understands them, how the biggest building in UB is still empty because they built it crooked and couldn’t install an elevator, how everything is either Soviet-era ugly or under construction, but there’s a beauty to the city in its spontaneity.

Ganz estimates that by 2020, only 5% of Mongolians will be nomadic herders, a complete reversal from 100 years ago. This, I believe, is the ultimate affirmation of the idea that efficiency in the economy will be reached despite the attempt to subsidize a different economy, because people ultimately adapt and move toward different industries. I guess the biggest mystery to me, right now, is why these “unskilled” nomads don’t adapt herding to a sedentary model, where they can still herd but can make five times as much money doing so. Perhaps, when the romance of moving to the big city subsides, many former herders will take their education and go back to the countryside, creating a new “traditional” ranching economy that is more efficient and will ultimately bring more wealth to themselves and the economy.

These are not coherent thoughts but just my rants and musings. Anyway, what do you think?

July 1, 20101 commentRead More