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Wednesday
May 7, 2008

Soros' Follies Again by Tibor R. Machan

In the late 60s I was invited to listen to a fellow Hungarian refugee in Los Angeles discuss communism. I nearly walked out when he began with the refrain about how communism is such a wonderful ideal but, sadly, unattainable in practice. What wonderful ideal? The prospect of a worldwide intelligent ant colony, bound together completely with no individual initiative in play anywhere, all automatically serving humanity--is that some wonderful ideal? It is hell, so (Read more...)
Discuss this Article (19 messages)

Post 0

Wednesday, May 7 - 8:33am

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Soros reminds me of our beloved NYC Mayor Michael Bloomberg, a very rich man who advocates strongly for government controls. They strike me as "schmoozers extraordinaires" the kind of men who deal not in production but in "pull." If I were writing the screenplay for Atlas Shrugged I'd make it quite clear that there is no difference in essence between Bloomberg, Soros and Wesley Mooch and his ilk.

Post 1

Wednesday, May 7 - 7:48pm

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There's an interesting take on the issue of market oversight that Soros appears to want in Spencer McCallum's "The Art of Community."

http://en.wikipedia.org/wiki/Spencer_MacCallum

McCallum makes the case for a "proprietary community," as a general model for the construction of society, in which the kind of decisions made by supposedly "disinterested" bureaucrats about the rules in a market are instead made by a single individual who has a vested interest in the value of the property as a whole, being the proprietor.

He points out various rules of thumb that have evolved in the urban Mall business, such as the concept of never having just one of any particular type of retailer, as then that retailer can be a parasite on the success of the other stores. Imagine if you were the only ice cream shop in a big urban mall, for example. The temptation would be raise prices, as people would come to the mall for a bundle of different reasons and then write off a buck extra for an ice cream sunday. So, you have a food court instead, where vendors compete directly for the same sales. And it's the proprietor's job to find those rules and implement them in lease agreements and contracts with the vendor tenants, once again to maximize the value of the Mall as a whole.

A sole proprietor cannot be simply bribed by one customer to give them a market advantage - not if he is rational, anyway - because the advantage would come at the cost of the total, whereas a group, such as a Board of Directors of a corporation, can easilly devolve to a contest of competing bribes, in which the benefit of taking a bribe outweighs the personal individual gain of the Mall's performance.

McCallum looks at examples like the political contest involved in trying to decide which side of a downtown street to widen, which rarely reflects any real objective analysis of benefit/loss, but rather a vector sum of special interests, with a high transaction cost reflected in donations to political campaigns, etc. A unitary interest in the total value of the outcome of such a decision is simply not to be found in the political model for community, which tends toward mere contests of wills, but is natural for a sole proprietor.

It almost sounds like an argument for a king or dictator, who profits directly from the prosperity of a state or kingdom - and certainly the same forces are at play. The downside of such situations of course is that a single individual can also be irrational and fallible, with little to check him. A good king can accomplish miracles. A bad king can destroy the country.

For this reason, I personally have a lingering perference for organizations like the Mondragon Cooperative, which has demonstrated through their 50 years of virtually non-stop growth of about 20% per year, that an industrial democracy in which the workers are also the owners, can sustain a fairly close approximation to the potential business objectivity of a unitary proprietor, while at the same time making sure that nobody is dropped off the boat for mere range of the moment expediency. (Mondragon provides virtually cradle to grave security for its owner employees, including its own school system and hospitals.)

Mondragon has proven that it is possible for objective, profit-driven market rules to work. However, I think that a lot of the success of Mondragon has been the result of expectation. The employees expect that Mondragon will be there for their retirement and for their kids, and so they aren't going to be easilly sucked into rash decisions. At the same time, they have a justified confidence that Mondragon is strong and has capable leadership that can take on new ventures, which they do.

Thus, the distributed proprietorship and its potential dissolution into a "20th Century Motors" as in Atlas Shrugged, is instead sustained on a rational track by the decades of experience and the unique culture that has evolved. A lot of such cooperative enterprises have crashed and burned because they turned into a range of the moment contest for control over declining assets.

The issue is not really whether markets should be regulated, but rather one of what kind of regulatory sytem best reflects the objective interests of all the parties. An unregulated market carries with it substantial transaction costs, especially related to risk and unpredictability.

Post 2

Wednesday, May 7 - 8:15pm

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By what right, Phil?

"The issue is not really whether markets should be regulated, but rather one of what kind of regulatory sy[s]tem best reflects the objective interests of all the parties. An unregulated market carries with it substantial transaction costs, especially related to risk and unpredictability."

Please define regulated. Of what and by whom? If I am the only person selling sprockets, and only Summer and Teresa are buying, what right do you have to regulate our little market?

I think your praise of Mondragon sounds outlandish. Twenty percent growth yearly for fifty years? What exactly is 1.2^50? I assume their beginning capitalization was more than $1.00? Either Mondragon is so big that no one has ever heard of it, or you in your delusion could use some benevolent dictating. Can you email me you bank account and routing numbers, PINs, SS and DOB?

Post 3

Wednesday, May 7 - 8:44pm

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This is not an issue of rights. You may be jumping to conclusions. I am not saying that I have a "right" to regulate your private, voluntary, peaceful, interactions with anyone. However, it appears quite clear that markets without rules can be risky to all concerned and therefore people generally prefer using markets that have some kind of rules and oversight aimed at preventing fraud, for example, at minimum. You don't have to participate if you don't want to, at least as far as I'm concerned, but I would assume that you would want to avoid risk and maximize ROI in general.

Would you rather want out into a parking lot and dicker with whomever was there for your car or food or home, without any verification that the product was actually real, or belonged to the sellers, or hadn't been sold to twenty other people that afternoon? Probably not. A well-regulated market incorporates rules and procedures to free you from having to do all the endless legwork to try to verify those things, so that you can generally assume with a modicum of checking that things are in the order they appear, and make your decisions based on the product itself.

Google on Mondragon Cooperative. You will be pleasantly surprised. I was. (Maybe not 20%, ok, but enough to make them worth about $30 billion, starting with about $5k, I think.)

Post 4

Wednesday, May 7 - 9:33pm

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What, beside fraud, which is a crime, would you regulate? I have shopped quite happily at farmer's markets and parking-lot bazaars. The internet seems to be the best unregulated counter-example to your unspecific claims.

Post 5

Thursday, May 8 - 5:42am

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No loudspeakers at the Farmers' Market, please. That's the rule.
Everyone gets the same sized booth and everyone gets one booth.

Set-up is no earlier than 6:00 AM and tear down by 8:30 PM (Summer) or 5:30 PM (Winter).

No merchant is allowed to advertise outside of their space (no walking the aisles with handbills),
but you can hire the Market Girls to hand your stuff out at the entrances.

If you do not like these rules, get your own space and start your own market.

I agree with Phil, that if you look at malls, and similar spaces, you will see that monopolies are rare. In fact, competitors want each other in the mall because the presence of each draws customers that the other hopes to win via product differentiation.

That is a matter of attitude. Not all so-called "businesses" are brave enough to compete on the open market. Many crave monopoly status.

For instance, you buy a hectare of land and rent it out in 5m x 5 m plots and let anyone do anything they want. You are making money, lots of if, and you do not control anyone, a real utopia... for how long... and for how long will you have profits?

OTOH, my cousin, Benito, has a hectare and plots are for rent, but the first plot is needed for his long list of rules and the barracks of armed guards that enforce them. He can't get any renters and being a socialist tough guy, he can't figure out why.

PHIL & MIKE have a hectare. They share a common vision of a village green, a real LOTR squire's paradise with little shops, and a stream no one is allowed to pollute. When the Little Scissors Sharpeners closed, they found another one to come in so that Grindstone the Troll would not have the place to himself. Phil & Mike exercise ownership.

George Soros figures that his immense wealth lets him own more.

(Edited by Michael E. Marotta on 5/08, 6:13am)

Post 6

Thursday, May 8 - 6:01am

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"In human affairs, as distinguished from natural science, I argue that our understanding is imperfect. And our imperfect understanding introduces an element of uncertainty that's not there in natural phenomena. So therefore you can't predict human affairs in the same way as you can natural phenomena. And we have to come to terms with the implication of our own misunderstandings, that it's very hard to make decisions when you know you may be wrong. You have to learn to recognize that we in fact may be wrong. And, even worse than that, it's almost inevitable that all of our constructs will have some kind of a flaw in them. So when it comes to currencies, no currency system is perfect." -- George Soros, New York Review of Books, May 15, 2008. http://www.nybooks.com/articles/21352

I recommend that anyone interested should actually read for themselves what George Soros said. He failed to mention Karl Popper. As does Hernando Cortez, he stresses the importance of rule of law. Soros points out that the Russian government is not limited by rule of law, so it is a bad place to invest.

George Soros is no fan of laissez faire. However, considering who he is, you would be doing yourself a disservice not to understand him on his own terms. President Barack Obama will be taking his advice... if not doing his bidding...

(Edited by Michael E. Marotta on 5/08, 6:17am)

Post 7

Thursday, May 8 - 11:42am

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Definition by Non-Essentials

The self-imposed rules of the farmers' market that MEM refers to are not the same as regulations imposed by some regulatory agency by force by the government. I am surprised to see such a blatant package deal on this site.

Post 8

Thursday, May 8 - 8:26pm

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Ted: The self-imposed rules of the farmers' market that MEM refers to are not the same as regulations imposed by some regulatory agency by force by the government. I am surprised to see such a blatant package deal on this site.

??? If you reread Tibor's piece, you will see that he appears to jump back and forth between "regulation" in general, such as by Swap Meet owners, and regulation by government bureacrats.

Tibor: "....Third, of course, "markets" don�t do anything--they are but spheres of human activity, in this case mostly commercial, business or economic, and as such they are homes to innumerable forms of human conduct. No one can possibly control them except to cause them to experience distortions far worse than free men and women ever produce." and then... "Finally, how will this "right kind of balance between allowing the markets to do their work" and government regulation come about? "

Soros' own quote by Tibor does not actually differentiate whether Soros intended to mean state regulation, or some other kind of oversight, such as the kind that EBay exercises.

I had a feeling that whatever I said on this topic would be misinterpreted. It is exactly the farmers' market sort of rules that I'm referring to, along with the kind of agreement that one almost invariably sees in order to use an internet facility like FaceBook, or blogger, or any number of millions of other sites. Regulated markets provide facilities like roads or paths, or contracts specifying how disputes are to be resolved, like the arbitration agreement you probably signed with your dentist. It wasn't created by some state bureaucrat. In fact, it was designed to prevent either you or your dentist getting mired in the state legal system by providing a volutary option to have any dispute handled by private experts. Successful markets typically require participants to adhere to rules that are specifically designed to facilitate trade.

And, BTW, it seems that 20% may actually be a little low for the 50 year growth rate of Mondragon...

Let's see now, off the top of my head. Year 1:1, 2:1.2, 3:1.34, 4:~1.6, 5:~2 ... So, 120% is roughly equivalent to doubling every 4 years. In 50 years, that's ~12 doublings, right? 8 doublings is 256x, ok? So 12 doublings is about 4,000x. 4000x $5k is only $20M. However, the Mondragon Cooperative is approximately at $30 billion, or over 1,000 times what 120% per year would get you. Sorry for my off-the-cuff math. It would take about 10 more doublings, or another 40 years to get there at a measly 120%. Aren't you glad that you asked?

(Ted wrote: "I think your praise of Mondragon sounds outlandish. Twenty percent growth yearly for fifty years? What exactly is 1.2^50? I assume their beginning capitalization was more than $1.00? Either Mondragon is so big that no one has ever heard of it, or you in your delusion could use some benevolent dictating. Can you email me you bank account and routing numbers, PINs, SS and DOB?")

Ted: Google on Mondragon Cooperative... If you have trouble remembering the name, drag your mouse over it and use CTRL/C to copy and then paste it into the Google search box with CTRL/V... I would also suggest that you get a calculator. ;->

Post 9

Thursday, May 8 - 9:34pm

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Ted, you need to read the Soros interview cited. I agree with Phil that there is ambiguity in the words.
I am also fully cognizant of what government regulation is.

Also, my citation to rule of law is for Hernando DeSoto (The Mystery of Capitalism), not Hernando Cortez.

I am not sure that there is any "Objectivist" theory of management. Historically, there was rule by the friends and relatives of the king, followed by rule by local notables, followed by bureaucracy. Sometimes along the way, there appeared charismatic leadership.

We tend to think poorly of bureaucracy. However, bureaucracy is management for a democratic society. Bureaucracies are based on talent and promotion by merit. They follow published rules. All clients are treated equally; the process is impersonal. The goal of bureaucracy is efficiency.

Part of the failure in Iraq is reflected in the lack of a working bureaucracy. They have sectarian rule that is akin to the "king and his kin." This can evolve into formal bureaucracy. That was explained by the "Arabic" economist and historian Ibn Khaldun. Originally the emir was a warrior prince and the wazir was the door man. Eventually, the wazir became the real ruler and the emir was a figurehead. In the West, Charlemagne's grandfather was only the "mayor" (major domo) of the castle.

The point of all this is that you can rant against "regulation" but all enterprises are managed by someone according to some theory. In Atlas, the good guys ruled their businesses by charisma. Charismatic organizations are not stable. They serve "ideologies" rather than serving a clientele. Promotion is via loyalty, rather than ability.

I have been involved with two co-operatives, ELFCO the East Lansing Food Cooperative and PFC: the People's Food Cooperative of Ann Arbor. I served twice on the Board of ELFCO. (We maintain memberships in both.) Co-ops have their drawbacks as well as their positives. The positives include the fact that co-operatives rarely engage in unethical behaviors of any kind. This came out in a management class I had, Organizational Behavior and Development. If you get a broad mix of people together, in order for them do anything, they have to agree. The wider the cutlural differences, the more fundamental the ethical agreements. On the other hand, when everyone comes from the same cultural context, you get "groupthink" -- The Bay of Pigs and Enron.

We have discussed such organizations here on RoR just recently. The National Football League, Sunkist, Welch's, Ocean Spray, Land o' Lakes, are all co-operatives, operated for the benefit of the members.

Post 10

Thursday, May 8 - 10:00pm

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Michael, read your own post #5 where you speak of the rules of a private farmer's market. (I assume those rules were set up by the owners, not by town ordinance - maybe I was wrong?) Phil, I read Tibor's article. Evidently you didn't read what you yourselves wrote? Soros is not an Objectivist. I expect Soros to equivocate. You two should know better. Expressing your own sympathy for "regulations" in a context where a leftist is unabashedly advocating the government regulation of the free market is not just a case of ambiguity. Do you want to clarify exactly what type of regulations it is that you two do support that don't count as anti-laissez faire statism? What you've said so far speaks for itself.

Phil, I'll accept your math on Mondragon. I don't have a calculator on me, and my computer doesn't do exponents.

Post 11

Friday, May 9 - 4:47am

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I really liked this quote from the essay:

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... if the regulators, bureaucrats all of them, are especially imperfect--which is what public choice theory teaches, noting their institutional disorientation as persons-with-power-and-no-rational-restraints--why trust them at all?
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Ed

Post 12

Friday, May 9 - 4:52am

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Ted Keer: "my computer doesn't do exponents."

Of course, it does. Go to Google Documents and sign in or register for a free account. Open a spreadsheet. In a cell enter a formula such as = 1.2^20. (^ is the exponent operator.) 1.2^50 = 9100.438
http://www.google.com/google-d-s/intl/en/tour1.html

(Edited by Merlin Jetton on 5/09, 5:07am)

Post 13

Friday, May 9 - 6:19am

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Not sure if it is justified using average growth rate from the initial investment - what could you say about Apple if you just used the initial investment? I would rather say look at the last 10 years or even 20 - tell me those figures. Sounds like they are good, but a start up by definition has huge growth at the start, then stabilizes.

Post 14

Friday, May 9 - 6:43am

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I just got tired of always qualifying "regulation" with "government," although the context would, I believe, make clear that any other type is not my focus. I have written numerous pieces on this topic and outside of the shoot-from-the-hip cyber-conversations I do make it explicit that my concern is with government regulation rather than regulation by, say, an insurance company or Good Housekeeping or whatever.) See the award winning book I co-edited on the topic, Rights and Regulation [with M. Bruce Johnson] (Ballinger, 1983), as well as the following essays:

�Some Normative Considerations of Deregulation,� Journal of Social, Political and Economic Studies, Vol. 1, No. 3, 1979, 363-377,
�The Petty Tyrannies of Government Regulation� (in Rights and Regulation),
�Government Regulation,� in Tibor Machan, ed., Commerce and Morality (Totowa, NJ: Rowman & Littlefield, 1988),
�To Solve Problems, do we Need Government Regulations? in Mark Spangler, ed., Clich�s of Political Control (Irvington on Hudson, NY: Foundation for Economic Education, 1994),
�Corporate Commerce vs. Government Regulation: The State & Occupational Health and Safety,� Notre Dame Journal of Law, Ethics and Public Policy, Vol. 2 (Fall 1987), 791-823,
�Government Regulation versus The Free Society,� Business and Professional Ethics Journal, Vol. 22, No.1 (2004), 77-83.

(Edited by Machan on 5/09, 6:46am)

(Edited by Machan on 5/09, 6:47am)

Post 15

Friday, May 9 - 10:34am

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Dr machan said "I just got tired of always qualifying "regulation" with "government," although the context would, I believe, make clear that any other type is not my focus."

QED, Michael & Phil.

Sorry, Merlin, never learned to use spread sheet programs. I did use Wolfram but that was long ago, on a PC. Thanks for the reference to Google, bookmarked and a sanction for you.

Oh, and Kurt, I'm not so sure. I expect Mondragon should own the world by 2100 according to the reported trends. Just look at AT&T...

(Edited by Ted Keer on 5/09, 10:37am)

Post 16

Friday, May 9 - 4:38pm

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(Merlin & Ted: Or, just go to google.com & type in the exponent you want to compute in the search bar; works as a calculator. Cool!)

Post 17

Friday, May 9 - 4:51pm

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Wow! Cool! Thanks, Laure.

Post 18

Saturday, May 10 - 1:47pm

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Ted: Oh, and Kurt, I'm not so sure. I expect Mondragon should own the world by 2100 according to the reported trends. Just look at AT&T...

Assuming that the 9100x is correct, then in another 50 years Mondragon would be worth 9100 X $30Billion, or 9.1 X $30Trillion = ~$270 Trillion. In the year 2000, the total wealth of the world was estimated from GDP figures and other sources to be about $70 Trillion. However, the world total wealth will be presumably growing as well, at a rate more like 5% yearly, barring major global catastrophes or the singularity, both of which have a fairly high probability. Thus, Mondragon would be owning something on the order of 25% of the world in another 50 years, assuming a very stable world. Since Mondragon focuses on high tech tool-making - eg., industrial food refrigeration equipment rather than growing crops, mining equipment rather than mines - it may be well poised to grow even faster.