Wednesday, June 26, 2013

Kay on Free Markets (3) Diffusion of Power

Free markets diffuse economic and political power. John Kay says that a major benefit of free markets is that rent seeking is constrained.

Rent seeking is the process by which the ambitious find it more rewarding to batten on the wealth created by other people than to create it themselves. Rent seeking takes, and has taken, many forms – castles on the Rhine, the Wars of the Roses; ten per cent on arms sales, or seven per cent on new issues: awarding yourself control over former state assets, stealing the revenues from your country’s resources deposits, seeking protection from foreign competition, blocking market access by new entrants; winning sinecures or overpaid positions by ingratiating oneself with public servants or corporate employees. The mechanisms of rent-seeking range from the application of armed force to victory in democratic election; the methods pursued range from lobbying on Capitol Hill and in the restaurants of Brussels, through access to the King or the Chief Executive.

But while rent seeking is ineradicable, we can have more of it, or less. Politics everywhere used to be dominated by rent seeking; factions would battle for control of the state and when they won such control would use it to steal as much as they could get their hands on. In much of the world, it is like that still. ‘It’s Our Turn to Eat’ is the stomach churning title of one fascinating recent book about the corrupt – and moderately – democratic politics of modern Kenya. We have come to recognise the resource curse – wealth from national resources does more harm than good in many countries because of the rent-seeking it attracts – and foreign aid may have some of the same characteristics. But in Western Europe, at least, corrupt politics has ceased to be an avenue for rent-seeking.

The ability of a political/economic system to resist rent seeking depends on the degree of economic decentralisation. If there are concentrations of economic power. Individuals will try to get their hands on the rents concentrations of power attract whether they are found in the public sector, in private businesses, or in groups of private business. The wider the extent of the opportunities this created, the greater the tendency for individuals to gain wealth and influence for themselves by attaching themselves to power rather than exploiting their own individual talents and by developing distinctive capabilities in their own economic activities…

The ability of a market economy to restrict rent-seeking, its capacity to channel the desire for acquisition into channels that create wealth rather than extract it, depends on measures both to prevent the concentration of economic power and to limit the terms of access to such concentration. These are constraints on the economic power of the state: constraint on the concentration of economic power in large businesses: constant vigilance at the boundaries between the state and business: and a mixture of external supervision and internal restraint which prevents individuals who pull levers of economic power from using these levers to direct renting to themselves.

Because the last decades have confused a pro-business stance with a pro-market stance, we have emphasised some of these conditions at the expense of others. Western – and especially Anglo-Saxon societies – have constrained the economic role of the state. These measures have reduced the scope of one focus of rent-seeking, that by organised groups of public employees. A substantial element of such rent-seeking remains in areas that remain inescapably within the public sector. And, despite the furore over MPs’ expenses, we have continued to do well in maintaining the financial, if not necessarily the intellectual, integrity of our politics and politicians. Few people enter British, or west European, politics for the money. If the worst we have is the odd moat-clearing or duck-house, and the occasional sale of a peerage, we are not doing badly: although it is important we should continue to make a fuss about these issues. Corruption is a slippery slope, long and gentle.

There was a recent time, however, when similar restraint applied in large business: when people knew, as people in the UK Treasury do know but people in the Kenyan Treasury do not, that a lot of money may pass through your hands without any of it being yours. The senior managers of large British industrial companies before the 1980s did not pay themselves large salaries because they did not think it appropriate to do so. They would have been insulted by the idea of a bonus or success fee in much the same way as a doctor or teacher would still be insulted by a bonus or a success fee. They saw their jobs as a responsibility rather than a reward. These conventions have gone: and in the United States, the problem of the diversion of a substantial part of the rents earned by large corporations into the hands of senior managers is now a serious issue.

This is, however, a side show. The larger issue is the concentration of power of large business, or groups of large businesses, and the use of the leverage that power gives to strengthen established positions and enhance the economic and political power still further.
The most dangerous form of rent seeking in the modern economy is the collusion between governments and the financial sector.

Tuesday, June 25, 2013

Kay on Free Markets (2) Process of Discovery

John Kay says there is a good deal more to the power of markets than the price mechanism. Markets are a process of discovery based on freedom to experiment, combined with discipline in which unsuccessful experiments are terminated quickly. A chaotic process of experimentation is the means through which a market economy adapts to change.

The world is uncertain: not just risky, but uncertain, in the sense used by Keynes and Knight. Not only do we not know which future outcomes will happen: we are unable to specify at all fully what these possible outcomes will be. If we could predict or anticipate the invention of the wheel, we would have already invented it. Market economies do not predict the future, they explore it. That is a fundamental – perhaps the fundamental – difference between a planned and a market economy.

Hayek continues to be the most eloquent exposition of the concept of the market as a process of discovery. His argument was a priori , but vindicated by the failures of the eastern bloc in the post-war era. These planned economies failed in the development, not just of consumer products, but of business methods. Their technological development was disappointing in almost all not related to military hardware. Centralised systems experiment too little. They find reasons why new proposals will fail – and mostly they are right in finding reasons why they will fail because most experiments do fail. Market economies thrive on a continued supply of unreasonable optimism. And when, occasionally, the experiments of entrepreneurs succeed, they are quickly imitated. It is a sad fact of the market economy that even for innovations that are commercially successful, few are commercially successful for the innovator.

If market economies are better than planned societies at the origination and diffusion of new ideas, they are also better at disposing of failed ideas. Honest feedback is not welcome in large bureaucracies. In authoritarian regimes, such feedback can be fatal to the person who delivers it. In less draconian contexts, unwanted messages can be fatal to careers. And when I talk about large bureaucracies here, I am talking just as much about large private bureaucracies as large public ones. Disruptive innovations most often come to market through new entrants – from Google, EasyJet, Amazon. Incumbents have good reasons to be suspicious of novelty and protective of their established markets and activities.

The health of the market economy depends, therefore, on constant replenishment of the business sector by new entry. If, as planner or sponsoring department, you had been planning the future of the computer industry in the 1970s, would you have asked Bill Gates and Paul Allen?, If, as planner or sponsoring department, you had been planning the future of aviation in the 1980s, would you have asked Stelios Haji-Ioannou? If, as planner or sponsoring department, you had been planning the future of retailing in the 1990s would you have asked Jeff Bezos? Of course not: whether you were the politburo or permanent secretary you would have asked men in suits like yourself.

Watching the impact of electronics and the internet on children and grandchildren, makers of business and public policy have at least understood these issues. Committees of the middle-aged Twitter about technology like embarrassing adults trying to have fun at the teenagers’ disco. But, like those adults at the party, we are not really serious. Whether planners or governments of a market economy, we see industries through the eyes of established firms in the industry. And in doing so. miss the pluralism that is the market economy’s central dynamic.
Most people who develop a new business to try out a new idea fail. The few that succeed change the economy. This process of discovery is what has made the free market successful.

Monday, June 24, 2013

Kay on Free Markets (1)

The neo-classical economic model claims that free markets lead to an optimal economic situation. The proof of this claim requires so many restrictive assumptions that the proof is not worth much.

In the Future of Markets, John Kay takes a much less perfectionist approach. He suggests three elements to the triumph of the market economy. He says that economists focus too much the first and not enough on the second and third.

  1. Efficient resource allocation
  2. Markets as process of discovery
  3. Diffusion of political and economic power.
Kay says that a defence of the free markets must include all three elements.
There is one central theme that runs through all three strands in the success of the market economy, a theme which I have called disciplined pluralism. When prices act as signals decentralised enterprises and decentralised information are brought together to create a coherent result. Markets as a process of discovery are based on freedom to experiment, combined with discipline: unsuccessful experiment is acknowledged and terminated. Markets as a means of decentralising power are the determinant of the areas where politics and economics meet.
1. Efficient Resource Allocation
The price mechanism is generally a better guide to resource allocation than central planning. John Kay says,
The model of ‘prices as signals’ describes how self-interested agents – individuals or firms – might, through independent decisions, make consistent and efficient choices about how to organise production and distribution and the allocation of capital, labour and other resources. In a loose formulation, this idea has been around since the beginnings of economics. Many people interpret Adam Smith’s famous remark about ‘the invisible hand’, and his observation that it was not the benevolence of the baker, but his self-love, that furnished our table in this way. In an astonishing demonstration of the power of spontaneous order, decentralised markets manage the process of coordinating complex production systems better than centralised direction.

Friday, June 21, 2013

Empire to Kingdom of God (19)

The Kingdom of God has come.

Government has shrunk and disappeared.

The majority of people in the area have chosen to follow Jesus.

Some people are still not Christians and not part of church. They can get the blessing of the Kingdom. However, they can still ignore the kingdom, if they choose. However, they will not get justice and protection from anywhere else.

All the institutions needed to support life are run by people who are submitted to Jesus. So his will done.


This full series can be found at Empire to Kingdom.

Thursday, June 20, 2013

Empire to Kingdom of God (18)

More churches are established.

Wednesday, June 19, 2013

Empire to Kingdom of God (17)

More expansion occurs as the gospel is proclaimed mightily in the power of the spirit.

The government shrinks as its power collapses.

Tuesday, June 18, 2013

Monday, June 17, 2013

Empire to Kingdom of God (15)

And the church keeps on growing.

The apostles keep on postling.

Sunday, June 16, 2013

Empire to Kingdom of God (14)

As the apostles fulfil their mission, the Kingdom of God grows.

New centres of justice are developed. Schools are started. Social welfare increases the acceptance of the gospel.

Once the apostles have been sent out, some of the people in the original church start a business (B). They provide employment for some of the people from the churches they are linked to be the apostles. They also provide work for non-Christians who living in the same area.

Saturday, June 15, 2013

Empire to Kingdom of God (13)

The apostles keep on working. More churches will be established.

Friday, June 14, 2013

Empire to Kingdom of God (12)

The Kingdom continues to expand.

Deacons in the two new churches become highly skilled in caring for poor people who live among them. They take responsibility for caring for all poor people living in the area where the four churches have been established, regardless of whether they are a Christian. They have effectively established an alternative social welfare system (S). This will be really important when state welfare systems collapse.

Thursday, June 13, 2013

Empire to Kingdom of God (11)

The churches continue to grow.

Two new churches come into being in new neighbourhoods.

Wednesday, June 12, 2013

Empire to Kingdom (10) Defence

When the economy collapses, the police will stop protecting the people, because they cannot afford to maintain patrols. A few of the people in the church start to watch out for their community. They will challenge evil people entering their neighbourhood and pray against them. Their non-violent methods will be more effective than those of the official police. An alternative system of defence is emerging (D).

One of the people in the new church is known for the effective way they home school their children. Other people who are concerned about the failing state schools ask this person if they would teach their children, too. Soon a new school is flourishing in their home (E). A couple of people from outside the church send their children to the new school, because they recognise the quality of the education being provided.

Tuesday, June 11, 2013

Empire to Kingdom of God (9) Justice

Something else that is very important could begin to happen. In the modern world, the power of governments is weakening and standards of justice are disintegrating, so justice in the state-operated courts is costly, slow, unpredictable and uncertain. People lose all they have fighting to obtain justice.

A couple of the elders in the first church are recognised for their wisdom, so people start taking their disputes to them. Everyone recognises that their justice is honest and effective. An alternative system of justice emerges (J), when these elders are recognised as local judges. Many from outside the church take their cases to these elders because they know they will get a quick and honest resolution to their disputes.

Monday, June 10, 2013

Empire to Kingdom of God (8)

The new church is modelled on the one that sent it, but reflects the people who belong to it.

Sunday, June 09, 2013

Empire to Kingdom of God (7) Apostolic

A better strategy is to plant churches in neighbourhoods where people are living. This is a neighbourhood church.

If the Holy Spirit is present in power, the church will grow quickly. When it reaches and optimal size it wills send out apostles to establish a new church in a different part of the city, possibly quite close by. More on the working of apostles can be found at the Apostolic Way.

Saturday, June 08, 2013

Empire to Kingdom of God (6)

If the modern church wants to influence the government, it must send Christians to work within it. This is never very successful, because it is very difficult to work in the state without being corrupted by its power. The principalities and powers are still at work in the state, so those who submit to it are opening themselves up to their influence. The government works by power and control, which tends to undermine the gospel.

Friday, June 07, 2013

Empire to Kingdom of God (5) Secularism

Focusing in on one nation, the state dominates the church.

In the last century, secularism set in and the church was squeezed out of its place of privilege.
The state still uses power and control to achieve its purposes and create a good society. The demonic principalities and power still work through the state to accomplish their purposes.

The church and the state both work from the edge of society. The government passes laws and issues decrees. It sends its agents and taxgathers to enforce its power and control.

The church operates in a similar way. People gather in the church to receive guidance and support. They then return to their neighbourhoods to live.

House Demolition

The insurance company has finally demolished the house that we lived in four five years. The foundation and land was badly damaged by the earthquake, so it could not be repaired.

We just happened to drive by last night and the excavator was sitting on the section next to it. By 10am this morning the house was down and the rubble was being loaded on a truck. They are now breaking up the concrete foundation to remove it, too. It is exactly a year today since we found the house we are now living in.

The house in front and behind are waiting to be demolished too.

This is how it looked when the contractors were finished. The government now owns the land.

Thursday, June 06, 2013

Empire to Kingdom of God (4)

The power of the church gradually weakened. The Reformation divided the church, and nation states began to emerge. The new churches relied on the state for their protection.

The leaders of the church continued to believe that they could control and shape the state. They relied on the power of the state to advance their cause, but the principalities and powers were still active. Power and control were still in ascendance.

Wednesday, June 05, 2013

Empire to Kingdom of God (3) Christendom

The Roman empire eventually withered away, and the church was left in control of the western world. This was Christendom.

This was not ideal, because the church continued to rely on control and power, not on freedom and service.

Tuesday, June 04, 2013

Empire to Kingdom of God (2)

As the Roman empire weakened, it aligned itself with the growing church to preserve control.

The leaders of the church believed that they could shape the empire to achieve God’s purposes. This was not possible, because the empire was still controlled by evil principalities and powers. The empire was still based on control and coercion and not on love.

Monday, June 03, 2013

Empire to the Kingdom of God (1)

When the church was getting underway, the Roman Empire controlled everything.

John called the Roman empire the Beast. It was the ultimate evil empire, controlling everything and destroying everything that came into its path. The Empire was actually controlled by principalities and powers, the spiritual forces of evil.

The empire controlled its empire by issuing decrees from the edges. The emperor never goes into the world. He issued decrees and sent his agents to enforce them. Caesar never visited Jerusalem. His agents Pilate and Herod maintained his control.

Peter told his followers to submit to the empire. Not because it was noble. Peter saw it as the government of men. However it was so strong, that there was no point in taking it on head on. It would fight back and the fledgling church would be crushed. It was more important to get on with preaching the gospel under the radar. This was a subversive strategy.
Therefore submit yourselves to every ordinance of man for the Lord’s sake, whether to the king as supreme, or to governors, as to those who are sent by him for the punishment of evildoers… that by doing good you may put to silence the ignorance of foolish men (1 Pet 2:13-14).
This full series can be found at Empire to Kingdom.