The Disappointing Short Shrift Of Peter Schiff Wednesday, October 24, 2007I spent the better part of my day watching clips of Peter Schiff from his appearances on cable television over the years, and while I probably misprioritized my time today by doing so, I still managed to take away some valuable insights from the various clips.
Peter Schiff, president of Euro Pacific Capital, a foreign brokerage and investment firm, is a person who might be termed as a "contrarian" in common investment parlance. Since most investors these days are bullish, Schiff's contrarian positions take the form of pessimism concerning the value of the US dollar as well as the US economy as a whole. In Schiff's view, constant debasement of the US dollar by the Federal Reserve, combined with an unsustainable trade imbalance with the rest of the world, specifically Asian countries, will result in the inevitable collapse and recession/depression of the US economy as the various junk investments are washed out of the economy in the correction, a la the Austrian Business Cycle Theory.
Schiff is critical of the US trade imbalance because he believes that all the lending that has been carried out by Asian countries in the US has been wasted on consumption purchases by US borrowers, as opposed to investment/productive expenditures. As Bob Murphy of the Ludwig von Mises Institute points out here (and later here), from an objective economic viewpoint, a trade imbalance is not necessarily a bad thing so long as it has occurred voluntarily. Schiff might actually agree with that, but in regards to this particular trade imbalance, Schiff believes the Americans are living a parasitic lifestyle, as he explains in a commentary article entitled "Even Stephen Roach has it wrong," written March 28, 2005 and accessible here (I can't link directly to the article because of the way the Euro Pacific Capital website is constructed).
After watching Schiff consistently explain his thinking and offer rebuttals to other theories with the guests on various cable TV financial shows for the better part of the afternoon, I came to several realizations as to why the other guests (and hosts!) often respond to Schiff and his theories by scoffing, talking over him or downright insulting him as an overly-pessimistic, unrealistic and "no fun" type of guy.
I think the biggest disconnect between Schiff and the other guests and analysts is one of timing. There's two components to the issue of timing.
One has to do with current performance of the markets. Schiff spends almost all his time each show reiterating his mantra that a recession is coming and is inevitable. However, despite what ever bad news of the day which might be the topic of discussion on each show, at the present point of time in each airing the depression is not actually occurring (of course, Schiff also argues we're already in a recession and we just haven't realized it yet). Schiff describes the results of the recession initially as being a massive loss of jobs, a collapse of the value of the US dollar, decompression (I do not wish to mistakenly use the term "deflation" here) of US home prices to non-bubble levels, an evaporation of earnings and equity in financial services companies as well as a veritable wiping out of much of the "service sector" of the US economy. While bits and pieces of Schiff's predictions are, in fact, being realized each and every day, because it is not occurring all at once as Schiff insists it eventually will, his critics are thus able to argue that he's ignoring all the seemingly positive indicators of the daily, nominal strength of the US economy because he stubbornly maintains his bearish position.
Another issue of timing has to do with the short term interventions of the government and Federal Reserve which serve to prolong Schiff's recession timeline and further delay what he claims is inevitable. Schiff rightfully identifies these interventions as a worsening of the situation and a worsening of the correction which must occur at some point in the future. Schiff's view of a "healthy economy" is a long term one-- once the US economy flushes out all the bad investments, restores its manufacturing/productive base and reaches a more normalized equilibrium in regards to trade balances, Schiff would define the situation as non-problematic. All the other guests' view of a "healthy economy" is a short term one-- if the economy makes nominal gains today, it is healthy and doing fine. Recession is not the solution, it's the problem. The avoidance of recession is a signal of health.
Many other disagreements arise between Schiff and other guests due to their variant economic views. As someone with a perceptible foundation in Austrian economics, Schiff understands that production is the health of an economy and the economic "instrument" which is in true scarcity. Almost every other guest Schiff was on-air with was, either fully or partially, versed in a decidedly Keynesian interpretation of economics, where spending or demand is the economic "instrument" in scarcity (this probably explains why so many of the other guests focus on psychological issues such as fear and anxiety when seeking to explain problems with the economy).
Here, Schiff is unquestionably on the "right" side of the issue, and understanding the importance of production to an economy leads one to also view Schiff's investment recommended strategy favorably. Schiff offers, in one of the links above, an analogy involving six Asians and one American stranded on an island to demonstrate his investment theory and the underlying problems of the US economy. I offer now a simplified analogy involving two individuals, with no nationality, to further explain why production is more important than consumption:
Consider two individuals who constitute an "economy." One individual spends his time working productively to produce food. The other individual sits around and does nothing all day beside his pile of US dollars. For whatever bizarre reason, the first individual agrees to take US dollars from the second individual in exchange for some of the food he produces.
According to Schiff's critics, the second individual is at least as important, if not more important, to the health of this "economy," as the first individual. According to them, without the purchases of the second individual, the first would be in poverty, for who else would he sell his food to? But is the first individual really richer from this transaction from a material standpoint (ignoring the fact that, for whatever reason, he has voluntarily agreed to this trade)? No, he's not. The food has utility because it can be eaten and thus sustain a person's life. In this economy, the dollars have no utility-- the only thing the first individual can do with the dollars he receives is trade them back to the second individual for more dollars.
The truth is that the first individual is materially worse off in this economy for trading his food for dollars. The food he trades for dollars is assumed to be food he would have otherwise saved as he would not have been able to consume it all himself each day. Using the food he saved, he could take several days off, occasionally, from producing food to produce other goods and thus to enrich himself materially further and further. Instead, he trades this food away to the second individual who simply consumes it and offers him nothing materially in return.
This is where Schiff is coming from and this is also why the other analysts are wrong to insist that the consumer (the second individual) is essential to economic growth and viability. This is flat out wrong. Without the first individual producing food, neither individual would survive. The second individual couldn't even sit around all day and then trade his worthless dollars to the first individual if the first individual didn't spend his day producing food, because they'd both be dead.
The only way the two parties materially benefit in the long run is if both are producing goods. Perhaps instead of sitting around all day, the second individual learns how to construct buildings and objects made of wood, and he trades these goods to the first individual for some food. Now real gains are being made by both because the first individual saves time producing these extra goods for himself that he could've only accomplished if he had saved up enough food first to do so, and the second individual saves time on producing food that he would've had to do before he could get to producing wooden objects. These two individuals can continue to trade their savings to one another and reach ever increasing standards of living because of it.
The final revelation I had while watching these clips was that Peter Schiff consistently identifies the underlying, fundamental reasons for the day's market activity (gains and letdowns), while the other analysts seem to believe everything happens at random and that people should then react to these happenings. They apparently also believe that these reactions do not propagate further effects in the markets. I'm not sure why Schiff is so clairvoyant on these underlying issues and why all the other commentators seem to be completely clueless, but it might come back again to Schiff's superior understanding of economic theory.
As Keynesians, the other commentators seem to believe that business cycles are simply an inevitable part of a market economy-- completely unexplainable, but something which everyone must cope with nonetheless. Because they view market instability as essentially causeless, they do not see the costs of government/Federal Reserve intervention. Bastiat's broken window fallacy is completely ignored in this situation because they are not viewing the situation economically in terms of costs and benefits... to these Keynesians, there is no cost to government intervention because the market is acting irrationally and causelessly and always will do so. There is no room in their minds to consider the effects of the government "cause."
Schiff, on the other hand, seems to have an explanation for everything, and why shouldn't he? He fully understands that markets are not automatic instruments but people interacting with one another. If you do something or exchange something with one person, that person is going to react or exchange something with you in return. The solution is found not in randomly applying approved government fixes, but in identifying the instigator of the original action and ending the instigation, which more often then not comes right back to government fixes being applied at random.
As Schiff often repeats, "A recession is not the problem, it is the solution." As hard as it may be for some people to swallow (corporate news networks have a noticeable conflict of interest in supporting anything but a bullish line, given that when the recession is allowed to commence full force, they'll be beaten just as hard, if not harder, as anyone), a recession is inevitable and simply disbelieving it is so or purposefully remaining ignorant of the economic theory which underlies such a conclusion is not enough to hold it off. Unfortunately for Peter Schiff and his prediction-making, his insistence that a recession is a couple years away still means at least a couple years worth of people insisting he's wrong and ignorant, despite how many of his minor predictions might play out as he says along the way.
And although it's unlikely, Schiff could ultimately be shafted by the Federal Reserve and foreign CBs if they manage to hold off the recession for another several decades and he dies first. But either way, right or wrong, some people will make nominal profits on their false intelligence on the way down, all while Peter Schiff sits and smiles at his accumulating real wealth held in foreign assets, recession NOW or recession later. While his narrative isn't always clear throughout the article, I still recommend Gary Galles's article on the marginal rate of substitution over at the Ludwig von Mises Institute's blog. A few highlights and interesting points from the article:
Polls, after money the lifeblood of politics, also typically fail to ask the right marginal questions. One may ask, "Should we add another lane to the 101 freeway in the San Fernando Valley?" But the answer depends on what it is going to cost the person asked. Without knowing what costs respondents think they will pay when they answer, we have almost no idea what a yes or no response means. For that matter, even if the question specifies a cost of, say, $200 per year, we still can't be sure of what their answer means, because they may be answering based on the often very different costs they actually expect to bear, rather than the cost specified in the poll question.
For instance, where I live, air conditioners cannot be sold if they have less than a minimum level of thermal efficiency. But for someone cooling an infrequently used cabin, the added cost of the more energy-efficient air conditioner may easily be more than the value of the energy saved during use. And there are many other cases where supposedly technically inefficient choices are economically efficient (e.g., the fact that most of us choose to live in our current homes and drive our current cars, instead of "state of the art" new models).
Does The Free Market Exist? Can It? Tuesday, October 23, 2007A common economic theory I've heard propounded recently is the idea that if a government offers a particular company or sector of the economy a tax abatement or tax holiday, that the government is then, in effect, subsidizing that company or sector of the economy. This theory is only coherent if one maintains the perspective that the government rightfully can and should tax any and every transaction of which it is aware.
According to this theory, then, anytime the government could tax an activity but doesn't, it is instead subsidizing the activity. The situation is binary-- either an activity is being taxed, or it is being subsidized.
Subsidy can be a privately or publicly-funded enterprise. In the private sense, an individual or group of individuals might voluntarily give an amount of money to another individual or group of individuals and thus subsidize part of that recipient individual or group of individuals' cost. In the public sense, money must first be taxed away from one individual in order to then subsidize another recipient individual or group of individuals.
Proponents of the "tax or subsidize" view of the world seem to ignore this reality about public subsidy. By not taxing an activity, the government is simply allowing the people involved to keep whatever money is rightfully theirs. By the "tax or subsidize" view, all money rightfully belongs to the government-- to not tax is to subsidize.
From this perspective, does the free market even exist?
On a somewhat related note, consider the following scenario, which I was inspired to think of after reading news of an agreement between Bear Stearns investment bank and a division of the Central Bank of China which would have the two entities investing billions of dollars into one another's operations:
Consider the political territory of the current United States of America as a closed economic environment. The federal, state and local governments within this economic unit are completely abolished and all coercive acts (public and private) end. Gold is mutually agreed upon as the currency of choice and inter-regional trade begins. This is a free market.
Now, the "borders" of this economic environment are opened up, and the individuals within begin to trade not only with themselves, but with foreigners (Canadians, Mexicans, Chinese, Saudi Arabians, etc.) also. However, nothing has changed in the "foreign" world. These countries all maintain central banks and fiat currencies (they also maintain internal regulatory environments, but that isn't as important to this scenario as the existence of central banks).
Does a free market still exist in the former territory known as the United States of America?
I obviously ask the question because coercive institutions have been introduced into the scenario, coercive institutions which, because of their large holdings of gold and other currencies, are able to massively distort productive incentives and economic outcomes from their free, consented alternatives.
A final question: does, then, a free market exist if any coercion is present anywhere in the system? Consider now the situation described in the first scenario applying to the world as a whole, but introduce the existence of one private (ie, non-government) thief. This individual, by using coercion and appropriating other people's wealth and then spending it, distorts the economic outcomes of the system from what they would be if he did not exist/did not steal. While his actions may seem statistically insignificant when applied to a market as large as the world, he still will have some effect, somewhere.
So then, the final-final question is at what point do the accumulated acts of coercion by private individuals, minarchist or fully socialist governments create enough distortion that we can say "this is not the same outcome as what an actual free market would produce?"
"Designing" Markets Friday, October 19, 2007
Al Roth talking at Google about "market failure and market design"
If you've got an hour, watch this video of Al Roth of Harvard University giving a talk on "market failure and market design" at Google, and ask yourself the following question:
What is another phrase that could be substituted for "market design" that would mean the same thing?In other words, what's an honest way of describing what "market design" consists of (who designs a market? Who implements the design? How does one compensate for individuals who disagree with the "design")? Consider, when answering this question, my previous post in which I identified a market as people and the way they interact with each other.
Al Roth gives a number of examples of markets which have "unravelled." Can you identify any regulatory practices instituted in these "unravelled" markets throughout contemporary history which may have contributed to this "unravelling?"Please post answers in the comments section of this post.
(If you don't have a full hour to devote to this rather nauseating video, watching the first ten minutes will probably give you a good enough idea of what Roth is talking about to go ahead and try answering the questions!)
Anti-market bias and Blackwater Wednesday, October 10, 2007Lately, the private security firm Blackwater has received a lot of negative publicity concerning claims of inappropriate behavior in Iraq. I'm not about to make any comment on what Blackwater is actually up to. Nor am I interested in defending the total mission of the Iraq war. But I think people's reactions to the stories about Blackwater provide an interesting litmus test for anti-market bias. See, the accusation is that Blackwater personnel are guilty of inappropriate uses of force in Iraq. Now this is certainly nothing new. Inappropriate uses of force and accusations of inappropriate uses of force have been standard fare for some long time now. But the interesting twist is that Blackwater is a privately owned firm. There are two potential responses to that fact:
1. Blackwater is a private firm motivated by profit and not subject to democratic checks and balances. The behavior of this firm is unacceptable, but hardly unexpected. The way to prevent this sort of thing is to make sure that only soldiers on government payroll are involved in maintaining the national defense,Alternately:
2. Blackwater is a private firm motivated by profit, so unlike the elements of the nationalized defense industry, when there is some question as to the behavior of their employees there at least remain such options as terminating contracts and refusal to rehire, options which do not exist when we are dealing with elements of the nationalized defense industry.I don't mean to oversimplify; of course members of a government run military unit could be disciplined for any unlawful acts that they might commit. But there are some pretty important differences.
If the problems leading to misconduct are systematic, private firms can be fired or even banned from the area of operations. This was one of the initial responses to the charges facing Blackwater. If there is a systematic problem in, say, the U.S. Army, there isn't much in the way of a similar option. Banning specific units could happen, but it doesn't. No one even considers it.
If a commander in a government run military unit lets the troops get out of hand, he can be disciplined, but whatever discipline takes place tends not to be especially severe. Even demotions among commissioned officers are rare. If the boss in a private firm lets the troops get out of hand, he risks losing nearly all of his income if fired, and possibly his profession if he gets a reputation for allowing his subordinates to conduct themselves inappropriately.
No one gets choked up about the employees of private security firms. If they do anything wrong, there is no especially strong political disincentive to disciplining them as there is with punishing government soldiers. If members of a government run military unit are accused of misbehavior, there are plenty of people with a knee jerk tendency to assume innocence or at least downplay any guilt on the part of "the brave young heroes who take up this burden in defense of freedom." The employees of privately operated organizations don't enjoy the same admiration which so often leads to undue tolerance of inappropriate behavior.
Again, I'm not making any specific argument about Blackwater or about the war in Iraq or about the total mission of the war on terror. All I mean to say here is that given the choice between privately operated military units and state operated military units, the cause of avoiding needless brutality is better served by privately operated military units. This all makes for an interesting test for anti-market bias.
For those who oppose misconduct in wartime (and everyone seems to at least claim as much) there is no logical reason to oppose the use of privately operated military organizations in favor of government run military organizations. But overwhelmingly response 1 seems more common than response 2. This may be a failure of imagination on my part, but I can't think of any reason for that other than anti-market bias in the form of a presumption that people in the employ of governments are just somehow better than people in the employ of private firms.
Burying "Market Failures" 6-Feet Under Tuesday, October 09, 2007Let this serve as a final demonstration of the ridiculous nature of the notion of "market failure" and with this posting let us condemn the notorious idea to a cold, moist future beneath the soil.
In the college textbook, "The Economics of Development, 6th Edition," by authors Dwight H. Perkins, Steven Radelet and David L. Lindauer, the non sequitur of the "market failure" rears its ugly head, once again, on page 264:
[Population-]Revisionists also call attention to a failure in the market forThis passage is emblematic of the faulty logic and misunderstanding of economics displayed throughout this "economics textbook" (which is closer in nature to a manual on statist policy recommendations and a white-washing of collectivist, socialist atrocities throughout history that are the result of such policy recommendations).
contraception. If there are poor, incomplete or imperfect markets either for
information on contraception or for the contraceptives themselves, women have
more children than they "want" and population is higher. One study reports that,
in Haiti in 2000, 40 percent of women 15-49 years old preferred to avoid a
pregnancy but were not using contraception. To the extent that this was the
result of a lack of information about or access to birth control, there is a
market failure for contraceptives. In such circumstances, fertility levels
do not fully reflect individual preferences and are too high. [emphasis mine]
Let's take this step-by-step, starting with some fundamental definitions.
To begin with, markets are people. It's common to think of "markets" abstractly or to associate markets with specific institutions. Consider a businessman who returns home from work and finds his son watching a financial news channel. "So, how did the market do today, son?" he might ask. In this instance, the businessman is referring specifically to the stock markets, and even more specifically, and most likely, the New York Stock Exchange. The son replies, "Markets were up, Dad. Analysts cited optimism based off of the release of better-than-expected earnings reports by several large, industrial firms as the reason for the high volume of trading and growth in the market's value." But the NYSE is not a robotic automaton that assumes an optimistic tone and then begins to increase its own value. And it's not even correct to envision the NYSE as simply the traders scurrying around the trading floor, filling orders.
That's because the traders are acting as proxies for people. The NYSE is a collection of stocks bought and sold, daily, by people. The people initiating buy and sell orders on the NYSE are the market. When someone wants to buy "from" the market, they are buying from another stockholder. When someone wants to sell "to" the market, they are selling to another stockholder.
The same can be said of any industry or marketplace of any kind. When you go to the apple market to buy apples, you are engaging in trade with other people. The apples do not grow themselves, harvest themselves and then trade themselves. People produce the apples and then trade them to other people. Markets are people. The totality of a given markets operations day to day are the totality of interactions between the people participating in the market. The conditions of the market, not only the supply and demand and prices of the market, but also what is supplied and what is demanded by the market, are determined by people.
Furthermore, the conditions of the market are decided upon subjectively. If some people desire oranges and some people are willing to produce oranges and sell them, there is then a market for oranges. The market for oranges didn't exist objectively by itself whether people wanted oranges and whether people were willing to produce and sell them or not. And if people didn't prefer oranges or if people didn't feel like producing them, there would be no violation of some objective, natural circumstance or law.
What then does it mean to observe that a "market failure" has occurred? Using the definitions developed above, it would have to mean that people have failed. And more specifically, it means that people have failed to produce or supply a given good or service, either entirely, or at a particular price, that the observer deems subjectively to be a necessitated, objective circumstance.
Let us return to the quoted passage to further elaborate on this point. In the passage, the author(s) state:
To the extent that this [lack of contraceptives] was the result of a lackIn case it isn't clear, there is an obvious value-judgment being passed here, that being "there should be contraceptives available to anyone who desires one." This is implicit in the use of the phrase "access to" in conjunction with the obvious state of reality in which birth control is supplied, not by god-send, but by the active, productive efforts of individual human beings. To "lack access" to a resource, in this circumstance, means that either the resource is not being supplied at all because there is insufficient opportunity to recover the costs of supplying it, or else it is being supplied, but not at a price that anyone who wants it can afford. Given either circumstance and stating that a "market failure" has occurred is simply saying that people have failed to enslave themselves to other human beings in a fashion consistent with the level of slavery the observer deems necessary and right.
of information about or access to birth control, there is a market failure for
Consider why this is necessarily so-- according to the author, the woman who wants contraceptives but who does not obtain them is not responsible for these circumstances. Instead, "the market" (remember, other people), are. If "the market" (other people) did not inform this woman of her options, or did not provide her with contraceptives at a price she could afford (which necessarily includes the value of zero), "the market" (other people) have failed this woman. "The market" (other people) then necessarily owe this woman contraceptives or information about them.
As many advocates of "market failure" theory like to suggest, and as this author simply states, the existence of "market failure" is an economic bad because it results in the externalization of cost. In this scenario, fertility levels rise above their "market equilibrium" level because various women are unable to prevent the pregnancies they'd like to prevent. Somehow, by an odd twist of logic, this means that this cost should be internalized on the mother-to-be by... subsidizing her contraceptive purchases/knowledge at "the market's" expense. In other words, as revolting as it is to consider logically, this situation can be corrected by externalizing the cost of contraception that the mother faces, outward onto "the market."
"Markets" are nothing more than people. When "markets" don't do what you would like them to, they haven't failed-- you have. People who bathe in the supposedly pristine waters of "market failure" theory need to open their eyes to reality and climb out of the intellectual mud bath they find themselves in. If "markets" (people) don't produce what you want at a price you agree with, you either need to attempt to persuade them logically to do so, or else work productively to change the cost-benefit incentives in a way that will encourage people to voluntarily provide you with the things you want.
Any other solution is the same a tyrant would employ.
Since the 1960s, economists, policymakers and other observers concerned with economic development in economically-depressed regions of the world have debated the merits and demerits of market economies versus command and mixed economies. More specifically, these people have sought to understand the role that market-oriented or command-oriented policies might play in furthering or limiting economic development in a given region.
Throughout the 1950s, 1960s and 1970s, most economists and policymakers studying the subject put their faith in statist intervention in the economy as a means of promoting economic development. Price controls, protectionist import quotas and tariffs, exchange rate controls, inflationary monetary and interest central bank policies, unbalanced budgets and large government deficits along with various internal subsidies and external taxes were implemented by the regimes of various sub-Saharan African nations as well as various countries throughout Latin America and Asia. Unfortunately, many of the economies in which this type of intervention occurred watched as over the next decade inflation and corruption ran rampant and, in many areas, economic development regressed as economic growth per capita statistics went negative.
By the 1980s and 1990s, however, the academic consensus amongst economists and policymakers had changed in favor of market-oriented reforms. Markets were recognized for their superiority in resource allocation, ability to react to shocks and changes, enhancements provided to and by competition and their decentralized, dispersed natures, which not only promote economic equality but also help to foster political and social equality. Moves by many countries during these periods, specifically Mexico, Chile, Argentina, South Korea and Indonesia towards market-oriented economies were met with success. However, while economic growth following the adoption of these policies was positive, and economic development followed as well, the growth and development rates forecasted by supporters of the policy were often much higher than actual rates of growth, leading some to question once again what had gone wrong.
Some commentors, admitting the many areas in which markets were superior to command economies, also pointed out the various shortcomings of market-oriented economies and questioned what role these failings may have played in less-than-expected rates of growth. Market susceptibilities to monopoly/oligopoly, external economies, external diseconomies, infant industry syndrome, underdeveloped institutions, inadequate information, macroeconomic imbalances and national goals led to some skepticism when it came to market-oriented solutions to problems of economic development. And the seeming real world examples of the flaws of pure market-oriented solutions in the cases of Russia, China, Poland, Vietnam and India seemed to lend credence to that skepticism.
Perhaps trying to ride the middle-ground of the two positions (market versus command), a viewpoint amongst various members of academia and the Western bureaucracy began to develop, in what would become known as the "Washington Consensus." The Washington Consensus sought a solution for economic development that embraced market-oriented policies while at the same time accepting a need for a slow progression from statist to market economics, in an attempt to promote political and economic stability, conditions which the Washington Consensus viewed as the perhaps "missing ingredients" from previous economic development "recipes." The Washington Consensus advocated fiscal discipline-- not balanced budgets, but less unbalanced budgets. The WC advocated reordering public expenditure priorities in favor of public health, education and infrastructure, tax reform, liberalization of interest rates, competitive exchange rates, trade liberalization, liberalization of foreign direct investment, privatization of agriculture and minor industrial interests, deregulation and the security of property rights.
But the Washington Consensus was not without its opponents, either. While countries such as China and India seemed to have followed the Washington Consensus without officially acknowledging it, while attaining improved economic growth and development in both countries as a result, many other countries, specifically those in Latin America and Eastern Europe, blamed the policies of the Washington Consensus for the recurring social, economic and political turmoil in their countries. Political leaders of many of these nations actively rebelled against the WC-- Luiz Inacio Lula da Silva of Brazil ran a successful presidential campaign railing against the WC and threatening to end it if he came to power. Additionally, many in Poland and Russia, the site of recent "privatization," blamed many of the policy suggestions of the WC for the increased cronyism and corruption and collapse of living standards in their countries.
Transitioning from a command economy to a market-oriented economy can be tough. By nature, a command economy is engaged in massive redistribution of wealth and resources, and the distortions it creates in the economy, whether arbitrary and politically-motivated or not, guarantee that following a transition to a market-oriented economy, there will be new winners and losers. Often times command economies, such as those prevalent in many sub-Saharan African countries, as well as Russia, China and India, engage in subsidies of various "necessities" of life, such as foodstuffs and fuel. With the transition to a market-oriented economy often comes the end of these kind of subsidies. In the short term, this can cause intense economic hardship for many people and lead to political instability which might compromise the complete and full transition. In the same light, opening up state enterprises to market competition often results in the economic insolvency of the state enterprise. Once again, if the state does not intervene to support the enterprise through tax revenues or by printing money, thousands of people could be thrown out of work and face economic hardship. Another major complaint of the transition to market-oriented economies is the tendency for cronyism and monopoly-- often the "privatization" of a state enterprise will not be open to competitive bidding and instead the industry will be handed over to the friend of a bureaucrat, who will then use the monopoly position to raise prices. Again, hardship for many people ensues.
Various real world examples confirm all of these tendencies. As previously discussed, "crony capitalism" in Russia following the fall of the Berlin Wall and the collapse of the USSR was quite prevalent. Poland, which attempted "shock therapy" by privatizing all state enterprises and moving directly to a market-oriented economy in one move, resulting in a fall in gross domestic product. In contrast, China and Vietnam, which focused on gradual reforms and the marketization of agricultural sectors before minor and then major, state-run industrial enterprises, saw GDP rise by an average of 7-9-percent annually. However, while Poland suffered initially, it and the other countries which fully privatized right away were some of the first countries to fully recover and achieve renewed growth. Even Russia is somewhat back on track now, though this could be due to increased oil profits rather than the success of any of Russia's particular moves towards a market-oriented economy.
"Market failures" and the various shocks and hardships that may be suffered as a result of moving towards and market-oriented economy aside, any country interested in economic development can rest assured that long-term economic growth and, consequently, economic development, will be all but guaranteed after adopting a market-oriented economy. The simple economic truth is that command economies do not beget wealth and the kind of economic development necessary to be "competitive" with the notion of a modern economy with an overall high standard of living. The closer a country can move itself economically (and politically) to a laissez-faire, free market economy (aka a capitalist economy) the higher will be its rate of capital accumulation. The higher the rate of capital accumulation in the country, the higher the productivity of labor will be and the faster the economy will grow and with it, the faster the economy will develop and the standard of living will rise. There is as of yet no completely free market (aka anarchic capitalist) economy anywhere in the world, but the closer any country (developing or developed) brings itself to that ideal, the quicker it will achieve its goal of economic development.