Why does privatisation sometimes go wrong?

The imposition of flawed privatisation models imposes economic losses far beyond the sectors concerned. Although the problems experienced in privatised industries have largely been the result of political interference and state regulation, their failure may be misused by ideological interventionists to undermine trust in markets more generally.

Both the public and opinion-formers have weak incentives to properly investigate why particular sectors have not performed well and this ignorance can be exploited. If the political culture turns against relatively free markets, the wider efficiency losses are likely to be substantial, as more and more economic activity becomes subject to high taxes and restrictive controls.

Privatisation is a political process and as such will be vulnerable to the problems afflicting political processes in general. Almost inevitably it will be influenced or even ‘captured’ by special interests. As a result, there is a risk that the outcome is not a dynamic free market, or even a lightly regulated sector. At worst, government will regulate the market to enable special interests to extract ‘rents’ from taxpayers and consumers. Such a model would protect favoured interest groups from new market entrants, competition and disruptive entrepreneurship, while participants’ profits might well rely on state subsidies.

As public choice theory would have predicted, many of the privatisations of the 1980s and 1990s did not produce anything approximating to free markets in the sectors concerned. In some industries at least, the period might more accurately be characterised as a shift from ‘state-capitalism’ Model A to ‘state-capitalism’ Model B. This raises the question whether Model B, consisting of heavily regulated markets under nominal private ownership, delivered economic benefits compared with the direct state ownership of Model A.

The answer is likely to depend both on the characteristics of a particular industry and the regulatory structure adopted post-privatisation. In an unhampered market economy, sectors characterised by major economies of scale and vast, inflexible, long-term capital investments – such as the rail industry – are likely to be dominated by large firms exhibiting high degrees of vertical integration. The ‘command economies’ within such firms will exhibit significant knowledge and incentive problems no matter what the ownership model. Thus, ceteris paribus, the benefits of privatisation are likely to be lower in such industries than in naturally more fragmented, dynamic and competitive sectors.

Nonetheless, there are particular problems associated with state ownership that are likely to apply across all sectors. These are explained in detail elsewhere, but include politicisation, producer capture, and poor incentives for entrepreneurship, innovation and cost-control. Where state regulation ensures monopolies, such pathologies may be exacerbated by an absence of competition. The poor results became apparent in the nationalised industries of 1970s Britain. Endemic misallocation of resources led to heavy taxpayer subsidies and poor quality services for customers.

However, some of the privatised sectors exhibit broadly similar problems today. The following (non-exhaustive) analysis therefore draws on theory and recent evidence to summarise some possible reasons why artificial post-privatisation markets could fail to produce efficiency gains compared with the directly state-controlled model that preceded them:

  • Politicisation – The propensity of politicians to interfere in a sector could hypothetically increase post-privatisation, resulting in increased regulation/taxation and concomitant efficiency losses. This outcome may be particularly likely in sectors with high political salience. Any change in the status quo creates risks for policymakers, providing incentives for them to intervene. The costs of such intervention are likely to be opaque and widely dispersed, leading to limited accountability.
  • Overregulation – Politicians may face fewer disincentives to impose costly regulations on a nominally privatised sector than under state ownership. In the former case, the negative effects can be blamed on private firms, whereas in the latter they are likely to be blamed directly on the government, creating higher political costs. Voters and ‘opinion formers’ have weak incentives to become well informed about such issues. Senior officials may benefit from the salary and status opportunities provided by expanded regulatory oversight, while key corporate players in the sector may welcome additional regulation if it serves their interests (for example, by raising barriers to market entry and protecting them from competition).
  • Flotation receipts – Short-term incentives to maximise flotation receipts may encourage the creation of heavily regulated ‘rigged markets’ that reduce the risks facing investors. Large, risk-averse institutional investors, such as pension funds, may prefer a model that effectively guarantees returns rather than entrepreneurial and disruptive freed markets that threaten incumbent players.
  • Transaction costs – Artificial post-privatisation markets may depart significantly from the organisational forms likely to evolve in an unhampered market economy. It is conceivable that in some instances such artificial structures increase transaction costs compared with direct state ownership, thereby reducing allocative efficiency.
  • Restructuring costs – Structural changes may weaken ‘social capital’ within a sector by disrupting working relationships, as well as losing specialist, often asset-specific knowledge and skills through the departure of long-term staff. Organisational cultures may also be weakened or destroyed. The role of such factors in efficient operations may be somewhat opaque to both policymakers and senior management.
  • Moral hazard – If sectors comprise ‘essential’ infrastructure then firms can be sure that governments will step in if they fail. Indeed, rules are typically in place that set out how this would be done. Limited liability laws and the use of special purpose vehicles also limit downside financial risks. These factors may encourage excessive risk-taking and a concomitant misallocation of resources.
  • Rent-seeking – A combination of heavy regulation and private ownership could potentially increase incentives for special interests to engage in rent-seeking activity. Profit-making businesses might have stronger incentives to lobby for regulations and subsidies that increase their profits than the less commercially minded managements of state industries. There is even a danger that ‘crony capitalism’ could emerge, as observed with privatisations in post-Soviet economies.


This is an edited extract from Without Delay: Getting Britain’s Railways Moving.

The dangers of hyperinflation in Ukraine

?????????????????????????????????????????????????????????????????????????????????????????????????????????The Cato Institute’s Steve Hanke has estimated that Ukraine’s inflation rate is now running at 64.5% per month – well above the 50% per month that is usually used as the definition of hyperinflation. If this continues, the political and economic consequences are likely to be horrific.

Worryingly, an analysis of current conditions in Ukraine and a comparison with previous episodes of hyperinflation suggest the country is highly vulnerable to such a scenario.


The hyperinflation process

While the political economy of hyperinflation is often complex (see below), in simple terms it is caused by governments creating large amounts of money. Instead of funding public spending through borrowing from investors or collecting taxes, governments print money or create it electronically.

Expectations then come into play. As governments rapidly debase the currency, individuals lose confidence in the money. More and more people expect its purchasing power to decline. They try to reduce their cash holdings to limit their losses from its depreciation.

Money then becomes like a hot potato. People try to pass it on as quickly as possible. The velocity of money explodes as it circulates far more rapidly through the economy.

There is a ‘flight to real goods’ as money is exchanged for items expected to more reliably hold their value, such as cigarettes and tinned food. This results in what Mises termed a crack-up boom.

Eventually, the transaction costs of using the money rise to such an extent that it is rendered useless and new forms of money, such as gold, foreign currency – or even cigarettes – are used instead, along with barter.

In the meantime, high rates of inflation have made economic calculation almost impossible, and huge malinvestments have taken place. The later stages of hyperinflation and any subsequent stabilisation, are generally marked by a painful adjustment process as these malinvestments are liquidated, and governments slash spending and/or raise taxes.

The Weimar Republic

Only by looking at the detail of particular episodes of hyperinflation does one begin to appreciate its horrors.

The first sign of trouble in Germany was when it went off the gold standard in 1914. The government then borrowed and printed money rather than raising taxes to pay for the war.

By 1917, the amount of money in circulation had risen five fold. The main surge in prices came after the war ended, however. The people had been hoarding cash during the conflict, for security, and because many goods were unavailable.

Then, in 1919, this money came flooding back into the economy – prices rose by around 300% that year.

It was then that people lost confidence in the currency – this mindset not helped by the Treaty of Versailles and the hefty reparation payments imposed on Germany. The flight to real goods began, and the hyperinflationary process accelerated.

There was also a problem for a government committed to maintain, as far as possible, its spending levels, in that high inflation made it in some ways even harder to collect tax to balance the budget. Eventually they ended up adjusting taxes by the month. But another problem was that companies would deal in foreign currencies using foreign bank accounts, to avoid holding Marks, making tax avoidance easy. The increased use of barter also didn’t help the collection process.

Germany also faced enormous instability, and this perhaps partly explains politicians’ unwillingness to exact big public spending cuts and their preference to use the ‘hidden tax’ of inflation to fund expenditure. There were hundreds of political assassinations and both the communists and national socialists threatened the nascent democracy, while the French were trying to break the country up by establishing a Rhenish republic.

Indeed it was after the French invaded the Ruhr in January 1923 – Germany’s industrial heartland – in retaliation to default on war reparations – that inflation accelerated to the level that has become the stuff of legend.

The German government lost a major source of revenue, but insisted on funding the Ruhrkampf, the struggle against the French occupation, and kept paying out dole for unemployed workers in the Ruhr.

Even at the end of 1922, the cost of living had risen by 1500 times since the war, while wages had gone up around 200 times.

But the worst was yet to come. The cost of living index, fixed at 1 in 1914, had risen to an average 15 million by September 1923, 3,657 million in October and 218,000 million in November – when the Mark was finally abandoned.

By this stage, only 1% of the government’s budget was funded from tax receipts, the rest through printing money.

In the last months of the Mark, people would queue outside banks with buckets and wheelbarrows because so much currency was required to buy basic goods. Local authorities and large firms were allowed to issue their own notes in lieu of Marks, to address the shortage. Around 300 factories were employed to print notes.

In the worst period, a cup of coffee that had cost 5000 Marks would cost 8000 Marks by the time it had been drunk. Diners’ restaurant bills would rise as they ate. Newspapers would list new prices for tram and taxi fares every morning.

Thieves would steal baskets and suitcases full of money, but leave the money and keep the containers.

It played hell with economic calculation and many businesses shut down in the last months.

Wider social effects

Another result was widespread famine in the large cities. Malnutrition was endemic and disease rife, particularly TB among children.

Although the harvest had been good, farmers were unwilling to exchange food for worthless currency. So the cities starved and the inhabitants ate rats and dogs to stay alive.

In contrast, farmers were doing rather well. Their fixed rate mortgages had dwindled to nothing. They could barter food for luxury goods from the urban middle classes, so farms would boast cars, expensive jewellery, fine furniture, grand pianos etc.

Of course, the urban middle classes saw their wealth destroyed by the inflation, and ended up selling valuables for essentials. Those relying on savings income were in a particularly poor position, and often ended up in the soup kitchens.

As an aside, it was very difficult to protect one’s wealth. There was a mania to invest in shares, and companies did well initially in the ‘crack-up’ boom, but by 1923 most shares were trading at a tiny fraction of their 1914 values, measured in pounds, and dividends had declined even more. In terms of purchasing power, shareholders were looking at a loss of 90% plus, much better than cash or government bonds, but still an absolute disaster. Rental property was also a disaster since rent controls stopped landlords raising rents in line with inflation. By 1923, foreign students with dollars were able to buy rows of houses in Berlin using their allowances.

Gold and foreign currency were far better inflation hedges, and both were in high demand during the hyperinflation, though even with these you would tend to lose significantly in terms of purchasing basic goods. Possession of such goods, such as coffee, sugar and fuel, not to mention food-producing land, was perhaps the surest insurance policy.

In the initial stages, the working classes did a bit better than the middle classes.

They received more frequent wage increases thanks to the political power of the unions, but eventually they lost out as factories and coal mines closed down, and millions ended up unemployed on a pittance of dole money.

Entrepreneurs, particularly currency speculators often did well, and those who could obtain foreign currency could pick up assets at bargain prices in the later stages of the inflation. There was great resentment at their success, while most people were borderline starving.

Urban unrest

Given this boiling cauldron of suffering and resentment, it is unsurprising that there was significant urban unrest. Linz in Austria, which was also affected by hyperinflation, was plundered by a raging mob, with shops looted. They didn’t just steal, they also smashed up fittings and furniture. Food shops were looted in Berlin and there were numerous riots in just about every city in Germany. Parties of workers raided farms, slaughtering animals and tearing the meat from their bones, before torching the buildings.

State of emergency

Predictably all this unrest led to a government crackdown, and in September 1923, seven articles of the constitution were suspended and a state of emergency introduced.

There could now be restrictions on personal liberty, freedom of expression, freedom of the press and freedom of association. The army and the police could interfere at will with postal, telegraph and telephone services, indulge in house searches, and confiscate property.

Incitement to disobedience could be punished with imprisonment or a fine of up to 15,000 gold marks. If lives were endangered the punishment would be penal servitude. Death would be the penalty for the ring-leading of armed mobs, treason, arson or damage to the railways.

The parallels with Ukraine

Unfortunately, these are the kind of developments that could afflict Ukraine if hyperinflation continues to take hold. Worryingly there are striking parallels with the situation in 1920s Germany.

In particular, the Ukrainian government faces an existential crisis combined with a collapse in tax revenues, meaning there are strong incentives for policymakers to attempt to maintain some semblance of political stability by printing money to buy-off various interest groups – in the short term at least.

The strong presence of potentially destabilising far-right groups in both the government and the military is an especially disturbing aspect of the current situation. And as in Germany, there are also some groups that could potentially profit from a hyperinflation episode.

Ukraine’s corrupt oligarchs, several of them holding political office, own vast assets abroad, and, unlike ordinary Ukrainians, are to a large extent insulated from the currency collapse. Along with overseas investors with hard currency, they may find opportunities to buy valuable Ukrainian assets at bargain prices during the crisis. Of course, this assumes that hyperinflation does not result in the nightmare scenario of some form of totalitarian regime coming to power.

Given the obvious risks, it is absolutely vital that the Ukrainian government changes course quickly before hyperinflation becomes entrenched. This perhaps means enacting spending cuts and doing as much as possible to de-escalate the political crisis and restore confidence.

Further reading:

When Money Dies by Adam Fergusson

Human Action by Ludwig von Mises

Unless otherwise stated, all articles on this website are written in a personal capacity.

Oxfam completely wrong on global inequality

In this television debate, I argue that current concentrations of wealth are largely the result of pervasive state intervention, including bailouts, quantitative easing and monetary inflation more generally (explained in more detail here). Oxfam’s proposals to address inequality by further expanding the role of government are likely to be counterproductive. High taxes and heavy regulation trap the poor in poverty.


How to destroy crony capitalism

The recent Oxfam report on inequality and the ‘top 1 per cent’ is riddled with statistical errors. Worse still, its proposed solutions risk harming the poor through ill-conceived government interventions.

Nevertheless, current patterns of wealth distribution raise important questions about ‘crony capitalism’ and the extent to which concentrated special interests have succeeded in rigging markets to benefit themselves at the expense of the wider population.

As might be expected in ‘state-capitalist’ economies characterised by high public spending and pervasive regulation, it would appear that a significant proportion of the ‘top 1 percent’ do indeed owe a large part of their fortunes to special privileges granted by governments.

Several powerful ‘crony capitalist’/protected interest groups can be identified, including:

  • Elements of the financial sector propped up by quantitative easing, monetary inflation more generally, bailouts, taxpayer guarantees, regulation, tax breaks, government-imposed monetary systems, state borrowing etc.
  • Beneficiaries of government contracts, who are often well connected to the political and bureaucratic elites who determine official spending priorities.
  • Landowners whose property was stolen by the state and then transferred into private ownership. This category would include many of the European aristocrats who still make up a significant proportion of their national rich lists, but could also be extended to include mining, energy and agribusiness enterprises benefiting from government land-theft around the world.
  • Property developers, often well connected to political elites, who are able to gain permissions that are unavailable to the general population due to planning and building regulations, and who profit from the resulting scarcity value. They may also be indirectly subsidised by taxpayer-funded transport infrastructure and regeneration grants.
  • Enterprises dependent on state protectionism in the form of illegitimate ‘intellectual property rights’ such as patents.
  • Professionals whose lucrative jobs depend on regulation and/or whose high remuneration relies on occupational licensing. Examples include lawyers, doctors and accountants.

Some of the individuals and firms benefiting from special privileges could of course also thrive in an unhampered market economy based on voluntary exchange – but it seems likely that a high proportion of the above groups would either be eliminated entirely or see a major fall in their relative wealth in the absence of state protection.

The precise impact on overall inequality would depend on the social structures that evolved under a system based on free exchange. However, it is clear that both patterns of wealth distribution and absolute levels of wealth would be very different if markets were freed. Crony capitalism, special-interest influence and rent-seeking behaviour tend to undermine genuine wealth creation. Accordingly, the emergence of ‘distributional coalitions’ is a serious problem for contemporary ‘state capitalism’.

Tackling the cronies will not be easy, but identifying some of the most egregious special interests provides a useful starting point. A combination of honest, free-market money and deregulation would destroy the privileges of the financial sector. Dramatically shrinking public spending would undermine the government contractors. Scrapping patents would subvert that insidious form of protectionism. Planning liberalisation would reduce the advantages of crony-capitalist property developers. And land restitution (which raises many difficult issues) might start to address the widespread government-corporate theft of individual and communal property. Finally, abolishing occupational licensing would bring much-needed competition to state-protected professions.

Unless otherwise stated, all articles on this website are written in a personal capacity.

Pseudo-markets versus voluntary networks – libertarian strategies for rolling back the state

broken chain 197Libertarians should not put much faith in the extension of ‘pseudo-markets’ as a means of rolling back government. A more radical strategy is needed.

The pseudo-markets approach involves setting up some kind of market-like structure in a largely government controlled sector. A typical example is education vouchers. Parents receive state-funded vouchers, which they then use to ‘purchase’ education for their children. To the extent such systems facilitate choice, competition and entrepreneurship they may provide benefits for participants. But there are also significant downsides. Pseudo-market structures are often afflicted by high transaction costs (partly because parasitic special interests benefit from artificial complexity). And since state funding is retained, the misallocation of resources remains entrenched and pervasive. Using education once again as an example, this could mean that government would carry on funding the teaching of those children who were gaining little from formal education, or indeed losing out due to the opportunity costs.

Moreover, with government funding comes government control. Under any plausible voucher system, only education providers that met certain politically determined criteria would qualify for state funding. In practice this would mean official control over the curriculum and other key elements such as admission rules. Even if a more flexible system were introduced initially, it would only take a few scandals – renegade schools adopting practices that were deemed unacceptable – for stricter eligibility controls to be instituted.

Another highly regrettable aspect of pseudo-markets is their creation of ‘distributional coalitions’ of groups that depend on government subsidies and regulatory privileges. Given strong financial incentives, private firms providing voucher-funded schooling would likely be far more effective at rent-seeking than the moribund government institutions they replaced. Similar examples abound, from the US ‘prison-industrial complex’ to Britain’s ‘privatised’ rail industry. Indeed rent-seeking activities may actually lead to an expansion in government support, with even more resources appropriated through taxation.

These state-dependent special interests would also have strong incentives to capture the regulatory framework in order to shut out competition and increase their returns. Thus large education firms would inevitably lobby for government protection in the form of stricter licensing of providers. They could also successfully promote expanded services to politicians, as a means of achieving various social objectives. Similarly, potential investors such as state-privileged pension funds favour rigged markets in order to reduce risk and guarantee returns. And parent-voters are likely to resist any attempt to reduce the value of handouts such as education vouchers, particularly given the skewed distribution of the tax burden. Indeed, the relative transparency of vouchers etc. compared with more opaque intra-state funding mechanisms would arguably make it even harder to reduce government spending. It is easy to see how the introduction of pseudo-markets in so-called public services can degenerate into yet another shakedown by special interests.

If pseudo-markets risk being counterproductive in terms of rolling back the state, they do at least provide lessons for the development of more effective strategies. Incentive structures would appear to be a key consideration. Clearly the retention of an element of state funding encourages rent-seeking behaviour that undermines attempts to reduce government involvement. This suggests that instead of attempting to reform ‘public services’, libertarians should focus their efforts on approaches that reject them completely. Accordingly, activists should develop strategies that first bypass and later supplant state institutions entirely.

Samuel Edward Konkin argued that a libertarian society could be achieved through the extension of the counter-economy – non-legal shadow markets that, due to their voluntary nature and greater efficiency, would eventually displace governments. The plausibility of such an outcome may be questioned in the context of modern surveillance states. Nevertheless, a less ambitious ‘quasi-agorist’ or ‘neo-agorist’ approach that sought to extend non-state networks could indeed be an effective strategy for undermining dependence on and support for government services.

Konkin was also highly sceptical about the efficacy of libertarian participation in politics. Yet, to the extent that libertarians do have political influence, it should perhaps be targeted towards removing those regulatory barriers that prevent individuals, families and communities from bypassing state institutions. Looking at education once again, this might for example involve campaigning for the removal of legislation that prevents homeschooling, requires the licensing of non-state schools or mandates education up to a certain age. Many such rules are relatively obscure and have little political salience, suggesting that in some instances concentrated pressure would result in reform.

Of course in some places, such as the UK and in many US states, there are relatively few barriers to methods of opting out such as homeschooling. Effective strategies may then revolve around raising awareness of these possibilities through the dissemination of information and practical methods of implementation. Ivan Illich, for example, advocated the development of ‘learning webs’ which would allow children outside formal state schooling to access appropriate expertise and learning materials. Indeed, contemporary homeschooling networks pool skills and materials to enrich children’s education and capture economies of scale.

Such non-state networks are clearly far superior to pseudo-markets in terms of preserving and extending liberty: Provision is voluntary and does not depend on theft of resources; incentives for rent-seeking are absent because there are no government officials to lobby for funding/special privileges; top-down politicisation and social engineering is extremely difficult to impose on such decentralised structures; and allocative efficiency is likely to be much higher than under state systems, because the investors in education (i.e. parents, extended families and small community groups) possess local, time and place specific knowledge (e.g. the talents of a particular child and local employment opportunities), as well as having strong incentives to control costs.

Libertarian objectives are also enhanced by the wider effects of extending non-state networks. Reduced dependence on government handouts is likely to undermine political support for predatory politics and the funding of ‘public services’. At the same time, non-state networks that develop in a particular sector can extend into other activities. For example, connections that develop through a homeschooling network can form the basis of counter-economic activities and the voluntary exchange of goods and services outside government regulatory frameworks. Networks could also develop around subcultures that resisted governments on ideological grounds, effectively becoming refuges for political dissidents (e.g. by facilitating escape to a safe location). Thus a strategy of exiting ‘public services’ and developing voluntary alternatives has the potential to snowball into the creation of resilient sanctuaries from the state offering protection from government aggression. The contrast with counterproductive pseudo-markets is stark.

Unless otherwise stated, all articles on this website are written in a personal capacity.

The global assault on stateless societies – and why libertarians should be concerned

War_on_Terror 200x145‘African leaders like to settle nomads. Nomads make it hard to build a modern state, and even harder to build a socialist state. Nomads can’t be taxed, they can’t be drafted, and they can’t be controlled. They also can’t be used to attract foreign aid, unless you can get them to stay in one place.’

Michael Maren, USAID (quoted by Murray Rothbard)

When assessing the effect of their activities, libertarians tend to focus on the West. It is difficult to argue that libertarians have been successful at rolling back Western states. Government remains pervasive and much of the nominally private sector now depends on state-granted privileges. But, more positively, the recent explosion of interest in libertarian ideas, together with the growth of the libertarian youth movement, are grounds for optimism that active opposition to big government will increase in the future.

Looking outside the West, the picture is also mixed. There is little evidence of a genuine libertarian movement of any size, but in many regions political elites have at least adopted models of state capitalism that allow some space for individual ownership and entrepreneurship. Government is still extensive, but the state has arguably retreated somewhat since the height of the communist era, and libertarian-influenced ideas in economics may have played a part in this.

Yet there has been another far more negative development that barely registers in debates over libertarian strategy. This is the ongoing assault on the world’s stateless societies – and in many cases their destruction. The history of this process is of course very long, and includes the conquest of what is now the United States. It continues today in aggressions across the world, actions that in most cases long pre-date the War on Terror.

For example, following decades of colonial rule by France, the territories of the Tuareg tribes of the Sahara are once again occupied by United Nations/African Union troops and other powers. Rather than leaving these groups alone, Western powers have forced them to become part of ‘Frankenstein countries’ such as Mali, Niger and Chad, which straddle one of the planet’s deepest ethno-cultural cleavages. Accordingly, Tuareg resources have been looted by an unholy alliance of corrupt sub-Saharan political elites and Western governments – France, the ex-colonial power, in particular.

Across in Asia, following a long period of Western-instigated destabilisation, the de facto stateless peoples in regions of Afghanistan and North-West Pakistan have been subject to 13 years of Western intervention. Indeed, much of the resistance to this has been from local residents and clans rather than an organised and encompassing ‘Taliban’. Vast amounts of foreign aid money have been pumped into the region to extend the reach of the state in an attempt to breed dependency and allegiance.

Similarly, in Somalia, also a victim of decades of ill-conceived external interference, it would appear that statelessness would not be tolerated by Western elites. This traditionally nomadic society, which has well-established non-state mechanisms for dealing with disputes and crime, could not be allowed to exist without a centralised state subservient to international governance frameworks. The United States and the European Union have paid neighbouring African countries to conquer Somalia and attempt to impose a new government on its people. Unsurprisingly the mercenaries of the Ethiopian, Kenyan and Ugandan armies, under the auspices of the US/EU-funded African Union, have committed atrocities during the ongoing invasion.

The attack on stateless societies is not just being conducted through war and conquest. A more insidious process is underway throughout much of the world. This involves government officials counting and registering individuals in de facto stateless areas and forcing or bribing them onto biometric identity registers (sometimes with compulsory ID cards). The state often gives itself formal title to their land (which may then be sold by corrupt officials to palm oil producers, timber firms, or mining companies), while various subsidised programmes undermine state-free lifestyles through the provision of aid. Traditional means of subsidence that are independent of government are destroyed through the appropriation of land and resources, breeding state dependency and killing off local cultural practices. This is the typical pattern from the forest peoples of India to the tribes of Papua New Guinea. Needless to say, the crackdown on stateless societies, including biometric ID programmes, is to a large extent funded by Western foreign aid.

So, why should libertarians be worried about the assault on stateless societies? Perhaps the main reason is the importance of these and other sanctuaries from the state in acting as a check on government tyranny. Individuals and groups may wish to exit in order to preserve their traditional religious and cultural practices, or to avoid losing their freedom in other ways such as slavery (either directly or indirectly via punitive taxation and other takings). In The Art of Not Being Governed, James C. Scott describes some of the strategies used by stateless peoples in SE Asia to avoid the various predations of nearby states. The existence of ungoverned territory was absolutely crucial to their success.

Stateless zones also offer the possibility of exit for political dissidents. For example, de facto stateless regions of central Asia provided refuge for opponents of the kleptocracies of the Persian Gulf. Without such sanctuary they faced kidnap, torture, extended imprisonment and execution as a result of their views. (Whether or not one finds the opinions of such individuals objectionable is beside the point.) Transnational institutions, international arrest warrants and extradition treaties arguably increase the importance of such refuges.

The exit option has the further benefit of acting as a restraint on the behaviour of states themselves. If political elites steal too much they risk generating a vicious circle as their subjects decide to leave and the returns from taxation and/or serfdom decline. Indeed, it is often the most entrepreneurial and talented who have the strongest incentives to move out. While attempts may be made to prevent exit, these also raise the costs of predation. Thus the presence of sanctuaries from the state will tend to reduce the extent of government in other areas by acting as a check on states’ ability to seize resources.

Ungoverned territories also serve as bases for counter-economic enterprises that circumvent the prohibitions on trade imposed by governments. For example, the Darien Gap and the western fringes of the Amazon rainforest play key roles in the cocaine trade; North-West Pakistan and Afghanistan in hashish and heroin. Whatever the pros and the cons of such activities, these sanctuaries help ensure freedom to choose rests with the individual rather than the state.

Finally, it is worth remembering that the ongoing aggression against stateless societies is very costly in itself, inflicting violence and suffering in the targeted regions, while at the same time requiring large increases to the tax burden and government debt in the West and the misallocation of economic resources on a grand scale. The negative impact of overseas conflicts on domestic liberties is also well established.

But what of the argument that stateless societies are very far from free, that they are frequently characterised by cultural practices that severely restrict the liberty of women and other groups? While traditions vary enormously, and some do indeed seem abhorrent according to Western mores, groups within stateless societies typically do not have the capacity to aggress against individuals on anything like the same scale as states. Compare, for example, the relatively tolerant attitudes (by regional standards) of Bedouin towards homosexuality with the brutal legal prohibitions by various Arab states; or the matriarchies of Zomia with the forced abortions and labour camps of China. One should also take into account levels of development and the logistics of surviving in the often very harsh and sparsely populated mountain/desert/jungle environments where stateless arrangements still exist. Even if desirable in principle, imported ideas such as ‘liberal democracy’ may be difficult or impossible to introduce under such conditions.

It is also incorrect to assume that economic development is impossible in stateless societies. This misconception partly results from the difficulty of measuring and incorporating their economic activity in standard GDP statistics. Trade with surrounding areas means such zones – when unmolested – have typically enjoyed significant improvements in living standards. Indeed this even appears to have been the case in the recent period of ‘anarchy’ in Somalia, despite the endless interference of outside powers.

Western politicians wishing to ‘free’ stateless societies should first explain how they would do so without violating the non-aggression principle. Would they use force to change cultural practices they abhorred? Would they appropriate resources from individuals in the West to fund their mission? And could they be sure their intervention would be successful and not counterproductive? For example, might it make target groups even more hostile to interactions with outsiders and their ideas, or alternatively incentivise them to become dependent on foreign aid handouts? The record of such initiatives does not augur well.

In conclusion, stateless societies still have a valuable role to play in the preservation and expansion of liberty. They comprise an important sanctuary from government and may bolster other sanctuaries within state-governed territories, including the counter-economy and various sub-cultures. In terms of libertarian goals, exit strategies that build up such pockets of resistance may well prove more effective in extending liberty than attempts to roll back the state through politics. This also implies that to the extent libertarians do have political influence a focus on opposing the assault on enclaves of statelessness would pay large dividends (for example, criticism of policies such as foreign aid and military intervention).

Those who hope liberty will be delivered by extending international institutions are surely terminally naive, as well as inconsistent (what about the force required to impose such a framework on the unwilling?). Such governance structures will inevitably be captured by special interests and, as with any major concentration of political power, there is a significant risk tyranny will follow. At that point, defenders of liberty will need an escape route. The importance of competition and the possibility of exit cannot be overstated.

This essay is based on the first part of a presentation on ‘Rothbard versus Konkin on Libertarian Strategy’ given to the Libertarian Alliance in October 2013.

Unless otherwise stated, all articles on this website are written in a personal capacity.

Why libertarian groups should not take government money

EU_enlargements_map 150x150 It is difficult to think of anything more hypocritical than libertarian groups taking state money. But worryingly the vast majority of organisations in continental Europe that style themselves as ‘free-market’, ‘libertarian’ and ‘classical liberal’ are funded with money appropriated from taxpayers. And given that libertarians in the US and UK spend a great deal of time arguing against foreign aid, it is rather ironic, to say the least, that many of these groups have been willing recipients of aid money from the US, EU and other governments.

This is not just a matter of principle. The government money has typically been tied to particular research projects and events programmes. These have promoted policy agendas that a high proportion of libertarians would find deeply objectionable and that bear little relation to genuine free markets.

Unsurprisingly there is a close correlation between such output and key priorities of the European Commission and US economic/foreign policy. Thus one observes a plethora of reports and events on deepening European integration and harmonisation; on strengthening the protection of ‘intellectual property rights’ – a particular focus of US lobbying; on cracking down on the informal economy (Konkin must be turning in his grave); on introducing pseudo-markets, coercive welfare systems and sham privatisations; and on entrenching the special privileges of large corporations through rigged-trade agreements such as TTIP.

Needless to say, senior figures at these organisations have frequently been prominent apologists for US foreign policy, even if this has meant completely betraying basic libertarian principles. Many of these state-funded bodies have also enjoyed an unhealthily close relationship with political elites, particularly in some of the smaller central and eastern European countries. Staff have often gone on to assume senior positions within governments, while some organisations have engaged in detailed policy engineering in cooperation with state bureaucracies.

Such politicisation is tempting – concrete examples of political influence make it easier to attract donations from special interests. But it’s also very dangerous. It increases the temptation to sell-out on principle and distorts research priorities towards those areas most helpful to political elites, while deterring organisations from criticising their political patrons. Worse still, it can do serious long-term damage to the libertarian/free-market movement when initially sensible policies are captured, distorted and rendered dysfunctional by state agencies, politicians and vested interests. Take the numerous botched privatisation programmes that resulted in crony capitalism and/or inefficient rigged markets. Fed through the government grinder, they have brought immense discredit on libertarian ideas.

This is not to say that the overall impact of these government-funded groups has necessarily been negative. Often they have been effective at raising awareness of the dangers of heavy taxation and high inflation, for example. Their agenda may well be preferable to many of the other statist traditions in the region. Perhaps the main objection is therefore their use of terminology – how they describe themselves as libertarian and free-market, pepper their literature with the words ‘freedom’ and ‘liberty’, when in reality they are promoting a particular model of state-capitalism that largely serves certain special interests in the West. And given their prominence, there must be a danger that potential libertarians in Europe will be led astray. Students may not realise that the ‘libertarian’ events they attend or websites they visit are funded by the EU, German government or USAID, and accordingly promote worldviews that differ markedly from genuine libertarianism.

Finally, it should be noted that it is unlikely to be in these organisations’ own interest to continue taking government money. Their dependence on state funds undermines their credibility, not only with the wider libertarian/free-market movement, but also among ‘opinion formers’ in their own countries. At worst, they risk being viewed as sock puppets for the US and EU, particularly as the rise of the internet and social networking makes it increasingly difficult for them to keep their state-funding secret.

These groups have important lessons to learn from organisations that have enjoyed sustained, long-term success in the US and the UK: don’t take government money, stick to your principles, and keep politicians at arm’s length.

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