We Be Bloggin' 'Mon
Recently, I took a short cruise from Florida to the Bahamas. Two nights were spent on the Caribbean, and two more on the island at the Lucaya Resort. Interestingly, the Bahamas has a long history as a tropical getaway. First, following the War of American Independence, American Loyalists fled to the Bahamas – still under rule of King George III – to escape what they viewed as the treasonous rebellion of the colonies. Second, after the War of Southern Independence, former Confederates appalled at the horrors of Reconstruction left the so-called Union once again, this time for the Bahamas. Now, the Bahamas is where the weary world travels to unwind, as well as where the wealthy park their money to avoid the legalized theft of taxation. For the most part, I lounged around on the beach, stuffed myself with fresh seafood, and drank from coconut husks, but of course I could not help but start thinking deeply about some of my experiences.
Charming Caribbean Cartel
Outside the marketplace of Lucaya, local Bahamians set up shop in dingy shacks to sell cheap souvenirs. Almost every shack had offered the same goods at the same price. At first glance, the market of shacks appeared competitive in the standard textbook sense. Specifically, factors of production were totally mobile (the proprietors could easily shut down or relocate their shack depending on market conditions), and there were no barriers to entry or exit (the cost of a shack was the only entry cost). Allison and I were quite satisfied with the “deals” we received on the souvenirs we bought from these shacks.
The next day, however, while browsing in some of the other souvenir shops and drug stores, we noticed many of the same souvenirs we bought yesterday at the shacks available at a much lower price. If the shacks were a competitive market, their prices should have been lowered down to equal marginal cost, certainly not higher than other less-competitive shops. In fact, the shacks were not a market of perfect competition at all, but actually a vast cartel colluding to inflate prices. Since all the shacks were in such close proximity, it was convenient and affordable to collude. Theoretically, competitive firms could try to collude, but competition for short-term profits drives down prices – think the dynamic of the Prisoner’s Dilemma. As soon as the agreement to collude is finalized, either one of the parties to the collusion will cheat, or an enterprising entrepreneur will appear to offer lower prices and seize market share from the colluders. If they were all located adjacent to each other then the obstacle to collusion could be overcome because communication and enforcement would be possible. Firms could all easily discuss the excess profits attainable under collusion versus the zero profits under competition. Close proximity would also enforce the collusion, ensuring that anyone cheating on the agreement would be discovered and trigger market-wide undercutting, eliminating profits in the process. Each shack was given a little latitude to negotiate the price in order to make a sale, but at a certain point the proprietors became a bit surly and refused to budge. Any sale below that price probably violated the terms – unspoken or explicit – of the collusion.
The standard textbook definition of competition, however, is a chimera. Around the turn of the 20th century, failing businessmen devised the antitrust case as a scheme to undermine those with whom they could compete fairly in the market. Politicians, always ambitious to seize more power for themselves, eagerly espoused the fallacies of antitrust, no matter the corruption of their corporate sponsors' ulterior motives. Since "perfect competition" (a world in which everyone is omniscient, reacts instantaneously to new information, and all products in a market are identical) does not exist, they argued, the federal government must intervene under the pretext of protecting competition, and thus antitrust legislation was born. Competition in the Austrian sense, however, is defined by Thomas DiLorenzo as, "a dynamic, rivalrous entrepreneurial process of discovery that facilitates coordination among market participants to their mutual advantage." In that sense, competition was present in the Lucayan marketplace, and in fact is present in any market in which the government does not intervene to create institutional advantages for protected businesses. The shack entrepreneurs, seeking to satisfy tourist demand, supplied souvenirs at the highest prices they believed tourists were willing and able to bear. If the shack entrepreneurs' cartel overreached and charged too much, tourists would begin substituting other products - not just competing souvenirs - for the overpriced shack souvenirs, pushing down souvenir demand and forcing the shack cartel to lower prices. After all, transactions will only occur when they are mutually beneficial: the consumer values the uses of the seller's product higher than he values the money which he pays, and the seller values the money the consumer pays higher than the direct uses of his product. In any market, competition is not only between businesses supplying perfectly substitutable products, but also between the infinite array of alternative uses of the consumer's money. The shack entrepreneurs were not just competing with other souvenir shops, for example, but restaurants, bars, tours, and all other pleasant diversions in the Bahamas. When considering how low the start-up costs for a shack shop must be, it is clear that the cartel's position in the market is more competitive than monopolistic. To preempt the emergence of new businesses aiming to seize market share, the shack entrepreneurs must keep their prices low enough so that entry into the market cannot be justified. In that sense, all free markets are competitive - even the threat of competition acts as a force for competition.
Cuba Libre!
Although not for sale in any of the shacks, Cuban cigars are among the many wonderful souvenirs available in the Caribbean. After over fifty years of the United States banning any trade between itself and Cuba, Communism still rules the island. In fact, Cold-War relic Fidel Castro is transferring power to his son, Raul. The survival of the Castro regime under the shadow of the U.S. Empire shows how trade embargoes are utterly impotent and even self-defeating. Historically, trade has been an essential medium of cultural exchange. For example, the ancient Greeks first learned the alphabet from the Phoenicians. More recently, near the end of the Cold War, smuggling and legal trade introduced the Soviet Union to a U.S. standard of living far above its own, precipitating the downfall of Communism. Economically, trade allows economies to prosper beyond their production possibilities, raising worldwide productivity and promoting more efficient allocation of scarce resources. When countries trade, they produce goods/service at which they have a “comparative advantage,” meaning they can produce at higher volumes at lower costs. Countries which import those goods do not have to commit their own resources to their relatively inefficient production of those goods, and instead can also focus on the production of their own comparative advantages. Trade helps economies free themselves from the constraints of nature, increases total production, and raises standards of living. Just as individual transactions between consumer and producer only occur if they are mutually beneficial, importing and exporting economies both gain from trade. Fundamentally, "trade" and most of "international economics" are simply extensions of basic economic principles, such as division of labor and specialization, writ large on a global scale.
Denying the people of an entire country the cultural and economic benefits of trade because of the atrocities of a government which has usurped power is utterly perverse. To understand the positive force of trade, contrast the divergent cases of China and North Korea. After the U.S. military liberated Manchuria from the Japanese in World War II, Chinese Communists under Mao Zedong staged a coup and drove the former government – the Republic of China – to Taiwan. Losing a country it had freed from Japanese to the rising threat of Communism was crushing to the U.S. government, which refused to recognize the newfound “People’s Republic of China” for 30 years. To make matters worse, shortly after consolidating power, revolutionary leader Mao ordered China into the Korean War on the side of North Korea and the Soviet Union against the U.S.-led United-Nations forces. Eventually, however, relations between the U.S. and PRC began to mellow. Richard Nixon and Henry Kissinger, in a strategic move of realpolitik against the Soviets, inaugurated relations with the PRC. When Zedong died in 1978, the next generation of Communist leadership rejected dogmatic Communism and undertook a balance of economic liberalization and political control. Beginning with the reforms of Deng Xiaoping and accelerating after the national turmoil surrounding Tiananmen Square, Chinese Communists have freed most of the PRC economy from the clutches of central planning. China permitted private enterprise, in addition to opening its economy to trade and foreign direct investment. Because the U.S. regained hope in China, generations of Chinese were exposed to the higher American standard of living and culture of freedom. Because of that contact with the outside world, many Chinese now desire the same level of material comfort and individual liberty for themselves. Instead of living in terrified isolation, the Chinese people’s horizons were expanded beyond their provincial lives working on one of Mao’s communal farms. China’s leaders, realizing the failure of Maoism and sensing popular strife, chose reform. After years of rapid growth, China is now the second-largest economy in the world, and is poised to assume a powerful position in international affairs. Despite all the anxiety, the rise of China should inspire rather than terrify the world. China’s rise is a wonderful story of redemption and the enduring power of freedom’s triumph over the menacing shadow of tyranny. China’s Communist government is still authoritarian, but significant progress has been made all thanks to trade.
North Korea, or the “Democratic People’s Republic of Korea,” however, has gone the opposite direction. Following the Korean Armistice in 1953, the U.S. government and its allies - particularly South Korea - assumed a hostile stance towards North Korea. Up until 2008, a U.S. trade embargo under the unconstitutional “Trading With the Enemy Act” was in force against North Korea. Over time, North Korea – nicknamed “The Hermit Kingdom” – has become completely isolated from the outside world, and the consequences have been horrifying. Unlike China, which came to its senses after years of bloody war and wrenching poverty under Communism, North Korea remains a hardcore Communist regime straight out of the Cold War. North Koreans are prohibited from self-employment, and must report for duty at government-owned businesses. North Koreans are allotted government housing, complete with loudspeakers blaring government propaganda which they cannot deactivate. A strange class/racial hierarchy controls North Koreans’ social lives, dictating with whom they can socialize. Students are brainwashed to believe that North Korea is the envy of the world, and that the U.S. government is responsible for all its troubles - the truth of which is bitterly ironic. The centrally planned economy is geared towards the projection of government power – arming, supplying, and manning the Korean People’s Army – depriving the country of essential production of consumer goods and capital investment. When the Soviet Union fell, the electric power it supplied to North Korea died as well, plunging the country into a dark void. Foreign visitors are taken on carefully choreographed tours of "Potemkin villages," villages constructed with props and populated with actors designed to create the illusion of prosperity. North Koreans are prohibited from leaving the country, and those caught fleeing are tortured or executed. To punish the petty bellicosity and temper tantrums of the Kim regime, the U.S. government inflicts devastating sanctions on all of North Korea, from the Communist overlords of Pyongyang to the innocent people living under oppression.
If the people of the U.S. were free to trade with North Korea, the government-controlled industries would initially absorb most of the economic gains, but the cultural gains for the people would be invaluable. Entire generations of North Koreans are ignorant of the world beyond their country’s militarized borders, and have no understanding of the prosperity or liberty of a free country. Discovering the luxury in which other countries live – especially South Korea, the formerly weaker and poorer neighbor – would dispel the illusion of North-Korean splendor which Pyongyang has propagated. Furthermore, empowering ideas like “liberty” are alien in North Korea, but as George Washington noted, liberty grows rapidly once its seed is planted. When North Koreans observe how other people live – free to make their own decisions about how to their lives – the stark contrast between the pervasive control from Pyongyang and the independence of the rest of the world will stir a longing for liberty.
Trade with the U.S. would open North Koreans to a whole new world of prosperity and freedom. Since the dawn of civilization, trade has facilitated cultural exchange, and there is no reason to assume the same phenomenon does not occur in the 21st century. Exposure to new ideas slowly but surely leads to change, as foreign concepts assimilate into the culture over time. Surprisingly, years ago, South Korea – still technically at war with North Korea – recognized the advantages of trade, and opened trade between the two Korean economies. At the Kaesong Industrial Complex, for example, South-Korean businesses have invested in North-Korean factories. Tens of thousands of North Koreans are employed at this large compound, where they interact with their South-Korean brethren. Observing the comfort and freedom of South Koreans surely incites skepticism towards Pyongyang’s propaganda. Unfortunately, escalating military hostility between the two Koreas drove Pyongyang to recall its citizens from Kaesong, but South Korea should not be deterred in seeking out similar opportunities.
The U.S. government must lead by example and embrace trade as the most effective way of overthrowing North-Korean Communism and liberating the North-Korean people. North Korea's ruling regime will never assent to reform, but like East Germany in the 1980s, the spread of information – in this case, via trade – will undermine their reign more effectively than the most statesmanlike diplomacy, onerous economic sanctions, or brilliant military campaign.
