Quicksilver Capital or Bumper to Bumper Traffic Jam?

|Peter Boettke|

As "globalization" took off in the public imagination in the 1990s, many economists (myself included) viewed this not only as a great manifestation of the gains from trade, but also as a disciplinary check on politicians and policy.  Policies which are counter-productive to wealth creation will lead to capital moving away from the counter-productive and to the more productivity friendly policy regimes.  Countries will lose both creative people and capital when they adopt stupid policies, and attract them when they follow more "friendly" policies for creativity, entrepreneurship, and investment.  Globalization will discipline governments through a competitive process to attract a tax base, etc.  In short, a process analogous to the Tiebout process associated with local public economies is applicable to the global economy.  The best book on this, in my opinion, was Quicksilver Capital by Richard McKenzie and Dwight Lee.

Unfortunately, Tiebout competition can be derailed when there are effective mechanisms of collusion among the various levels of government.  The collusion among governments subvert the competitive pressures that Tiebout identified as my colleague Bryan Caplan demonstrated in one of his first academic papers.  As market-preserving federalism breaks down due to government collusion with respect to key policy variables, the discipline of competing for a tax-base is muted.  Capital doesn't exist as quickly.

In the NYT today Thomas Friedman argues the current global financial system is more analogous to bumper to bumper traffic where one accident can result in a long traffic jam, rather than continuous competitive pressure caused by the ability of individuals to move and investment in more favorable locations.

What do you think?  Are the forces of quicksilver capital defeated by the collusive behavior of leading governments to check the disciplinary competitive pressures for good economic policies?  Or do you think this is the wrong way to think about international political economy and globalization?

Comments

[Richard Ebeling]

Another element to this, Steve, is that while the money equivalent of capital may be moved from one geographical area to another with, in principle, the click of a "mouse" button, the real capital that the sum of money is meant to represent cannot.

The physical plant and equipment, the buildings, the "human capital" of the workforce employed in a certain endeavor CANNOT move. And while back in the 1990s much was made of the new "cyberspace age," the fact is the vast majority of what we use and consume is real "stuff," i.e., physical goods and services -- the food we eat, the clothes we wear, the homes we live in and cars we drive, the buildings where we work and the equipment in them (from our desks, to our paperclips, to the water cooler where we stand for our break).

Unless you are able to really stay ahead of the twists and turns of a government's policy, what that government does influences the value of that "real stuff," and therefore what the monetary sum (after taxes and other political fees and "carrying charges") will be when you decide to sell the "real stuff" to "export" your capital wealth.

As for acting as a discipline on abusive government, as Dwight Lee and Dick Mackenzie tried to argue in "Quicksilver," as you point out states and layered political jurisdictions soon attempt to impose interlocking rules, regulations and restrictions against moving your capital with, if not your feet so much anymore, than with that mouse click. Think of the attempts by the U.S. and EU authorities to twist the arms and impose regulations and penalties on "tax havens," or to strong arm the Swiss to give up the names of behind number accounts, etc.

Yes, the creative private entrepreneurial spirit always tries to stay a few steps ahead of the political authority in the race between the plunderer and the plundered. But the state is always attempting to utilize the very technologies and mechanisms that the market develops to thwart the participants in that market.

The ingenuity of the market has long been appreciated. In the 1820s, the British Classical Economist, Nassau Senior, referred, for example, to the smuggler as the "heroic reformer," who is always trying to undermine the restrictions and barriers that the state places in the way of those wishing to benefit from mutual gains from trade.

But the conflict between the plunderer and the plundered never seems to end.

Richard Ebeling

[FC]

Back in the 1990s Dallas County Community College ran TV ads with a business professor exclaiming "The Internet has made time and distance irrelevant!" (Of course, he was in a lecture hall...)

I wondered what their physics department thought of that. I certainly got a lifetime's worth of chuckles out of it.

[Richard Ebeling]

The only place that time and space don't matter and does not exist is in the perfect competition model -- and Frank Knight made that explicit in a article even before he published his, "Risk, Uncertainty, and Profit" (1921), in which he presented one of the first detailed expositions of the necessary conditions for perfect competition.

Richard Ebeling

[David Andersson]

I think this topic - inter-jurisdictional - competition (and collusion) is the most important topic in economics and politics. I have a post dealing with the "inter-jurisdictional spontaneous order" here: http://davidemanuelandersson.wordpress.com/2010/01/08/the-inter-jurisdictional-spontaneous-order/

and a new one dealing with migration here:
http://davidemanuelandersson.wordpress.com/2010/05/21/migration-is-both-a-human-right-and-a-key-economic-freedom/

One of the key conflicts in recent years ín the EU has been over whether the constituent nations and regions should compete with one another or whether they should "harmonize" rules and regulations. Fortunately, the harmonizers (read: all French politicians and most social democrats outside of France) have only occasionally got it the way they want it. Policies in US states are still more similar than policies in EU nations.

I don't think that it's necessarily true that human capital "CANNOT move." Mobility seems to be increasing with the reduction in transportation costs and the gradual adoption of English as the lingua franca of knowledge-based work (look around you in your university department or MNC or your local restaurant: are all the workers from your home nation or state? Are you in your hometown or home region?). Manufacturing workers may be relatively unwilling to move, but they constitute a rapidly shrinking part of the labor force in Europe and North America!

[Troy Camplin]

The EU rather idiotically discriminates against hiring Americans. I have looked for jobs in Europe, and every one I looked at said they only hired Europeans. Which has to be the dumbest policy I have ever heard of. Rather than trying to be an attractor in a brain drain, they repel potential American workers. I'm surprised our own country hasn't decided to "teach Europe a lesson" by doing the same thing.

[David Andersson]

Troy,

I totally agree. In many places, it used to be worse, though ("we only hire French, Belgians, Germans" etc.)

[Troy Camplin]

True enough. I guess some improvement is better than none. Doesn't help me get a job, though :-)

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Risk, Uncertainty, and Profit" (1921), in which he presented one of the first detailed expositions of the necessary conditions for perfect competition.