Missionaries for Cannibals

The American journalist H.L. Mencken once quipped that if a politician found he had cannibals among his constituents, he would promise them missionaries for dinner. As Korea gears up for April's parliamentary elections, the recently rebranded Saenuri Party is apparently doing all it can to illustrate Mencken's point. Nominally conservative, the Saenuri Party is at present doing its best to outflank the progressive Democratic Unity Party by promising an expanded menu of welfare programs and market restrictions which, while they might make Roh Moo-hyun grin in his grave, are nevertheless a reminder that politics is a principles-free sport.

Rumor has it that conservatives stand for free markets, a reliance on oneself and one's family, and a supposed distrust of government. Like most politicians, however, this Saenuri bunch (dating back to their days as the Grand National Party) has been neither coherent nor consistent in their defense of such principles, attracting well-deserved criticism from the left for pardoning criminal businessmen and from the classical liberal crowd for restricting market competition and trying to pick winners. Yet, while Saenuri politicians may be slippery, they are no fools: they know which way the political winds are blowing and have realized that their inability to articulate their core principles (assuming they have them) has landed them in hot electoral water. Which brings to mind another American humorist, Groucho Marx, who once remarked that "those are my principles, and if you don't like them...well, I have others." Just let the Saenuri politicos know what they need to say in order to get elected and they'll parrot it right back to you.

As Stephan Haggard and Jaesung Ryu pointed out in a Peterson Institute blog post from last week, however, conservatism in Korea, as compared to its American cousin, is different sort of brew. Consider that Park Chung-hee, the dictator who ruled Korea through most of the 1960s and 1970s, is labeled a conservative in these parts despite overseeing an industrial and trade policy that would make left-wing American progressives (and "national greatness conservatives") sigh in statist envy. Moreover, Korea's constitution, in stark contrast to that of the United States, hardly bespeaks skepticism about unchecked state authority.

...the [Saenuri Party's] new platform, called “promise to the people,” embraces a welfare-state and the idea of “democratizing the economy.” Progressives in South Korea have long sought to reform the country’s monopolistic chaebol structure; it may seem strange that a conservative party is advancing greater state involvement in the economy. But recall that the party’s standard-bearer is the daughter of Park Chung Hee, a firm believer in industrial policy. The country’s constitution has a surprisingly expansive role for the state, stipulating that “[t]he State may regulate and coordinate economic affairs in order to maintain the balanced growth and stability of the national economy, to ensure proper distribution of income, to prevent the domination of the market and the abuses of economic power and to democratize the economy through harmony among the economic agents” (Article 119, Section 2).

As Gavin Stevens, a character in William Faulkner's novel, Requiem for a Nun, put it, "the past is never dead. It isn't even past." Conservative politicians in Korea - like politicians as a general breed - have always had an affinity for government power, so why should we be surprised by their current contortions as they desperately seek to retain their positions?

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Don't Like Cronyism? Shrink Government Power

Korea's left-wing media is all abuzz today over a new study, issued by Chaebul.com, which finds that - are you sitting down for this? - the heads of local conglomerates tend not to spend much time in the clink when convicted of wrongdoing. And you'd better stay in your seat, because I'm about to quote from the Hankyoreh newspaper - almost certainly a first, but when they're right, they're right:

...seven heads from among the top ten conglomerates in terms of assets were sentenced to a collective total of 22 years and six months in prison since 1990, but all were given suspended sentences. In contrast, just 25% of people from the general public received suspended sentences in criminal cases last year.

Here we have exhibit 1-A in illustration of the fact that South Korea is not a free market. Many of the cases cited in the Chaebul.com report involve political corruption, that is, of corporate heads maintaining slush funds for the purpose of bribing politicians. The expectation, of course, is that such "donations" will lead to preferential treatment and protection from the market, arranged by said politicos, else why would anyone bother bribing them in the first place. The obvious corollary to this truth is that no one bothers to bribe someone who can provide nothing in return. I might try to bribe a police officer to get out of a speeding ticket, but I wouldn't bother trying to pay off the pizza delivery boy to accomplish the same end.

A few months back, at the peak of the Occupy Wall Street movement, someone posted the following Venn diagram and it bounced through the internet with a quickness.

Both Occupy Wall Street and the Tea Party movements in the United States believe that government-corporate collusion is a threat to the health of the nation's economy. Each side, however, comes to this belief from a different direction. The Occupy crowd, who in Korea would be among the Hankyoreh's likely subscribers, insists that this corruption can be regulated away if only we would get the right people into office and if only these right people were allowed to do the right things. In other words, we should give the government more power.

By contrast, free market types, like the Tea Party and those of us who haunt the halls of CFE, believe that government power is precisely the dung heap which attracts the corporate flies. Quite simply, if you concentrate power in government, you also concentrate the power of those who can afford to lobby the brokers of that power for favors.

As ever, then, identifying the problem seems to be easier than agreeing on a "solution."

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Competition is a Process of Discovery

In a free society, who should make the cars? Who should grind the soybeans and mold the tofu? And who should run the grocery stores? Is the answer to any of these questions obvious, ex ante? That is, can we say that only those individuals whose father worked as an automobile engineer should be charged with making the cars, and that those who grew up in tofu-making, or merchant, families should carry on the family business? Would we expect an efficient use of resources and the highest quality of product to emerge from such a system? I suspect, at this point, that you’re shaking your head “no.”

Somehow, though, members of South Korea’s ruling Saenuri Party (formerly the Grand National Party) have decided that they do, in fact, know who ought to be your local butcher, baker, and candlestick-maker. In an attempt to mold the Korean market to their whims, the Saenuri leadership has put forth a bill that would prohibit large retail stores – such as E-Mart, HomePlus, and Lotte Mart – from opening new outlets in small cities for the next five years. Said Kim Jong-in, a member of the party’s leadership:

“If [we] don’t provide an institutional framework, small and medium-sized retailers are all bound to shrivel up, hiring will be destroyed and welfare demands will grow. There is often talk of market principles, but a market economy’s problems are not always solved by the market and require restraint for a certain amount of time.”

In his essay “Competition as a Discovery Procedure,” the economist F.A. Hayek wrote that “if anyone actually knew everything that economic theory designated as ‘data,’ competition would indeed be a highly wasteful method of securing adjustment to these facts.” In reality, this ‘data’ acts a veil, tricking us into believing that we know more about the economy than we actually do. The purpose of competition is to continually reveal new information about who can do what more efficiently than it has ever been done before, and then to prod the relevant actors into the most rewarding activities. As the title of Hayek’s piece suggests, competition allows us to make these discoveries without the conscious design of any central planner in government – indeed, these central planners are incapable of making such discoveries, only of blocking them.

Consider that in the early 20^th Century, the United States automobile industry was populated by hundreds of small-scale manufacturers, outfits with names like American Chocolate, Hupmobile, American Underslung, Stoddard-Dayton, and Desberon that have long since disappeared into the ether. Eventually, of course, the American auto industry consolidated around three large firms (Ford, General Motors, Chrysler), but imagine if the U.S. government, in a misguided moment of good intentions, had decreed that the myriad small firms deserved protection from their larger rivals. Such meddling may have spared America the Edsel and the Citation, but it just as likely would have deprived us of the ’55 Thunderbird and the ’69 Hurst Olds as well. More importantly, the initial chaos and ultimate amalgamation of the market led to the realization – the discovery – of economies of scale and a vastly better product for the consumer.

What the Saenuri Party is proposing is not so much a protection of small local retailers, but rather a punishment of consumers who would surely flock to the larger outlets if given a chance. If forced to compete, the smaller stores would likely find they either had to specialize – by offering local, organic products not available at the likes of E-Mart, for instance – or face failure. And by blocking the entry of larger stores into the market, the government is short-circuiting an essential operation of the market economy on which we rely for our ever-improving standard of living.

As Israel Kirzner writes in this Cato Institute Policy Analysis:

"…it is necessary, of course, that entrepreneurs be free to act upon their discoveries -- no matter how this may redound to the disadvantage of those who have not themselves made these discoveries. Such freedom to act requires that no entrepreneur be blocked from entry into any line of market endeavor. Freedom of entry is the legal and institutional prerequisite for the discovery procedure of the market."

Just as there is no use in declaring the winner of the World Cup before the tournament plays itself out, we have no way of knowing who will be the best producer of any particular product or service before the market process takes shape. Unlike the World Cup, however, this market process, blessedly, never ends. If only the Saenuri Party members understood this.

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Recommended Reading on Conscription

A few days back I offered these thoughts on conscription and, specifically, why it should be eliminated in South Korea. Somehow, in writing that post, I never came across this this 2011 piece by Joshua C. Hall, an economics professor at Beloit College in the United States. Had I known of it, I would have merely directed you to Hall's article in its entirety and used my own time to address other matters, so fluently does he address the inefficiencies and immorality of mandatory military service. I'd still suggest you read it, but just to whet your appetite, here are a few outtakes.

In my piece, I wrote that the costs of conscription cannot be fully known unless we also account for the lost opportunities of the conscripts. Hall writes:

People's opportunity costs of producing various goods and services, including military services, differ. Conscription ignores the fact that some individuals have a comparative advantage in food production or engineering or teaching and, instead, forces everyone drafted into a military occupation less directly in line with their abilities.

Hall goes on to note that, "by ignoring comparative advantage, conscription reduces the productive capacity of society." Conscription is thus not as cheap as it first appears.

Conscription is also discriminatory, as Gwartney, Lawson and Block argued in a 2001 report: "Singling out a specific group (for example, young men or young women) to pay for something that benefits all is a clear "taking" and a discriminatory form of taxation."

Strange, I have yet to meet a Korean feminist who demands that conscription be applied equally to both genders.

Finally, as I noted in response to a comment on my original post, by using conscription, Korea may not even be getting the best possible military for its money. Quoting from a 1988 US government study, Hall writes:

In addition, conscripted armies cannot take full advantage of specialization, which yields efficiency gains over time as individuals become more productive at repeated tasks. By its very nature, conscription creates an environment in which many soldiers are "short-timers," and, thus, a wide variety of productivity gains related to specialization are foregone in a conscripted army. A 1988 Government Accounting Office report finds that under most assumptions regarding the replacement of career military people with first-time conscripted soldiers, the budget for an equally effective military would be higher with a draft than under a volunteer military.

Do yourself a favor and read Hall's piece.

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Elsewhere...

Hear those crickets? Yes, I know, things have been mighty quiet around these parts in recent weeks. I was buried in work, most of which was merely spillover from last year and which was thus not bringing in any more money despite consuming my time. This week has seen my return to the webosphere, and to writing about matters which actually hold my interest, but most of my latest writing (with the exception of this account of my return to the dark ages) has been a better fit for other outlets. A few links, then, are in order.

Over at the Center for Free Enterprise site, I've written a trio of pieces that will, as chef Paula Deen puts it, knock your socks clean off and into the dryer:

In this post, I explain why you ought to celebrate the fact that Facebook creates so much value even as it creates so few jobs.

Once you've finished reading that post, check out my argument against Korea's system of mandatory military service.

And just a few minutes ago I posted this piece on Korea's lackluster venture capital and SME sectors. The Korean government, you see, crowds out private investment for small firms, protects uncompetitive companies, and then wonders why it has neither a vibrant venture capital market nor a healthy SME sector.

Finally, I've already linked to my recent op-ed for Korea Business Central, but in case you missed it, you can read it at the link.

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Time to End Conscription in South Korea

Ahead of the upcoming parliamentary elections, Korea's political parties are scrambling to appeal to every last constituency. The latest bit of electoral pandering comes courtesy of Representative Nam Kyung-pil of the newly rebranded Saenuri Party (known until recently as the Grand National Party). Seeking to corner the young male vote, and particularly the young soldier vote, Nam has proposed raising the monthly wage of all conscripted soldiers to 500,000 KRW, quite an increase over the 93,800 KRW that these young fellows currently earn for their efforts. If Nam truly wants to garner these estimated 460,000 votes, however, he should take the honorable step of proposing an abolition of conscription altogether.

The most common argument for mandatory military service in South Korea is, of course, North Korea. For more than sixty years, South Korea has remained on a war footing in preparation for any attack from the North, a reality that supposedly necessitates conscription. Absent conscription, the argument goes, too many young men would be inclined to shirk their duty to the nation and the cost of coaxing them into uniform would be prohibitive. Yet, while North Korea must certainly be taken seriously, this defense of conscription ignores important matters of economics and morality.

In the United States, the last soldier press-ganged into military fatigues entered service in December, 1972. Beginning in 1973, America transitioned to an all-volunteer military following years of heated debate between those who favored conscription and those who thought it inefficient and immoral. As David Henderson recounts in this 2010 podcast from Econ Journal Watch (and in this article), economists like Walter Oi pointed out that the true costs of conscription cannot be calculated by simply tallying up the government's budgetary costs. One must also account for the the cost - that is, the opportunity cost - borne by the conscripted young man who is forced to forego several years of his life in order to serve in the military. In the American case, Oi found the loss to draftees, in inflation-adjusted 2005 dollars, to be somewhere between $4.8 billion and $6.6 billion. When young men are forced into military service, they give up better opportunities to contribute to society and to the economy - opportunities in which they might produce more value and thus the tax revenue necessary to pay volunteers.

Perhaps even more important on this front are issues of morality. In the American debate over conscription, the economist Martin Anderson noted that a draft was little different than the forced labor of slavery - and perhaps even worse, as young conscripts are compelled into the odious moral position of choosing between killing and being killed. Yes, South Korea faces an existential threat on its northern doorstep, but what does it say about a country - one which ostensibly represents the side of freedom - which must force its citizens to defend their own nation?

Under a system of voluntary military service, the South Korean government would have to appeal to its citizens' sense of patriotism and to their pocketbooks in convincing them to join the armed forces. That this might be more expensive than the present system is no defense of conscription. After all, no private company is permitted to use forced labor simply because it's cheaper than paying market wages. Why, then, should the government have this power?

In proposing the abolition of conscription, Representative Nam would no doubt sacrifice votes from many older, more conservative demographics in his district, but at least he'd be on the right side of history.

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In Search of Angels

As Korea moved through its rapid industrialization and economic development in the second half of the 20th century, small- and medium-sized enterprises (SMEs) found themselves mostly ignored or marginalized as the Korean government funneled resources into the chaebol that have come symbolize corporate Korea. As early as the mid-1970s, the Korean government began to offer systematic financial assistance to SMEs, but it was not until after the Asian Financial Crisis of 1997-1998 that the government launched its most generous policy support for the smallest fish in Korea's business pond. As Dongsoo Kang of the Korea Development Institute notes, these policies were both an admission that the nation had become too dependent on the fortunes of a few large firms as well as compensation for the earlier sacrifices made by SMEs due to the unbalanced economic growth of the country.

Not surprisingly, SME performance initially accelerated with the help of these programs, but in recent years the Korean government has found itself protecting a large number of uncompetitive businesses - "zombie" firms - from the winds of competition, thus wasting scarce resources that could be allocated elsewhere. Indeed overprotection by the state has become the primary barrier to the development of a truly competitive stable of SMEs in Korea.

Via the Joong Ang Daily

To be sure, many aspiring entrepreneurs in Korea face the timeless problem of obtaining the financing necessary to get their product or service off the ground and out the door, a challenge made all the more tricky given the dearth of venture capital funds floating around the country. As the graphic to left (published today as part of a special report on the subject of venture capital in Korea) shows, Korea lags far behind a nation like the United States in terms of angel investments, even when accounting for differences in GDP.

Granted, the United States is exceptional in the success of its venture capital markets, but Korea has cause for concern as it seeks to kickstart its economy for the future. SMEs are at the heart of a capitalist economy and are an essential well-spring of products and practices that trigger what Joseph Schumpeter termed "creative destruction," the free market's often untidy way of delivering progress and creating wealth. It's fair to wonder, then, what will happen to a Korean economy in which SMEs are not a source of this dynamism.

The job of venture capitalist, of course is not for the faint of heart, and it is a role from which private investors often shrink. Banks are reluctant to lend to start-ups and young businesses that lack adequate collateral or whose prospects are simply too risky. In addition, creditors face the problem of differentiating between the financial situation of an SME and that of its owners, who may have, for instance, taken second mortgages on their homes to finance the early activities of the company. Finally, and perhaps most importantly, reluctance to extend financing to SMEs can be especially strong in the case of the most innovative firms, which are, by definition, unproven and thus more of a risk.

In Korea, therefore, the government has stepped in to fill this gap. State support for SMEs has taken a variety of forms, including credit guarantees, direct and indirect loans, credit insurance, and venture funds. There is also batch of non-financial programs aimed at supporting SMEs, including support for research and development, infrastructure, and education and knowledge transfer. One result of state financial support to SMEs has been to reduce the incentives for the private sector to seek out profitable investments among fledgling companies. After all, it is difficult for private banks with budget constraints to profitably compete against with the government's subsidized loans.

The intention of these programs, of course, was to spur innovation and productivity, but as ever, we must distinguish between intentions and results. As Gunseli Baygan of the OECD wrote in his 2003 report on venture capital in Korea, "the dynamism of venture capital markets is subdued by the extensive government role in all aspects of financing. Government support provided to smaller enterprises tends to protect them from normal business pressures, diminishing competitiveness and innovation." As a result, Korean SMEs continue to struggle. Instead of recognizing the errors of its excessive intervention, however, the government has stepped in with additional measures - such as prohibiting large firms from operating in certain business sectors - which are sure to further harm the prospects of SMEs.

So why haven't Korean SMEs become an engine of Schumpeterian creative destruction? As we've seen, Korea's development model created an environment that was biased against their success, built as it was on a system of tightly rigged state-chaebol relations, and the lingering effects of this structure remain evident today. In trying to atone for these historical inequities, however, the Korean government has acted in accordance with the same statist philosophy that created the problem in the first place. Until politicians and bureaucrats realize that they cannot simply wave their baton and orchestrate success, they should not expect the condition of local SMEs to improve.

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Facebook, Efficiency, and (Not Steve) Jobs

As Facebook prepares for its much-anticipated initial public offering, many a hand has been wrung over the supposedly troubling fact that, while Facebook is a wildly successful company, it actually creates very few jobs.

Consider the graphic above, which accompanied this recent Wall Street Journal piece. Toyota, arguably the world's most successful car company, employs more than 317,000 workers around the world, which results in $15,454 of net income per employee. Facebook, by contrast, gets by with a mere a 3,200 workers and thus pulls in $312,500 in net income per person.

Such efficiency, however, is not universally cheered. On the latest edition of the syndicated political talk show Left, Right, & Center, for instance, panelist Chrystia Freeland - as she is wont to do - lamented the fact that so few people can create so much value. She remarked:

Where I have a concern, and something I think we're not talking about enough, is all the economic action, as epitomized by Facebook, is in a space that isn't creating a lot of jobs...to me the pressing social and political question is, how do we deal with this digital revolution that may be creating economies and societies where entrepreneurs do fabulously well but they're not creating that many jobs?

If that's how she feels about Facebook, I can only imagine how panicked Freeland and her like-minded colleagues must be about nature and its abundant gifts to humanity. Not a single job is created in the production of rainfall, oxygen or sunlight. Each of these things simply pours down upon humanity, free of charge, thus making each of us poorer as a result (to use Freeland's logic).

Where Freeland-esque thinkers go wrong is in their focus on "job creation" rather than "value creation." We should applaud firms like Facebook that are able to create extraordinary sums of value with so few workers. Human time and labor are scarce resources, and when more is required in one area, less is available in others, a fact which has defined the advance of human prosperity throughout history. The development of settled agriculture allowed humans to produce surplus food, which meant that fewer folks were needed to hunt and/or gather and could instead focus on a trade like making clothes, tools, weapons, or - to bring us back to the modern era - social networking sites like Facebook. As industries become more efficient, the workers who are no longer needed in those sectors begin to put their entrepreneurial talents to work and, in the process, create entirely new industries and firms.

Writing in The Freeman, Steven Horwitz makes this very point:

A century ago 40 percent of Americans worked in agriculture; today it’s less than 2 percent. The former farm workers didn’t all go unemployed. The wealth created by higher farm productivity and lower prices enabled us to demand all kinds of new products that in turn created many more jobs than were lost in agriculture. This is the story of innovation everywhere.So rather than talking about job creation, let’s focus on value creation. The case for freeing markets is that such freedom best enables individuals to find ways to use their knowledge and skills to create value for others and thereby create wealth for themselves. The more wealth that value creators can keep, the more likely they are to continue to create it. Even if a value-creating innovation destroys jobs in the short run, the increased wealth will bring a great deal of job creation in its wake.

What, then, is to become of the workers not needed by the likes of Facebook and Twitter? I don't know, and I doubt anyone else does either. But then, I imagine that, back in 1920, there were plenty of rural American newspaper editors fretting over the fate of all the youngsters who were no longer needed down on the farm.

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Wherein Aaron Gets His Comeuppance

Back when I was a kid, my Grandparents lived in an old Idaho farmhouse which, for one reason or another, lacked a flush toilet. Oh, the home had a commode, but I recall that flushing it involved dumping a bucket of water into the tank. Why we were still doing this in the early 1980s I don't recall, but it certainly beat the other option: a proper outhouse out behind the brooder house.

I bring this up this because, several weeks ago, I mentioned to the missus that we'd probably do well to leave the water taps dribbling on the coldest days if we had any interest in preventing our pipes from freezing. Before last winter, I'd never had this experience but after the hassle of getting them flowing again on that occasion, I didn't care to do it all again.

Well, fast forward to yesterday morning, which found Seoul flash-frozen by -17° centigrade temperatures. I was in a hurry to get out of the house, as was my wife, who was starting a new job and who thus had matters aplenty on her own mind. Fast forward to 8 PM last night when I came strolling into the house, ready for a hot shower and a shave after a day at work only to find that the water taps were dead and dry.

In one of his more well-known remarks, Woody Allen once quipped that "not only is there no god, but try finding a plumber on Sunday." I'll go you one further, Woody: try getting a plumber to your house on a day when all your fellow nitwits also didn't remember to guard against frozen pipes. And so, after trying to thaw the pipes ourselves, to no avail, it appears that we're to live without running water until at least tomorrow.

I have no doubt that my grandparents would be dealing with this lack of indoor plumbing with considerably more grace and stoicism than I can muster. Growing up in this modern world, where the toilet stands ever-ready to whisk away your deposits, I daresay I've become an impatient, mollycoddled pantywaist who can't stand a few hours of diluted hardship.

Bottom line: remember to leave those taps flowing ever so slightly, lest you end up letting the yellow mellow and trucking buckets of water to flush the brown down.

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