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Alan D. Hyde
04-09-2003, 06:01 PM
Some good thoughts here, I think. Heterogeneity is as beneficial to social and economic systems as it is to ecosystems.

AFTER THE WAR

The Company Way
What does Iraq need? Corporations.

BY JOHN MICKLETHWAITE AND ADRIAN WOOLDRIDGE
Wednesday, April 9, 2003 12:01 a.m. EDT
The Wall Street Journal

The war is still raging in Iraq. But already a familiar cry can be heard from the left. The only victors from this horrific mess will be those ravening beasts of capitalism--companies. This is a "corporate war," the protesters argue--a war driven by Big Oil rather than by democratic idealism, a chance for President Bush's corporate cronies to get a return on their investment.

Look, they say, at the $100 billion worth of rebuilding contracts that will be divvied up over the next few months. Look at the way that a subsidiary of Halliburton, Vice President Dick Cheney's old company, landed a contract to fight oil-well fires. And look at all the money that the defense giants will make from replacing the bombs and bullets that are raining down on Baghdad.

There are lots of possible retorts to this sort of conspiracy-mongering. For instance, that Iraq's eventual return to the world oil market will surely push oil prices downward--which is hardly good news for Big Oil. Indeed, most businesspeople abhor the fog of war and the disruption that it brings: The stock market hasn't exactly leapt for joy on news days that suggested a longer-than-expected conflict.

Yet the best answer is a much simpler and far less defensive one. Companies, and lots of them, are exactly what Iraq (and indeed the whole of Arabia) needs. Developing private-sector corporations is the key to unlocking Iraq's economic potential. This will also help unleash a powerful liberal force in a society that has tasted too little freedom.

Reflect for a moment on the history of the past 500 years and you discover that the much-vilified private-sector company has been the West's secret weapon. In 1500, Arabia was ahead of Europe in terms of its commercial development. Contrary to all the current mythology about Islam being "antibusiness," the Prophet Muhammad, who was himself a trader, looked on commerce far more favorably than has the Christian church.

Yet the Arab world--just like that other erstwhile commercial pioneer, China--failed to develop private-sector companies in the same way that the West did. The decisive break came in the mid-19th century, when Victorian Britain passed a series of Companies Acts making it easy to establish limited-liability private-sector companies. Capital that had been trapped in fragile family partnerships (like Dickens's Dombey & Son) or stodgy state-approved monopolies was suddenly free to roam. In the West and Japan (the only Asian country to embrace the form), these new "Ltds," "Incs" and so on revolutionized productivity, showered consumers with a relentless series of innovations and drove the first great age of globalization.

The Arab world's failure to adopt this revolution meant that it fell ever further behind the West. Islamic inheritance law--dividing estates among sons--made it difficult for partnerships to grow to a size where they needed outside capital. The state still dominated the economy. When the Arabs did try to catch up with the West, inspired by "the lion of Egypt," Gamal Abdel Nasser, they chose to imitate the centrally planned economies of the communist world, further marginalizing private companies. Nasser, a devoted reader of Le Monde and Britain's New Statesman, would have been better off studying the Harvard Business Review.

The result is a region mired in stagnation. Leave aside oil, and the total exports of the major Arab countries are smaller than Finland's. Economies such as those of Saudi Arabia and Kuwait are dominated by nationalized oil companies that specialize in providing jobs and wealth for the ruling families.

The Iraqi economy is among the worst. Its only significant company is a gigantic monopoly--the Iraqi National Oil Co.--that is run by the Ministry of Petroleum and pours money into the pockets of Saddam's cronies. The Arab world spins all sorts of vile conspiracy theories to explain Israel's high standard of living, while its own people are condemned to unemployment and declining incomes. It would do better to examine the way that high-tech companies power that tiny country's economy.

But is Iraq ripe for the wonders of the company? Skeptics produce two arguments. The first is that new companies in Iraq will come only in the form of foreign oil multinationals--an improvement perhaps on the Iraq National Oil Co., but not something that will convert ordinary Iraqis into entrepreneurs. The second is that oil economies are lousy at producing popular capitalism; that oil and monopolies go together like love and marriage.

There is some truth in the first criticism. Foreign companies can bring a wealth of capital and expertise (like that now being used to quell the oil fires in the south). But they will not necessarily bring a sense of ownership and entrepreneurship. George W. Bush keeps saying "the oil belongs to the Iraqi people." The U.S. must go out of its way to encourage Iraq to produce indigenous companies to manage that oil wealth.

The second criticism--that oil has to mean big companies--is more dubious. Look at the capital city of America's oil industry, Houston, and you discover that the oil economy is not necessarily synonymous with giant monopolies. The city is a hive of entrepreneurial zeal and highly skilled small energy companies. In 1999, Houston still managed to add jobs, despite a slump in the oil price to $10 a barrel and a fall in the number of oil wells in America to its lowest point in living memory. Separate the oil industry from the iron grip of state monopolies and it is subject to the same forces that are breaking the rest of the corporate world into smaller and nimbler pieces.

Introducing corporate capitalism to any country is difficult--as Russia shows. President Boris Yeltsin tried to unleash entrepreneurship by both selling and giving people shares in former state monopolies, but he forgot about the importance of antitrust laws. Too much power has ended up in giant companies, mostly run by former Soviet apparatchiks, like Lukoil and Gazprom. On the other hand, there are plenty of other industries, such as beer, in which regular capitalism, with multiple companies, competition, branding, marketing and so on, is beginning to take hold.

The argument for introducing private-sector companies to Iraq should not just be about productivity. One of the many virtues of companies is that they provide a constraint on the power of the state. As Peter Drucker has noted, the joint-stock company was "the first autonomous institution in hundreds of years, the first to create a power center that was within society yet independent of the central government of the nation state."

Companies, on an individual basis, are capable of appalling abuses. But in the aggregate, these "little republics" bolster the civil society that makes democracy work. It cannot be entirely accidental that a liberal society such as the U.S. has 5.5 million companies while Iraq and North Korea have none. So let the corporation rip in Iraq. It is one of that unfortunate country's best chances of transforming itself into a prosperous, democratic country--and of acting as a beacon of light to the rest of the Arab world.

Messrs. Micklethwait and Wooldridge, writers for The Economist, are the authors of "The Company: A Short History of a Revolutionary Idea," just published by Modern Library.

***

Alan

[ 04-09-2003, 06:03 PM: Message edited by: Alan D. Hyde ]

Meerkat
04-09-2003, 06:07 PM
Screw the fog of war: they don't even like the fog of competition.

IMO, the biggest problem with corporations is that they all want to be monopolies when they grow up. So far, nobody seems to have found an effective way, or the political will, to counter-balance that and the corporations themselves don't seem inclined to live with an "adequate" share of the pie - they generally seem to want to go for the whole hog.

[ 04-09-2003, 06:10 PM: Message edited by: Meerkat ]

Greg H
04-09-2003, 06:11 PM
Is this some of the propaganda art you mentioned, Allan?

1. Always start by defining your opponent, he who controls the language, controls the argument.

Mer--- malignant capitalism must grow or die. Let's hope for a benign form.

[ 04-09-2003, 06:15 PM: Message edited by: Greg H ]

Meerkat
04-09-2003, 06:32 PM
Originally posted by Donn:
Contrary to Meerkat's totally unsupportable belief, Greg, there are benign corporations. Most, in fact, are benign. That's why capitalism works.Contrary to Donn's unsupportable scurrilous allegation, I never said that all corporations are malignant. Many, in fact, are benign. That's why capitalism works :D

JimD
04-09-2003, 08:16 PM
I mentioned in another thread that historian Paul Johnson wrote the Shaw of Iran was overthrown by the ayatollas mainly because the Shaw tried to make too many sweeping changes, too fast, through a policy that amounted to wide scale social engineering. I hope some of W's advisors have read Johnson

NormMessinger
04-09-2003, 09:48 PM
Capitalism works because of strong government regulation.

Art Read
04-09-2003, 11:42 PM
No... Capitalism works because everybody has his/her own best interest at heart. Capitalism is preventented from it's worst possible incarnation by REASONABLE government regulation.

Ken Hall
04-10-2003, 09:09 AM
For an interesting (well, it is to me) debate on this very topic, check out this debate between Jeffrey Tucker, at the time an Auburn doctoral candidate, and Kenneth Elzinga, professor of economics at the University of Virginia, carried online at the Acton Institute in their ongoing "Markets and Morality" section.

http://www.acton.org/publicat/m_and_m/1998_mar/tucker.html

http://www.acton.org/publicat/m_and_m/1998_mar/elzinga.html

http://www.acton.org/publicat/m_and_m/1998_mar/tucker2.html

Interesting points on both sides of the discussion.

Tucker is arguing against antitrust law, Elzinga in favor.

Where I come down on the issue is this: Where regulation prevents cartel behavior that the market itself is otherwise structurally unable to punish (for whatever reason), or otherwise prevents the offloading of negative externalities to other stakeholders, that regulation is valid and necessary in this flawed and fallen world. Where regulation serves as a barrier to entry, discouraging entrepreneurship (edit to add: large firms can afford a regulatory environment as a cost of doing business, small startups often cannot), we need to look at modifying or reducing the burden.

[ 04-10-2003, 09:11 AM: Message edited by: Ken Hall ]

JimD
04-10-2003, 03:26 PM
Originally posted by Art Read:
No... Capitalism works because everybody has his/her own best interest at heart. Capitalism is preventented from it's worst possible incarnation by REASONABLE government regulation.so could we say reasonably strong regulation :rolleyes:

NormMessinger
04-10-2003, 06:23 PM
I think he is saying capitalism works because people are selfish. Capitalism is not working especially well in Mexico. Why? Or maybe it is.

Meerkat
04-10-2003, 07:35 PM
Originally posted by NormMessinger:
I think he is saying capitalism works because people are selfish. Capitalism is not working especially well in Mexico. Why? Or maybe it is.Interesting isn't it Norm? It seems as though, from Mexico to Terra Del Fuego, there are capitalistic democratic countries with a tiny minority of extremely wealthy, a miniscule middle-class and an overwhelming mass of impoverished. I wonder if the mega-corporations there have established a climate that stifles individual or small company entrepeneurship? I suppose the corruption doesn't help either.

Thank goodness our government doesn't give all the business to favored corporations at the expense of the rest... oh, wait, they are now! Banana anyone?