The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part 1: Rights, Property, and Markets
• Property Or “property Rights”? *
• “design Faults” In Locke’s Theory of Property Taint Ownership With Guilt *
• Is Ownership a Myth? *
• How to Get a Free Lunch? Just Apply For It *
• The Problem of Contract Enforcement *
• The Public Goods Dilemma *
• Trying the Free Market *
• The Statist Legacy *
• Part 2: The Common Sense of Non-economics
• The Yakoubovich Syndrome, Or Lies, Damn Lies, and Economic Policy *
• Winning Policy Battles But Losing the War Against Economic Realities *
• Paying Ourselves More of Their Money *
• The Doctrine of “unequal Exchange” the Last Refuge of Modern Socialism? *
• Corporate Managers Are They Going to Kill Capitalism? *
• When the Economy Needs Morals *
• The Political Economy of Force-feeding *
• Hostile to Whom? *
• Mannesmann’s Courtesy Could Prove Rare *
• Part 3: French and Russian Tragicomedies
• Can Putin Build a Real Economy From Oil and Rigor? *
• Russia and the New Europe Growing Apart *
• Russia Hopping Along On Clay Feet *
• The French Tragicomedy *
• How the French “social Model” Could Self-destruct *
• A Little Bit of History Repeating *
• There Is No French Exception *
• The Hobbling of Private France *
• Part 4: The Capitalism They Hate
• The Capitalism They Hate *
• Striving to Get Richer and Poorer *
• “bread and Circuses” In the Modern Welfare State *
• Who Minds the Gap? *
• Float Or Sink? the Millstone of the “social Market” In Germany *
• How Germany and France, the Sick Men of Europe, Torture Themselves *
• Shall We Borrow From the Children? *
• Low Pay *
• Freedom to Strike Or Right to Strike? *
• Part 5: Creating Unemployment
• Stamp Your Feet and Demand a Fair Deal *
• Paternalism and Employment *
• The Things Labor Unions Are Up to *
• The Instability of the Welfare State *
• Some Bad News Could Be Good News *
• Built-in Unemployment Social Protection Costs More Than It Is Worth *
• Let ’s Throw This Model Away *
• How to Stifle Employment By “social Protection” *
• Workable Alternatives *
• A Tale of Two Models *
• A Vicious Circle of Social Kindness *
• Part 6: The Future of Europe
• The Economic Consequences of a United States of Europe *
• A Giant Free-trade Area Or a Political Counterweight to America? *
• European Crosscurrents and the Federalist Drift *
• How Confederacy Could Turn Into a Federal Superstate *
• Majority Rule By Any Other Name *
• What Now For “europe”? Why the People Failed Their Masters *
• Free-riding On the Euro *
• Some Democratic Economics *
• The Soviet Legacy *
• A War of Attrition Between Economic Reality and Political Dreams *
• A Brightening of the Economic Skies Over Brussels? *
• Turkey Knocking On Europe’s Door *
• Turkey and the Eu Club *
• Europe More Secular and More Islamist *
• A Bill of Rights Europe Did Not Need *
• Europe’s Social-democratic “government” *
• Power Corrupts, So Let ’s Make It Less Absolute *
• Part 7: Economics, True and False
• On the Economics of Protecting Employment *
• The Costly Mistake of Ignoring Opportunity Costs *
• “globalization” and Its Critics Mutual Gain Vs. Cloud-cuckoo Land *
• Are High Oil Prices a Form of Exploitation? *
• Immigration What Is the Liberal Stand? *
• More Nonsense On Stilts Mr. Bentham Is At It Again *
• Risk, Value, and Externality *

A WAR OF ATTRITION BETWEEN ECONOMIC REALITY AND POLITICAL DREAMS*

The international economic scene, like a good Western, is populated by white hats and black hats and is enlivened by tests of strength and endurance between them. The white hats are fighting for the prosperity of the ranch and they have nature and economic realities as their ally. The black hats try to get control of the ranch as a means of realizing political dreams and are backed by mass shortsightedness and gullibility. For the last decade or so, despite some lost battles such as the capitulation of the French government in the great transport strike of 1995 or the failure of the Italian government to force through essential pension reform, the white hats were quietly winning the war. Markets were becoming more free, welfare systems less extravagant, and governments a little less demagogic. After a series of disastrous presidents from Jacques Delors to Romano Prodi, the Commission of the European Union gained a more enlightened leadership under José Manuel Barroso and a more “northern,” more freedom-oriented team of commissioners. They are now the target of bitter attacks by socialists of all countries and all parties for their “Atlanticist,” “ultraliberal” leanings—a sure sign that they are doing some good work for the ranch. The “Yukos affair” in Russia and the “Bolkestein Directive” in the EU are two campaigns in this ongoing war of attrition.

THE YUKOS AFFAIR

In Russia, after his reelection President Putin announced a sensible economic program, encouraging hopes that after two failed attempts in 1861 and 1905, that potentially rich country might be third time lucky and finally extricate itself from the wet, cold mud in which it seemed to be forever mired—thanks mostly to the caprice and perversity of its own governments.

Now, however, a stalemate in the war of attrition seems to exist where neither side is really winning and the black hats give as good as they get. President Putin, despite protestations to the contrary, has abandoned his avowed policy of establishing secure tenure for property with freedom and light taxation for enterprise, both indigenous and foreign. The Yukos affair bore spectacular witness to this U-turn. The company, the country’s biggest privately owned hydrocarbon producer, was hit by a series of claims for taxes in past years that could not even pretend to be founded on the tax code; for 2001 and 2002, the back tax claimed exceeded the company’s total sales. To satisfy unpaid tax demands of $21 billion, the government put up Yukos’s largest productive asset at public auction and sold it to the sole bidder, a letter-box company, for $9 billion; the letterbox company then sold it on to state-owned Rosneft for the same amount. The sinister aspect of this comedy is that the Russian government asserts with a straight face that Yukos was not nationalized, let alone confiscated; the transaction was a perfectly normal case of recovering a debt owing to the state. There is much apprehension in Russia that other, albeit less spectacular, cases will follow.

The running is made by a squad of gray eminences around the president, many his former colleagues in the KGB, some holding high rank in its successor, the FSB. They are nationalist and not corrupt by Russian standards, but not literate in economics. Government ministers are mainly gray bureaucrats with the possible exception of finance minister Kudrin. The intellectual cream is represented by two liberal (in American English, “classical” liberal) economists: Germain Gref, the economy minister, and Andrei Ilianorov, Putin’s personal economic adviser. Ilianorov openly called the Yukos affair “a swindle” and was reduced a notch in rank but kept his place. Gref declared that the government will not meet the president’s 7 percent p.a. ten-year growth target “by banging the table.” He warned that the scarcest factor of production in Russia is an honestly functioning court system, without which the country, intoxicated for the time being by the high oil price, will sink back into the perennial mud.

A delegation of Western economists was received by Mr. Putin and castigated him for not pressing on with his original economic reform program. He told them with a rare sign of real humor: “Everybody wants to go to heaven, but nobody wants to die.” Political expediency and short-termist compromise must prevail over the virtue of doing the right thing.

THE BOLKESTEIN DIRECTIVE

The Bolkestein Directive is not the title of the latest thriller you find in the airport kiosk. It is the last major administrative act of the outgoing EU commissioner for the internal market. It is designed to make the market for services within the EU as free as the market for goods. Its particular sting is a country-of-origin clause which permits a Polish, Baltic, or Hungarian person, say an architect or a market research agent, to sell a service in Germany or France while only paying the (low) social insurance premiums and taxes due in his home country. This is taken in Western Europe as a quite flagrant license to practice “social dumping,” the undercutting of decades of socialist achievements, and is political dynamite. President Chirac of France promptly “vetoed” the directive and was joined, though in less peremptory style, by German chancellor Schroeder. Brussels says the directive was issued under existing powers, cannot be “vetoed,” and will stand. The French government of course will do as it pleases. It will not be the first time that it refuses to apply a directive or honor a treaty; its contempt for the deficit limit it signed up to in the Maastricht stability pact is eloquent proof that the EU cannot force a major member country to do what it really hates doing.

THE LISBON REFORM PROGRAM

The Bolkestein Directive, like the Yukos affair, is symbolic of wider conflicts. In 2000, the EU countries solemnly adopted the Lisbon Program of economic reforms that were to make Europe “the world’s most competitive, knowledge-based economy”: education was to be reformed, regulation simplified, and above all labor laws were to be eased to enable labor markets in the most sclerotic of euro-zone countries, Germany and France, to start functioning.

In the universities, regulatory agencies, and the unions, the black hats were, and still are, sitting in heavily fortified positions. For nearly five years now, they did not permit the Lisbon program to move forward. After he took office last November, and after he survived attacks by the left-leaning European Parliament and other socialist bodies, Mr. Barroso proposed to revive the Lisbon Program and tried to rally member countries to it. He was told in barely veiled terms by some major euro-zone governments that they were more concerned with safeguarding the “European model” than with initiatives that would make waves.

Germany, independently of the Lisbon Program, did carry out one immensely important reform of unemployment benefits that will almost certainly produce a speeding-up of economic growth later this year, though things will first have to get worse before they will get better. France relaxed the ceiling of permitted overtime under the infamous 35-hour-workweek laws from 130 to 220 hours a year. The new upper limit would permit a “legal” workweek of 39 hours, though they would be quite expensive overtime hours. However, true to form, the government made this extension of authorized overtime subject to the agreement, not of the workforce at a plant or office, but of the union supposed to represent them. This was yet another step in the government’s continuing effort to build up the unions and give them an importance by means of legislation that their sparse membership (only 8 percent of the labor force, and that almost entirely in the public sector with negligible membership in private industry) would not justify. However, according to the European model the unions must be important and if they are not, the government will give a helping hand to make them so.

[* ]First published as “A War of White Hats and Black Hats: A War of Attrition Between Economic Reality and Political Dreams,” by Liberty Fund, Inc., at www.econlib.org on March 7, 2005. Reprinted by permission.