The Firm vs. Nationalism

0:00Ludwig von Mises was not what we would today call politically correct. And one of Mises' least politically correct articles is a piece that he published in 1950 called The Idea of Liberty is Western. Mises was not offering a racial or a cultural explanation for the origins of liberty, but rather an institutional one. And I quote, Mises says, The idea of liberty is and has always been peculiar to the West. The East, the Oriental world, lacked the primordial thing, the idea of freedom from the state. It never called into question the arbitrariness of the despots.

0:46And first of all, it never established the legal framework that would protect the private citizen's wealth against confiscation on the part of tyrants. In other words, the rise of the Western world, the reason that the commercial and industrial revolutions happened in Europe and not, for example, in China, was not due to climate or natural resources or geography, as Jared Diamond would have it, for example, or luck or martial spirit, but rather due to institutions, institutions that protected private property, the rights of individuals, and limited the power of the sovereign. Now, key to the development of such institutions was the role of transnational or multinational organizations, most important of which, of course, was the church, the medieval church.

1:42The church was an organization that exercised real authority, but was not identified exclusively with any particular state. In fact, as Professor Reiko has reminded us, there's an emerging consensus among mainstream scholars, economic historians and political scientists on the rise of the West and the wealth and power of the Western world. Nathan Rosenberg, Rosenberg and Birdsell, Joel Moqueur, Douglas North, David Landis and so on have all written that Europe became wealthy precisely because unlike the Eastern civilizations, Europe was highly decentralized.

2:28That European political and social life was governed by a complex web of institutions and organizations with overlapping jurisdictions, Each of which competed with the others and placed limits on the power and authority of the others. Let me quote from one of Ralph's recent papers. Ralph says, the gist of the modern scholarly view is that Europe developed economically and eventually outstripped the rest of the world Largely because it was at once a common civilization, i.e. Latin Christendom, but also a radically decentralized mosaic of polities. This created multiple opportunities for economic and also political progress.

3:15There was competition among political entities, which came to see that a favorable treatment of property rights retained and attracted productive citizens. On the other hand, when a state behaved as states customarily did and do throughout history, i.e. as an unconstrained predator, it tended to lose ground to competing states. Other factors played crucial roles, but Europe's radical decentralization and the possibility of exit was the key factor. Today, of course, the church no longer plays that kind of a role as a limiting influence on the state. As Tom Woods alluded, even among some conservative evangelical congregations today, the church is sort of a branch of the Bush administration and the Republican Party.

4:06On the other hand, there are important multinational and transnational institutions that do place powerful limits today on state power. These include charitable and relief organizations like the Red Cross or Doctors Without Borders. Educational institutions like the Mises Institute, social and religious movements and groups, websites, even the internet itself in an important sense. But the most important such transnational institution is the business firm, the modern multinational or transnational corporation. And this afternoon I want to talk to you about such firms and the role that they currently play and potentially can play in limiting the power of the state.

4:52Of course we shouldn't be surprised that capitalism and capitalist institutions such as the firm are fundamentally at odds with the state. If you recall the famous distinction made by the German sociologist Franz Oppenheimer between two means of creating and acquiring wealth. The first, through voluntary exchange, what he called the economic means, and second, through theft, confiscating the wealth of someone else, which Oppenheimer termed the political means. The state in Oppenheimer's definition is, quote, the organization of the political means. In Murray Rothbard's words, Rothbard being influenced by Oppenheimer, Rothbard says, quote, the state is organized theft, organized robbery, and organized exploitation.

5:45The state encourages conflict among people, while capitalism, the free market, leads to harmony or encourages harmony and peaceful interaction. Of course, it's well known that private property and the market system encourage cooperation among strangers, people who don't know each other, people of different races, colors and creeds, people who speak different languages and might otherwise wish to have very little to do with each other. The famous metaphor of the pencil from Leonard Reed's article, iPencil, is one of the classic illustrations of this phenomenon. How thousands and thousands of individuals can cooperate peacefully and voluntarily in the production of even the simplest goods and services like a pencil.

6:32Just last week I read about a very dramatic example of this. The October, this week, earlier this week, the October 24th, 2006 issue of the Christian Science Monitor had an interesting article on a coffee enterprise in Rwanda that employs both Tutsis and Hutus. Let me just quote a couple of paragraphs from the article because it's instructive. A tall, slender Tutsi woman named Jeanette Nira Bagawana has at least a hundred perfectly good reasons never to speak to Anasat's Turimbukanusi again. That's how many of Jeanette's relatives, including her husband, parents and baby, were killed during the 1994 genocide that raced through her hometown here in Africa's midsection.

7:22Anastaz is a confessed killer who, Jeanette says, helped murder her husband. Yet Jeanette does, in fact, speak to Anastas regularly. She even pays him, along with other Hutus who killed her relatives, to work on her coffee farm. Increasingly, their uneasy partnership is paying off. The beans they grow and pick together are being sold, along with those of many other Rwandan coffee farmers, to Starbucks and other high-end U.S. coffee purveyors, creating growing prosperity for her, him, and others. The article goes on, This is a tale of Rwandan-style reconciliation. It may seem almost incomprehensible to outsiders, yet in some cases it works here. It's driven largely by economics. Coffee is Rwanda's biggest export.

8:09To get the beans grown, harvested, and processed, both killers and victims from the genocide are striking an uneasy peace born of economic co-dependence. They need each other to make that container of coffee, A Consultant is quoted as saying. Others have alluded today to the role that business enterprise plays in preventing warfare among states. We only need to look to the example of Walmart and Walmart's relationship with China. One of the things that, in all likelihood, prevents the neoconservatives from launching and their Desired War Against China are the strong economic ties between firms like Walmart and Chinese manufacturers.

8:58Walmart purchased about $23 billion of exports from China in the last year, 2005. As Michael Strong has recently written, Walmart might be single-handedly responsible for bringing about 38,000 people out of poverty in China each month, About 460,000 people per year. During the Cold War, some American grain trading enterprises, in violation of U.S. Congress and the Trading with the Enemy Act, were engaged in grain purchases and sales to the Soviet Union, again making it more difficult for the U.S. to pursue more aggressive policies against the Soviets.

9:47But let's talk specifically not just about importers and exporters, not only about firms that purchase and sell to firms and individuals in other countries, across borders, but more specifically about multinational or transnational corporations. Of the 100 largest economies in the world, 51 are multinational corporations. According to estimates by the UN, the universe of transnational corporations now spans some 77,000 parent companies with almost 800,000 foreign affiliates. In 2005, these foreign affiliates generated an estimated $4.5 trillion in value added, employed some 62 million workers and exported goods and services valued at more than $4 Globally, inflows of foreign direct investment, or FDI, were about 900 billion in 2005, a substantial increase over the prior couple of years, largely due to an increase in cross-border mergers and acquisitions.

11:00The value of these cross-border M&A deals rose almost doubled from 2004's level to $716 billion in 2005. Over 6,000 deals, 6,000 cross-border mergers and acquisitions in 2005. Now multinational companies can be organized in different ways ranging from very tightly structured companies that are headquartered in one nation with affiliates or subsidiaries in other nations to more loosely organize less centralized companies that have headquarters spread across different countries. The partnership between Nissan and Renault would be an example. There's a single chief executive officer of both Nissan and Renault, but executive offices in both countries.

11:50Even Daimler-Chrysler, to an extent, is of this form. The management scholar C.K. Prahalad at the University of Michigan, one of the most prominent writers in globalization and management, distinguishes among what he calls four stages of globalization. And I'll quote from Prahalad, the first stage, companies operate in one country and sell into others. Second stage, multinationals set up foreign subsidiaries to handle the sales to a particular country. In the third stage, the third stage involves operating an entire line of business in another country. Now what we're seeing today, according to Prahalad, what he calls transnationals as opposed to multinationals, represent firms in which, quote, even the executive suite is virtual.

12:38These firms place their top executives and core corporate functions in different countries to gain a competitive edge through the availability of talent or capital, low cost, or proximity to their most important customers. So what we're looking at today is the rise of transnational organizations that have even their central executive functions spread across national boundaries. The rise of such transnational organizations has caused great consternation in some circles. Businessweek published a cover story in 1990, unfortunately I couldn't find a picture of The Business Week was talking in 1990 about the stateless corporation.

13:31And the words of two popular writers on globalization, Horsman and Marshall, they say, quote, effortless communications across boundaries undermine the nation-states control. Increased mobility and the increased willingness of people to migrate undermine its cohesiveness, the nation-state's cohesiveness, that is. Business abhors borders and seeks to circumvent them. Information travels across borders and nation-states, and nation-states are hard-pressed to control the flow. The nation-state is increasingly powerless to withstand these pressures. Richard Swift, editor of the left-wing activist magazine, The New International, reports the following with great alarm, quote, capital moves so freely that it is often impossible for governments to find, let alone to tax.

14:27Corporations treat the world like a global chessboard, bidding down wages and taxes, avoiding environmental regulation and pillaging natural resources. If only that were so. Clearly the critics are exaggerating and overreacting. At the same time, there are important and real mechanisms by which multinational corporations do retard the growth of the state and do place limits on the state. For example, as global companies become less dependent on any particular state, they have Less interest in supporting any particular government with their tax payments. Some writers have written on what they call the fiscal crisis of the state, quote unquote.

15:16This idea that government expenditures are more rapidly outpacing government revenues, often blaming multinational corporations as part of the cause. Subsidiaries have learned how to tap into global labor markets, which makes them less dependent on social welfare policies of any particular nation. Governments can perform some tax arbitrage. They can arbitrage tax rates by shifting reported income among subsidiaries in different countries through transfer pricing, changing royalty rates, other inter-firm cross-departmental accounting maneuvers. This tends to put downward pressure on taxes in any particular political entity.

16:04The ability to shift production among countries puts some downward pressure on labor and environmental restrictions. Information sharing among affiliates of a multinational company can frustrate government restrictions on technology transfer, or at least can make it more difficult for governments to enforce limits on the exportation of key technology from one country to another. More generally, subsidiaries of multinational companies pay less attention to the actions of their host company governments than do stand-alone entities headquartered in states run by those governments because these subsidiaries are operating again on a multinational level where decisions are being made outside the boundaries of the host country.

16:51We know there's a vast number of studies showing that countries with higher levels of measured economic freedom, there's other empirical studies using the economic freedom index that Walter Block and others helped develop at the Fraser Institute, in other words countries with better protection of property rights, lower taxes, fewer restrictions on trade and international capital flows tend to attract more foreign investment, more foreign direct investment than countries with less transparent and more oppressive regimes. So it's well known in the development community that having an attractive business climate is a way to increase foreign investment. This is something that policy makers are coming to realize.

17:39Now, does this mean that we can rely exclusively on transnational corporations to protect us from the state? Well, hardly, hardly. Under the mixed economy in which we all live, of course, multinational corporations have strong incentives not only to avoid restrictions on the state, but also to use the state, to co-opt the state when feasible, to their own advantage. Multinationals tend to support not free trade, but government-managed trade. Large multinationals are among the strongest supporters of GATT and the WTO and so on. Many countries have a whole range of interventions they use to try to attract multinationals, to set up operations in their countries, to try to encourage their own companies to be more multinationally active.

18:34For example, some countries try to match domestic firms with specific international partners, or merger and acquisition targets, taking executives on diplomatic missions and trying to perform matchmaking and so on. Some governments even offer insurance, political risk insurance, for their companies making foreign direct investment overseas. If there's a coup or something in the target country, the home country government will reimburse the firm for its losses. Some countries even offer investment guarantees, more general investment guarantees. We know that host country governments often compete with each other in offering subsidies and other government favors to try to attract large multinational affiliates.

19:26So you look at the automobile industry here in the southeast, Alabama with the, Alabama's Mercedes plant, South Carolina's BMW plant and so on. States are trying to figure out ways not only to provide tax benefits and so on to attract foreign investment but also in many cases outright subsidies. Some governments strongly encourage or even force their own Some countries to engage in multinational activities, sometimes to secure what are perceived as key natural resources. Some Chinese and Indian companies, for example, are strongly encouraged and for practical purposes required by the government to invest in extraction and mining, oil and gas enterprises and so on in other countries.

20:25We can go back to the British East India Company as an example of a multinational enterprise that was anything but a creature of the free market, but was almost sort of a quasi-government enterprise. Certainly when we talk about the potential for multinational firms to constrain the power of the state, we're not talking about Bechtel and Halliburton. We're not talking about the East India Company or the United Fruit Company in Guatemala, which arranged for the overthrow of the president in 1954. We're not talking about British Petroleum in Iran, which arranged to have the, with the help of the CIA and Kermit Roosevelt, the grandson of Ralph Reiko's much beloved Theodore Roosevelt, arranged to have the popular prime minister overthrown in Iran in 1953 Replace with our good friend Desha, leading to the events of 1979 and many other problems we find ourselves with today.

21:28This is not the type of company, obviously, that we're talking about. Nonetheless, the rise in transnational enterprise, not only companies, but in particular, decentralized multinational organizations, represents an opportunity for us. We must continue to explain to people that multinational enterprise is inherently a good thing. It's fine to award the Nobel Peace Prize to an economist and banker, although, as Jeff Tucker has written and others have also explained, this particular recipient this year is really a politician, not a banker.

22:13It would have been even better to award the Peace Prize posthumously to Sam Walton as someone who's done more to promote peace and understanding among the U.S. and China than just about anyone else in the late 20th century. Oh, that reminds me. Let's see if this works. We can all buy these wristbands. I don't know if you can see these. You can get these from the Adam Smith Institute in Britain. They're wristbands. They say, I buy goods from poorer countries. Pick up some of those and show your friends that you're a true globalist and you're an advocate for the less well-to-do in the world, because you shop at Wal-Mart.

23:02We should encourage the operation of these so-called stateless enterprises, Mises, not only firms, but also non-profits, social cultural movements, etc. More generally, we need to continue to remind people of the benefits of voluntary, peaceful, commercial interaction among citizens of different nation-states. We must continue to praise the economic means of wealth creation and continue to denounce the political means.