Response to the End of Free Markets

Paul Fischer

Comparative Economics

5/28/2016

Shirley Gedeon

Rise of a New System, Response

The Ten Largest Corporations

Corporation	Base of Operations	Ownership*
ICBC	Xicheng District, China	1
Construction Bank of China	Beijing, China	1
Agricultural Bank of China	Beijing, China	1
Berkshire Hathaway	Omaha, Nebraska, USA	2
JP Morgan Chase	New York, New York, USA	2
Bank of China	Beijing, China	1
Wells Fargo	San Francisco, California, USA	2
Apple	Cupertino, California, USA	2
ExxonMobile	Irving, Texas, USA	2
Toyota	Toyota, Japan	2

*1 - State Owned 2 - Private Corporations Traded Publicly 3 - Privately Held Corporations

Source: Forbes Global 2000 (note: Forbes Global 500 ceased in 2003)

The Ten Largest Nations in the World (Aggregate E. U.) by Total GDP, 2014

Nation	GDP (US billions of dollars)
European Union	18,510
United States of America	17,419
China	10,354
Japan	4,601
Brazil	2,417
India	2,049
Russian Federation	1,861
Canada	1,785
Australia	1,455
Korea, Republic	1,410

Source: World Bank

Multinational Corporate Growth and Regulation

The numbers and size of the multinational corporations have multiplied enormously. This is reflected both in raw data as well as media coverage of that raw data: the Forbes magazine stopped covering the top 500 corporations just over a decade ago and established the new global 2000 list which is annually produced. Metrics critical to analysis of markets have now ceased to be relevant.

Expiration of media coverage and attention on a select number of keystone leaders has not occurred and this change is due to growth among multinational corporations, and not to a fundamentally unanswered call for comprehensive analysis. Such a need would be expressed during a point of rapid economic contraction of the sort not seen in modern markets. Justice is contemporarily meted out by the invisible hand of the free market, which has historically dominated even the mixed markets of today and created a low level of necessitated oversight or analysis. That is reflected in the rapid expansion of the numbers of multinational corporations by the tens of thousands in the decades after 1970.

There have been changes to the political make-up of the nations which corporations that play a role in the world market are based in. This is a result of both geographical shifts of markets as well as additive gains to extant public markets by authoritarian or hybrid democratic corporations. Substantive indicators of this change in market have become resurgent in the last decade.

In the decades prior to this the top ten corporations were generally publicly traded and read like a grocery bundle of the average American consumer. Today the list stands as a reflection of the near equal mix in the world’s population of those living in free democracies versus hybrid-democratic and authoritarian states. The extreme spreads of authoritarian markets, in which monopolistic behaviors are the norm, translate to fat tails and require a greater relative sample size to gauge efficacy and trends. It has already been established that the mechanisms of evaluation have remained the same after accounting for growth in terms of markets and numbers of multinational corporations, shifting popularly in media from 500 to 2,000 in the early 2000s.

Market inefficiencies are not to be expected as a result of this disconnect between consistent levels of analysis and changing political backgrounds extant in modern markets. There are two phenomena which can be identified which play a role in ensuring this: liberalization of existing free markets and unification of those markets. While carefully engineered corporate structures have entered the global economy as a result of decreased transportation, communication, and commodity prices the political setting for extant corporations has also dramatically changed.

The state may have begun to play a greater role in the United States of America during the recent recession but this concludes a long period, which continues today, of lowered levels of interference, engineering, or support. Member nations of the European Union as well as other free democracies globally have seen dramatic movement towards a libertarian utopia from a vision of a communist utopia (not to be misinterpreted that either would occur under any circumstances naturally). Free democracies globally have found ways to exert greater levels of freedom within their markets.

European markets also reflect well the trend of existing democratic nations towards greater unification, again noting some breaks in application to the United States. While not a new trend, with foreign corporations first challenging American dominance in the middle of the Cold War, it is one which had accelerated in recent decades. This is found in the sudden presence of a European economic power unrivalled since the colonial period, and is a change which must be considered in evaluating the levels of analysis necessitated by markets and is consequence to enormous levels of foreign direct investment across the globe.

State Capitalism

In the twenty-first century a distinct form of economic engineering has emerged which is individual to nations that embrace it that is known as state capitalism. This is a trend independent of socialism in which industries are engineered by the state. The outcome is a political victory for the state, which ensures a similar stability and has been seen in socialist domination of oil-producing nations including Venezuela. Bureaucratic control of certain industries ensures that the market is generally free and limits the exposure to government interference by any industry. A short period of interference may be a success politically and boost stability at a minimal cost to the industry, but a prolonged period without a commitment to public resources could transform into a liability for both state and industry.

Having described state capitalism, it is now appropriate to describe the geopolitical effects of free markets, perhaps in previous decades brought to a point of liberalization which is inefficient given minimal costs of regulation and the capacities of the industries, such as media earlier discussed, that allow regulation. When nations with free markets adopt a state capitalist stance, it may be more threatening to authoritarian governments even than a free market. The latter governments are incapable of demonstrating compromise and so are unable to reciprocate the move. This also gives the capitalist side of state capitalism a permanence which subverts authoritarian intent to spread.

On a final note, it is also worth exploring the insulation state capitalism provides to truly free markets. While buffer zones may be some sort of a defensive maneuver, it is also possible that uniform state capitalism may bring more hybrid democracies out of the functional norms of authoritarian states, or from under authoritarian control. That is an approach in which state capitalism is not the answer to preserve free markets but instead one of the many mechanisms described above which determine the actuality of regulation and the nature of markets. Misinterpretation of state capitalism as an escape route rather than as a shield could be fatal for an accurate economic forecast; the means used by capitalism for preservation and expansion cannot by definition be singular in nature.

Brief History to Capitalism - Response and Summary

Early economic theory is rooted in liberalism as an extreme reaction to the oppressive nature of feudalism. After many years of serfdom and servitude, which provided security at a steep price in terms of goods and liberties, the industrial wealth brought extinction to manorial systems of commerce. Limits and cautionary trends were established almost as quickly as the concept of capitalism was established. There are two primary sources of this: foreign intervention (much of the world still lived under manorial systems) and, later, actual necessities for regulation as monopolistic corporations arose out of cronyism in postwar America and other nations.

That which provided the greatest impetus for growth during the period of capitalistic development was the elimination of mercantilism by establishment of fair global markets and currency exchange. Nations relied on mass media and fair elections to propagate control, rather than on manipulation of markets or winning of gold in wars or by other means. Elements of mercantilism remain. These include using economic control for domestic political victories and the importance of maintaining a favorable trade balance.

Use of foreign policy to protect international economic interests also remains a critical part of the government’s role which remains today. The beneficiaries of such remnants can be individuals or institutions. How this is integrated into state capitalism will be examined next.

Definition and Expansion of State Capitalism

The difference between state capitalism and free-market is the individual nature of state capitalism. It should be possible to establish some marking traits of at what point state capitalism emerges from a free-market economy or from one attempting utopian communism in a similar way to that which it is possible to distinguish mixed market capitalism from anarcho-capitalism. State capitalism has an organic relationship with but is not synonymous to authoritarian or command economies, and is instead best described as a tool which can prevent free-markets from collapsing into such economic conditions as to necessitate total government intervention or which can bring a nation towards a command economy by mechanically emphasizing the role of the government.

It is best used when particular nadirs in marginal costs of regulation occur individual to nations, which is why it was not effective (or extant) in the middle ages when technological progress was in stasis or during the early industrial revolution as technological progress outstripped all nations ability to develop for around a century. One could describe national socialism in this sense, though dividing markets into compartmentalized unregulated industries turned out to be an abysmal worst of both worlds scenario. Welcoming foreign investment from corporations such as Fanta, already a subsidiary of Coca-Cola, meant that these divisions, perhaps enough to limit domestic investment and allow rudimentary engineering of the economy, yielded bizarre results as certain industries became completely flush with foreign investment and attempted to project that investment upon others.

Just as state capitalism is a tool between command and free economies, there are many tools which determine how the state capitalism operates. These intermediaries include national oil and gas corporations, state-owned enterprises, privately owned national champions, and sovereign wealth funds. The first can be used to show the nature of resource nationalism and the last allow western governments to achieve political goals with economic windfalls from developing and emerging countries.

National oil and gas corporations provide fundamental resources. As state-owned enterprises have entered and dominated the global reserves, multinational corporations such as ExxonMobile, a top ten company, are reduced to providing auxiliary roles in those markets. Even though the state-owned companies can sell on the same market now, competition is prohibited, creating a favorable disequilibrium for them. This is evident from food production to uranium extraction so the trend is by no means limited to oil.

The favorable disequilibrium created by the companies is nullified by the role of state capitalism, which subjects those companies to unprofitable decisions, such as gouging prices (and customers) outside of the realm of rationality in order to achieve national goals. Profits from these sources play a direct role in the development of sovereign wealth funds. Such funds are ways for free-market governments to exert economic influence like an authoritarian state as well as a way for state capitalist governments to extract funds from profitable state-owned businesses.

10 Largest Commodity Financed Sovereign Wealth Funds 2016

Sovereign Wealth Fund	Origin	Nation
Government Pension Fund - Global	Oil	Norway
Abu Dhabi Investment Authority	Oil	UAE - Abu Dhabi
SAMA Foreign Holdings	Oil	Saudi Arabia
Kuwait Investment Authority	Oil	Kuwait
Qatar Investment Authority	Oil and Gas	Qatar
Public Investment Fund	Oil	Saudi Arabia
Abu Dhabi Investment Council	Oil	UAE - Abu Dhabi
Kazakhstan National Fund	Oil	Kazakhstan
National Welfare Fund	Oil	Russia
International Petroleum Investment Company	Oil	UAE - Abu Dhabi

Data: SWFI 2016

Export and natural resources do not provide substantial cash flows for a free-market, so the way that it is possible to exert such influence as those funds allow is to provide direct funding for them from taxpayers and federal reserves in foreign currency. This can be used by authoritarian governments as well under certain circumstances. Such funds are tremendous economic opportunities and have existed for many decades. Public use of the term is barely a decade old, which predicates the secretive nature of the largest and earliest funds.

Many of the tools described serve two functions. In the same way that sovereign wealth funds have allowed investment of otherwise stationary reserves in free-market economies, authoritarian states have found ways of using these to their advantage by making them secret and investing heavily in organizations such as Blackstone. This money then circulates in a normally volatile market, but is controlled by an authoritarian state, giving undisclosed insight as to the nature of market developments. The scale of this development is dramatic: by the late 2000s there was more invested in those funds than was collected by the American government from taxpayers. OPEC is another example of how embracing economic liberalism can help state capitalist economies, rather than moving a nation towards free-markets.

State Capitalism Around the World - Response

Vladimir Putin remains a dedicated state capitalist. His work is described as a use of state capitalism to enforce potential goals for his political party. State capitalism emerged as a scapegoat in early Bolshevik Russia, but has today been the means by which the formerly communist juggernaut is able to swallow capitalism in general. A certain level of repression has been present, with a very distinct reaction compared to such Chinese violence.

Much of the nature of state capitalism in Russia is personality-driven, and Putin has had an enormous individual effect, combined with publicity and high approval, on the country as President and Prime Minister. It is clear that Dmitry Medvedev has not deviated from the course already blazed.  Repression has not been limited to protesters, and was also used to establish and protect Russian state interests in industries, allowing foreign companies only to hold a stake with a regular loss.

Tactics employed by state capitalism under Putin include armed police battalion deployment, the arrest of former oil and gas oligarchs, and establishment of restrictive trade barriers. Support for the protests was provided by the Communist Party and the oligarchs found solace among foreign Western investors who had hoped to grab Russian oil interests. Tariffs will be addressed in greater detail shortly, but when a trademark of state capitalism includes the use of funds and economic policies to win political victories, tariffs eat state funds and erode political goodwill.

One thing to add is that state capitalists to use sovereign wealth funds to undermine foreign regulations and engineering of markets or to break them in their favor. The ability of China to use this tool, with a few billion dollars, to exacerbate the economic crisis and ultimately require around 600 billion in rescue loans, is described with an account of Blackstone. During the financial crisis, these sources of cash could also be used to keep nations afloat and determine the nature of the recovery.

The concept that Russia and America have traded nuclear weapons for such reserves in foreign currency is indicative of the general nature of a shifting geopolitical goal. Both the Soviet Union and the United States swore to never use violence to obtain goals during the Cold War. That has today become a reality, and with an emphasis on the lack of an actual national opposition in the Iraq and Afghanistan wars, was a reality by the time Bremmer’s wrote his book. State capitalism has been used by Russians and Americans to both undermine and uphold free markets in recent past.

Response to the Challenge

The challenge is described as threefold in nature. The most important challenge being faced is that of the international tariff. By definition, this represents the sort of state intervention which in a free global economy, nearly always results in market inefficiencies. Even as nations pledged at the G20 summit not to impose tariffs, dozens were put in place during periods of economic turmoil.

Grounds for the decision are found in the security provided by an effective system of tariffs. It is harmful to facilitate competitors and in a competitive market governments will seek to maximize opportunities for growth in industries which pay taxes and will seek to punish those that pay taxes elsewhere. At the risk of unemployment and price disequilibrium, a government will destabilize some markets given the opportunity to.

That opportunity is provided by state capitalism, in which engineering can also include deconstruction. The liquidity of funds in a globally backed system of banking gives assurances that resources will still be available and investment will continue after tariffs are imposed. This is also the phenomenon which makes them particularly ineffective.

In state capitalist countries the imposition of a tariff essentially acts as a boycott or prohibition, and the investment is made anyway, and the chain of expenses, as well as growth, before the Federal Government collects the sum entirely back is dramatically shortened. This is because the economy is engineered and there is not a system for substitution, which would undermine the tariff. Truly free markets do not suffer this issue as severely, and require broader and more unwieldy tariffs to truly create a disequilibrium in the economy.

The same way a nation might use regulatory or police action to counter price gouging, foreign competitors selling a product cheaply can be countered with tariffs. Examples include the United States’ tariffs on Brazilian sugar and Russian tariffs on imported automotive parts. These are useful choices because political opposition and demonstration resulted in violence in Russia while the American tariff proved ineffective. The removal of farm subsidies and dramatic drop in food surplus by 40% in recent years buried American attempts at protectionism for the agricultural industries.

It appears clear, then, that in order to break a state capitalist economy it would be necessary to provoke widespread tariffs within that economy. This allows elimination of foreign reserves, sovereign wealth funds, and guts oil or resource companies. That happened in China as state-owned oil companies were subject to price ceilings and unable to declare losses, nearly leading to the nation’s dissolution around the time it joined the World Trade Organization and gained the security of investment. The shock was not sudden, however, as a similar crisis in oil in which Russia took a tariff in order to see America squirm, laid the groundwork for that nation’s ultimate dissolution and China remains in good, if not yet a superpower, standing.

Source:

Bremmer, I. (2010). The end of the free market: who wins the war between states and corporations?. European View, 9(2).

Could Failure to use Marijuana Responsibly for 5-6 Years as an Adult Pose the Same Mental and General Health Risks as Childhood Use or Even Failure to Exercise?

  Recent research has confirmed findings from the early 2000s which showed an increase in IQ among responsible adult users of marijuana in comparison to those who never used cannabis. While childhood use has been shown to be indicative of negative health consequences concurrent with reduced prolactin levels, looking into the effects of marijuana as a predictor or causal agent in positive health effects outside of the realm of cancer prevention has been relatively untilled ground. That builds on previous research which explored the possibility of using cannabis to reduce levels of dependence on other products with responsible adult use, even as childhood use has been proven to negatively impact the odds of responsible adult use. This paper will review some of the basic facts which longitudinal studies have demonstrated as an effect of responsible adult marijuana use, and how those effects can play out on a society while evaluating some very glaring inconsistencies or limiting factors which have presented.

  The impact of IQ on income and social class has been long established and is well publicized in today's highly technological global community. Less known are its predictive values for life expectancy and more severe mental health complications. Childhood IQ can predict mortality between groups with great discrepancies (Whalley). Lower childhood IQ has been associated with many mental health issues, though it has been shown to predict a lower rate of adult mania, an interesting anomaly which may merit some attention but does not disturb the nature of this trend (Koenen). While the impact of changes in IQ from adult or childhood use of marijuana, whether positive or negative, on life expectancy are minimal, paling in comparison to regular physical activity, which can add as much as a decade, or somewhat akin to tobacco use, shown to remove 1-2 years (Ferrucci), among a population these changes can demonstrate a viable advantage which should not be overlooked. 

  A horizontal shift in IQ can double the highly gifted and geniuses among a society with an average IQ of 98, such as the USA, and will continue to produce significant gains as IQ increases. Massive gains have been seen in the past (Flynn), with many factors that can be held responsible from removing environmental toxins such as lead to increased availability of educational factors which can play roles. The gains which are being described have yielded greater total and proportional numbers of college and high school graduates, which is yielding advantages to all spectrums of society (Moretti). There is no reason this trend should not remain the case.

  Responsible adult use of marijuana has been shown to increase IQ in a causal fashion (Fried) in a manner equivalent to the decline in IQ associated with childhood use. Heavy use is here substituted with childhood use because of later research which showed that the probability of becoming dependent on marijuana are around half of that of alcohol at age 18 and virtually zero by age 21 (Chen). Recent research has shown that the increase in IQ is a causal consequence of cannabis exposure, and not one of a predictive nature, a conclusion largely apparent from research (Filbey). That was research which also helped to investigate some of the mechanisms behind higher brain functioning. This would appear to now be a manner of basic deductive reasoning to see that this increase in IQ also will give a concrete benefit to society with responsible adult use encouraged by the spreading legalization of recreational marijuana.

  Some problems have presented, however, and many of the same issues which have negatively impacted attempts to prohibit cannabis now impede an honest recommendation of use for the purpose of mental health at least, though the anti-cancer properties appear to be solid in nature. Many mental health disorders are accompanied by self-inflicted harm, hard drug use, and other certain outcomes which leads to a negative stigma and a serious approach towards treatment. Early childhood use has been shown, commiserate with a declining IQ and mental functioning, to increase such negative outcomes along with other negative physical and mental effects including decreased mortality (Manrique). Interestingly, however, responsible adult use has "only" been found to result in equivalent outcomes among responsible adult users as those who had never used in all methods of evaluation including hard drug use and mortality from all causes (Andreasson). 

  The research outlined previously does not indicate any limiting factors which should be present in regards to mental health or life expectancy concerns: all countries involved in such research do have room for improvement which far outweighs any contribution from cannabis use of virtually any nature. It is unlikely that there is an organization responsible for the wholesale massacre of 1-2% of the marijuana using community, or slightly early termination of individual marijuana users that could explain the lost additional productivity, life expectancy, and mental health gains which are to be expected in any country, much less the developed countries where this research has taken place, so this particular confounding situation will have to stand as an anomaly or unexplained phenomenon. That statement may appear provocative and the latter precludes the former. Should the former be the case, the mental health gains would still be evident without a targeted shock among the mentally ill. There could also be an issue with multiple research studies, notably the work of Whalley, which would alter this conclusion should heightened IQ not causally impact greater life expectancies, or perhaps most likely, that the Swedish researchers led by Andreasson vastly overestimated the use of marijuana by the conscripts in their study, with heavy use occurring in childhood users but without the vast numbers of extraneous responsible adult users in excess of the childhood users which present in the USA, and naturally with a substance of the type. That is deemed as most likely due to the tendency of European cultures to expose younger children to age-restricted substances than in America, at least. The nature of a bell curve does indicate that the lower tail of IQ performance will demonstrate a limited effect on outliers with further horizontal shocks, so the failure to materialize significant declines in hard drug use or self-inflicted harm and other indicators of lower intellect are not outside of expectations and does not indicate confounding material or discrepancies in research.

  Finally, some issues have been noted with application of the positive and negative health benefits of cannabis to adults from a financial perspective, in terms of productivity gained. While there is no question that the general economy has fared more effectively in a large part due to intellectual progress and increasing regulations which have made American children and adults healthier, application of this theory has fallen apart when applied to responsible adult users of marijuana (Cerdá). As a group, according to research, the increase in IQ should be easily described as an economic shock, giving a great advantage in terms of productivity and social class. Both of these are frustratingly missing after economic research. Unlike the discrepancy in life expectancy, and perhaps exacerbating that conundrum, there are pieces of information which present to address this situation. Because childhood and responsible adult use are not distinctions made previously in research on health care costs, it must be assumed that the costs of childhood marijuana users tend to be much higher as a result of marijuana dependence and psychological or physical manifestations of this. Therefore, research showing that cannabis users as a population have the same per capita health care utilization as those who have never used could be interpreted to show significant gains among the responsible adult users (Fuster). As health care can make up hundreds of thousands of dollars over a life time, and is among the dominant expenses both for an individual and for the government, this may be communication of the gained productivity from cannabis use to healthier lifestyles or investments, if not more financially frugal decisions.

  The research is fascinating and demanding in nature. Seeing the demographic dispersion among groups of people after laboratory or controlled experiments which add a political or social aspect to the work is relatively rare. It can be concluded that responsible adult use of marijuana does indeed result in productivity gains associated with the increased IQ, and equal to the detrimental effects from childhood use. These gains in the current population of marijuana users, as a significant minority, are invested heavily into healthcare, though there is a low likelihood that this would continue with a regulated industry, while the trend may remain to some extent. In terms of life expectancy, the results are anything but clear, and this deserves further attention, investigation, or experimentation. While childhood users face increased mortality risks as expected, the responsible adult users live exactly the same lifespan as those who have never used. The 1-2% gap between expected and actual life expectancies is not explained by limits on health care returns: countries have greater life expectancies than the USA. It does not detract from the massive predicted and realized gains of responsible adult users of marijuana in terms of productivity and health care, or tarnish in anyway the great impact legalized recreational marijuana will have on the United States of America and the world in coming years.

References: 

Andreasson, S., and P. Allebeck. "Cannabis and mortality among young men A longitudinal study of Swedish conscripts." Scandinavian Journal of Public Health 18.1 (1990): 9-15.

Cerdá, Magdalena, et al. "Persistent Cannabis Dependence and Alcohol Dependence Represent Risks for Midlife Economic and Social Problems A Longitudinal Cohort Study." Clinical Psychological Science (2016): 2167702616630958.

Chen, Chuan-Yu, Megan S. O’Brien, and James C. Anthony. "Who becomes cannabis dependent soon after onset of use? Epidemiological evidence from the United States: 2000–2001." Drug and alcohol dependence 79.1 (2005): 11-22.

Ferrucci, Luigi, et al. "Smoking, physical activity, and active life expectancy." American journal of epidemiology 149.7 (1999): 645-653.

Filbey, Francesca M., et al. "Preliminary findings demonstrating latent effects of early adolescent marijuana use onset on cortical architecture." Developmental cognitive neuroscience 16 (2015): 16-22.

Flynn, James R. "The mean IQ of Americans: Massive gains 1932 to 1978." Psychological bulletin 95.1 (1984): 29.
Fried, Peter, et al. "Current and former marijuana use: preliminary findings of a longitudinal study of effects on IQ in young adults." Canadian Medical Association Journal 166.7 (2002): 887-891.

Fuster, Daniel, et al. "No detectable association between frequency of marijuana use and health or healthcare utilization among primary care patients who screen positive for drug use." Journal of general internal medicine 29.1 (2014): 133-139.

Koenen, Karestan C., et al. "Childhood IQ and adult mental disorders: a test of the cognitive reserve hypothesis." American Journal of Psychiatry (2009).

Manrique-Garcia, Edison, et al. "Cannabis use and depression: a longitudinal study of a national cohort of Swedish conscripts." BMC psychiatry 12.1 (2012): 1.

Moretti, Enrico. "Estimating the social return to higher education: evidence from longitudinal and repeated cross-sectional data." Journal of econometrics121.1 (2004): 175-212.

Scallet, Andrew C. "Neurotoxicology of cannabis and THC: a review of chronic exposure studies in animals." Pharmacology Biochemistry and Behavior 40.3 (1991): 671-676.
Whalley, Lawrence J., and Ian J. Deary. "Longitudinal cohort study of childhood IQ and survival up to age 76." Bmj 322.7290 (2001): 819.