What happened last week? Not much.
What will happen this week? Probably, about the same thing.
A pot simmers a long time before it begins to boil.
‘What you’re really talking about,’ explained a helpful French friend yesterday, ‘is what we call “rents”.’
The discussion had turned to zombies. We had been elaborating our hypothesis, which tries to explain how even good organisations tend to degrade over time.
In a few words: they are taken over by zombies.
Over time people find ways to game the system. They get little privileges… special favours… and elevated status. They connive to land government contracts… food stamps… special deals. Not all are lazy. Not all are dishonest.
But they are all beneficiaries of a corrupt system. Even if a programme… a policy… a war… makes no sense, they want it to continue. Their livelihood depends on it!
One approves the quality of your meat. Another makes sure you have put enough steel in your concrete. Another has the job of patting down your grandmother before she boards an aeroplane to make sure she is not packing heat. Still another advises the government on gender issues.
As more money flows through the pipes and conduits set up by the functionaries, more people get in line to get some. Instead of looking out for themselves – trading real goods and services with their co-citizens – they go to where the money drips.
One tap gushes with jobs paying more than the private sector. Others offer free food, subsidised lodging, or medical care at someone else’s expense.
‘Morality is what used to pay’, said Mancur Olson. He meant that habits and values are formed by circumstances. What works becomes what is “good”.
As the system degrades, things work differently. What used to work was hard work… education… and saving money. The ‘heartland’ was where Americans worked… made things… and made money.
Now, the route to success detours towards Washington and New York. Speculation, knowing somebody in power, or getting a special break from the feds, pays off.
Now, mothers want their sons and daughters to work for “the system”… to join the ranks of the bureaucrats… to have an edge… to be in an industry favoured by the feds. They know it’s almost impossible to get ahead without an “in”. The weight of taxes and regulations is just too heavy.
That is a big part of the reason US wages have gone nowhere in the last 40 years… and household incomes are nearly back to where they were two decades ago.
Of course, this phenomenon – zombification – applies to private organisations and businesses as well as the government. As a business ages, it typically changes from a dynamic, outward-looking organisation to a stodgy, bureaucratic organisation focused on holding onto power and money at all cost.
The big difference between government and private organisations is that only the government has the power to force you to do anything. When private organisations get infested by unproductive zombies, they go broke… or get taken over by more dynamic organisations. Government generally continues favouring the zombies… until the whole country goes broke.
‘That’s what happened in France,’ our friend continued. ‘What you are describing is what happened in France before the French Revolution. The monarchy had been in power for a long time. And different groups – mainly the aristocracy – had taken advantage of it. Powerful groups or important individuals found a way to profit from the system. This was usually in the form of a stream of income from doing something that didn’t need to be done.
‘They would, for example, give someone a monopoly on the importation of tobacco. Or salt. Or silk. Often, the person would buy the privilege from the government. And then the person who had the monopoly would get a “rent”… it was like having a patent.
‘Some people had the right to collect taxes. And there were tolls on the roads. All sorts of things. It was fairly easy to give someone a little privilege. You give someone the right to collect money from people going up and down the river, for example. Most people don’t know anything about it. It doesn’t affect them. And even the people on the river, each one individually may not pay much.
‘But the fellow collecting the rent had a good deal. And so the guy downriver wanted the same deal. And the guy upriver. And, as you say, over time, the river is full of people collecting tolls. We call them “rents”. And the guy who collects them, the guy you call a “zombie”, we would call a “rentier”.
‘Of course, it’s easier to give someone a rent than it is to take one away. So the number of rents grew… and eventually became so high that the whole economy of France was gummed up by them. You’d take a load of potatoes from the country to sell in the city and you might have to pay off four or five different rentiers.
‘You might describe these rents as friction in the system. The more the rents increased, the more the friction in the system increased. It got so bad that the economy barely worked at all. And back then it was an agricultural economy. All it took was a couple of bad summers – in the 1780s – and people were on the verge of starvation. Thing simmered for years… and boiled up in 1789.
‘A group of ragged, starving people gathered in front of the royal palace in Paris. You know the story. Marie Antoinette supposedly asked what the problem was. She was informed that the people were protesting because they didn’t have any bread to eat. She is said to have replied: “Then, let them eat cake”.
‘I’m not sure she ever said that. But it was the kind of remark that people remembered, whether it was true or not. Then, the revolution began… and a lot of the rentiers lost their rents and their heads.’
for The Daily Reckoning Australia
From the Archives…
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An Investment Strategy for the End of Australia’s Lucky Run
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How The Fed’s Forecast Fallacy Leads to Stagflation
08-10-2012 – Nick Hubble