Easter Island, in the Pacific Ocean, has long been a pet trophy for both environmentalists and anti-capitalists. This remote island is denuded of vegetation and features artefacts pointing to a rich cultural heritage, as well as a collapsed society.
The first European visitors discovered a forlorn rock where agriculture and deforestation had destroyed the environment and depleted food resources so badly that the island could no longer support its population.
"Exactly," goes the common thinking, "this is precisely why we shouldn’t be capitalists and simply exploit our environment - otherwise we’ll all wind up dead." In reality, Easter has a more sombre lesson. Capitalism works, and socialism will kill you.
When any good has a fixed (or, worse, no) value then its availability bears no relation to its price. The feudal system of the islanders held all assets in common. Trees had no cost. Cut down one tree, cut down a hundred trees; the only cost is in the effort required to do so.
As the number of trees declined there was no way to encourage sustainable use of those trees. Legislating that people look after trees makes no difference. If the trees had traded on the open market then, as the trees became scarcer, then the price would have skyrocketed. The high price would have encouraged the pursuit of substitutes.
The same is true of the oil industry. Oil is not held in common. It is freely traded. As the perception of the difficulty of getting it, or of its scarcity, increases, so too does the price.
Oil cannot run out. It will become too expensive to buy long before the supply ends. And that will encourage us to look for cheaper alternatives.
Globalisation and the global flow of capital are frequently blamed for inequality and poverty. "Surely," the argument goes, "you must be getting rich at the expense of all these poor, starving, hungry people?"
This is usually followed up with the statement that: "the rich get richer, and the poor get poorer".
Correlation is not causality. A person having a heart-attack may have eaten themselves to death. No-one is suggesting that the fit people running along the beachfront every evening have stolen all the health from the unhealthy people. The causality between wealth and poverty is not that the rich take anything from the poor; it is that the poor do nothing from themselves.
The UN Report sited in this week’s CrisisWatch declares that (amongst other stories): the average US citizen has an income 27 times greater than that of the average Nepalese, whereas in 1950 the difference was only 19 times.
You can, if you wish, get upset that the Americans have become so wealthy. However, the relative poverty of the Nepalese is hardly their fault. Nepalese have chosen a government and monarch who steal from them. That it is a brutal dictatorship is not the fault of the US. Regime change has not proven a successful stratagem and, unless Nepalese choose for themselves how they would like to be governed, there is little the US - or anyone else - can do about it.
The same is true for Ethiopia, Turkmenistan, Zimbabwe or any of the other benighted spots that are mentioned in the UN report.
It is not global capital flows that disable the poor. It is the poor’s failure to participate that ensures their increasing despair. In a similar way, it is hardly the responsibility of fit people to help the terminally obese get up and exercise. That is a task they must take on. If they don’t want to, then there are consequences.
Without honest acceptance of responsibility, it is impossible to begin the process of economic development.
All biological systems require a mixture of measurement and feedback. When feedback breaks down the result is disease.
Diabetes is the result of the body’s inability to control the appropriate level of insulin, which - in turn - is the responsibility of the Islets of Langerhans in the pancreas. If they don’t measure and do their job then they can’t tell the body to produce an appropriate level of insulin.
Capitalism works in a similar organic fashion. Entrepreneurs identify a need (for microwave ovens, iPod music players, or television soap-operas) and provide it. If they don’t produce enough then consumers will have such a demand for the product that they will choose to pay more. This will lead to large profits and encourage other entrepreneurs to provide the same product. As the supply of the product goes up consumers feel satiated and their demand for the product is met. At this time the price starts to go down, profits decrease, and entrepreneurs in search of rewards for their time and money decide to go elsewhere.
Development, unfortunately, works a lot like cancer. Cancer is what happens when cells lose their ability to know what to do, and when to stop growing. Each healthy cell in the body receives continual feedback about what it is supposed to be doing and when it is necessary to replace itself.
Development, being largely a form of benevolent dictatorship, has little feedback. There are no consumers to buy products and little competition or differentiation between rival products. Needy people are treated like children: "we know what’s best for you."
Just like cancer, development organisations spiral out of control in a developing economy, replacing healthy institutions and undermining individual choice. They just can’t help themselves. There is no-one to say stop.
Moral hazard is what happens when I spend other people’s money on myself. I don’t care too much about what things cost, or how profligate I may be. But at least I get what I want. Things get much worse when I spend other people’s money on other people. Then I really don’t care what happens and my spending may take on biblical proportions.
Public schools are a public good where politicians spend taxpayers’ money on other people’s children. Schools, frequently, don’t achieve the objectives for which they were set up. Good schools have no way of being rewarded and bad schools no way of being shut down. A recent innovation has been to present parents with vouchers that allow them to pay their children’s annual fee at school directly. That way the same money is being spent on education but parents now get to choose the schools they feel best serve their interests. That vouchers take the place of cash is to avoid the moral hazard of parents spending their money on themselves instead of their children’s education.
This does, however, imply that parents must pay attention to the quality of different schools and that an objective measurement of different schools is possible. Some means of evaluating and rating schools must be present. In general this is achieved through newspapers publishing the annual graduation scores of each of the different schools. That way parents can see which schools are better.
Teachers’ Unions have become quite powerful and are extremely unhappy with these types of metrics and choices. They have convinced governments to prevent publication of individual schools’ results and that a straightforward list is approved. Top schools still get round this by publishing their own tallies.
Vouchers are a significant improvement on ensuring competition between development service providers. However, it will only work where an objective, public and simple method is available for recipients to compare and choose who will serve their needs.
aloft: the whythawk blog 
