The problems unleashed in the Suez Canal reminded us of the delicate dynamic structure of capital. Many were astonished to discover two things when a gigantic cargo ship blocked the Canal. First, if a critical artery of global trade is blocked in one place, oil prices rise around the world – bad news for the United States that had achieved under the Trump administration the energy independence that the Biden-Harris administration is consciously destroying.
Of course, the fuel hike in the United States is not due to Suez, but to misguided, and erratic, ongoing energy policies. Yet, the world has become increasingly interconnected since the industrial revolution began. That – which has risks and costs – is good. It brings prosperity – to a greater or lesser degree – to every corner of the world. It lifts millions out of poverty.
But globalization – not globalism – does not mean making the operation of the local industry more expensive through taxes and regulations, destroying its competitiveness. Nor it means allowing Beijing – which is already an emerging enemy superpower – to abuse international trade, classifying itself as developed to project its global expansion, and as underdeveloped to close its domestic market to foreign products and services. All while demanding the opening of the world to its products, services, and investments, and let us not forget its manipulative exchange control.
The dynamic structure of capital
It also surprised many to discover that the vessel was owned by a company founded in one country that manages its naval operations in another and registers ships under a third. Obviously, this occurs due to tax reasons, and for you, it’s better that way. Otherwise, everything you buy – because all local products have more than one direct and indirect imported component – would be significantly more expensive. But when you estimate the losses caused by the stranding in the order of billions of dollars, who would pay for them depends on those legal complex frameworks. It is good to remember that they do exist and that they pass through tax havens because the world is full of tax hells.
The Suez Canal crisis dangerously crossed paths with that of closures as a strategy against the pandemic, revealing a problem that can only be understood in the light of the Austrian School’s theory of capital.
The dominant paradigm in economics states that “capital is a homogeneous, self-reproducing stock”, which more or less subtlety, is absurd. Capital is not a stock, is a flow. And it is never homogeneous. Metal die-cutting machines are capital, like sewing machines. But die-cutting machines cannot sew cloth and sewing machines cannot die-cut metal.
Capital is an investment whose redirection is usually difficult – often impossible – when demand changes. It is productive capacity derived from previous savings, invested in what someone yesterday speculated would be profitable tomorrow, “guessing” future demand. Its financial costs – the changing internal rate of return – are also subject to unpredictable changes. But it is invested in the future, usually with reasonable accuracy.
Why? Because much of the world lives in something akin to free-market economies – especially the most prosperous parts of the globe – with enough of a market economy for the capital structure to be dynamically efficient. The dynamic structure of capital is readjusted by the speculations of an infinite number of businessmen who handle exclusive, dispersed, and non-transferrable information of a part of the structure in which they operate. And they speculate their dynamic relationship with the rest of the structure.
The key is that prices transmit aggregated and synthesized information of everything that occurs in this infinitely complex structure of interrelationships. No more, no less. And why did I mention closures as a health strategy against the pandemic? Well, because these closures have put governments in the position of deciding issues on which they lack information that their own intervention prevents them from creating.
The altered prices pass on false information, disorienting investment and causing costly mistakes. This is how cyclical financial bubbles are created, bursting and initiating recessions: artificially lowering interest rates to create inflationary money, which on the one hand falsifies internal rates of return and on the other creates a mirage of unreal demand that will disappear when the bubble bursts. But that is another matter.
Today’s issue is that in the infinitely complex dynamic interplay of capital structure, of present savings and investment, for future demand and utility – to speculate the future, more or less, accurately. Or lose what was invested – the closures made governments decide which sectors could work and which sectors could not work.
How to decide? In the worst of cases, with indifference to the costs – both economic, which are life-threatening, and health costs, which in many other pathologies not related to the pandemic are also life-threatening -.
And in the best of cases, by what their experts – who believe that “capital is a self-reproducing homogeneous fund” – draw from mathematical models that never predict the real dynamics of the markets. And they failed. They over-boosted growth that they did not even foresee, they led to the bankruptcy of sectors that they pretended to protect. And finally, they pushed complex supply chains to the brink of collapse, until the grounding of a ship in the Suez Canal.
Fortunately, Merkel saw it on time, because the draconian closures left supply chains on the brink of collapse. In Germany, Angela Merkel refused on another wave of closures. And while Cuomo and Newsom devastated their states, DeSantis won and led the way. In real emergencies, (which can force extraordinary measures of limited temporary control to save lives), there is a need to stay as close as possible to the spontaneous dynamic readjustment of the capital structure and distort it as little as possible.
Or take responsibility for consequences that, in terms of prosperity and lives lost, will always be worse. Explain this to the governor who aspired to obtain four million dollars for the book in which he intends to present his disastrous management of the pandemic as an “exemplary success”.