Sunday, August 21, 2016

Shifting Geopolitical Structures, Market-State Empires, and the International Deal-Making

This post will be regarding the international structure of the world and how it's shifted from the old world of nation-states. In order to do so, I'll split this post up into several sections:
1. Introduction
2. Geopolitical Structures Today
3. Market-States, Clashing Empires, Diplomacy, and International Deal-Making
4. Conclusion

1. Introduction:
The world isn't just becoming rapidly imperial, but the entire power structure is something drastically different than anything we've seen in the past 300-400 years. Before the 20th century, the world was essentially ruled by European powers that held international empires. In the 20th century, these European states went to war and that war rapidly escalated into two World Wars because these European powers had international empires. So when the nation-states went to war, their empires simultaneously went to war. So a European war immediately and necessarily translated into a World War, which eventually saw a collapse of their empire and ended up in a world of nation-states.

In the 20th century and the previous 300 years, the most powerful world powers were all European. Today, the most powerful countries internationally are the US, China, India, Russia, and Japan. Note how only one of those countries is a European power (Russia). 3/5 are purely Asian and 4/5 have a coastline on the Pacific Rim. Late in the 20th century, the total amount of trade in the Pacific surpassed the trade in the Atlantic and this process has accelerated in the 21st century. So for the first time in world history, the most powerful trade network is the Pacific Rim trade network.

2. Geopolitical Structures Today:
So today, we live in a world dominated by Asian powers that're not only growing in population, but are also growing in power, productivity, and economic clout. Within a couple of decades maximum, we will see an Indian Navy that's more powerful than the Royal Navy. So the world we live in is rapidly transitioning from a line of thinking and philosophy centered out of Europe to one centered out of Asia. We're entering a world wherein the primary base of thinking and philosophy will be that of Asia.

It also becomes important to note that Europe is currently in terminal decline. Almost all European countries have experienced a total fertility rate well below sustainable for the past ~40-50 years. In other words, their populations are falling rapidly AND these countries already have very high levels of development. So the next logical step is sustained pressure on pension systems and social welfare programs. So these societies have declining populations, a declining workforce, and a larger pool of people who're now dependents. They're also now having difficulty assimilating immigrants and immigration is creating internal tensions within their societies. Europe's also got major financial issues that're leading to social and political imbalances. To put simply, there's really not much hope left in these places. They're gonna be headed on a downward trajectory for a long while.

So the power structures, ideologies, and ruling philosophies of the world are becoming more Asian. Also note that the battles between Asian powers are now taking center stage in terms of worldwide geopolitics. For example, virtually all of the "civil wars" or internal strife in most of Asia are really just a part of proxy wars between China and India. To put more simply, their empires are in conflict.

3. Market-States, Clashing Empires, Diplomacy, and International Deal-Making:
In Africa, there's a battle for much of Africa's mineral resources. Note that many of these mineral resources are key items with low substitutability in our smartphones, computers, and many other technologies. Also note that these minerals are very expensive to extract and refine, which is why they're pushed overseas. Due to the need for the extraction of these minerals, we have "civil wars" in many parts of Africa like Nigeria or Congo or many other places that're really just wars between two militias fighting for control of supply-lines and control of natural resources with each militia backed by some larger country as a part of its empire. In other words, many of these wars in Africa are just proxy wars primarily between the US and China as these are the two most predominant world powers with raw material needs. If a given party doesn't use these raw materials or mineral resources, these resources get immediately contracted out to the another international player that wants access to them.

In other words, we're entering a world with a few key large powers. Everything that occurs internationally in a geopolitical sense is merely just a clashing of more formidable powers. When these powers have conflicting interests, they sit down at a table and basically throw around various natural resources or contracts or certain ties with certain states as chips on the board to trade with other sides. To put simply, this current shift in international relations is like the days of old imperial powers before the turn of the 20th century. In order to reach some kind of an agreement, one side trades certain pieces of their empires in order to get concessions on the other.

This world is very different from the days of total war between individual nation-states. Instead, we have a recent case of Russia and the US negotiating. In this case, Syria is a government run by Assad who's effectively a Russian puppet. Many of the Syrian rebels, on the other hand, are funded and organized by the Americans. So we end up with a situation where you've got the American Empire and the Russian Empire are smashing into one another. So what happened recently to resolve various disputes in the region? John Kerry showed up with the American diplomatic team with a big binder and was working on a peace deal with the Russians by offering concessions to get concessions.

If the Chinese hold a card with various ties to some strongman in a country like the Congo or Nigeria that's got critical natural resources like, say, lithium that's not being used while some American company needs to access that lithium; then you could have a situation where the corporation makes a deal with various Chinese elites that provides them access to a resources like lithium with some kind of a financial contract.

4. Conclusion:
So we're basically entering a world of market-state empires wherein the empire itself occurs from many different ties ranging from weapons agreements to corporate agreements for natural resources to the ownership of companies in different countries more generally. What determines the clout and power of the empire in question is its economic, financial, and military power of not just itself, but all of the layers of ownership and the structure of the supply chains ingrained into its economic, financial, and military power. The conflicts we see in today's world are merely just a clashing of these empires in various regions across differing scales. In order to come to agreements, there's various parts of each empire that're traded for concessions with parts of another empire.

It's quite interesting to note that the structure of international relations probably more ancient than it is modern as you've got hierarchies across the world coming to agreements by trading various chips on the table as per their abilities and needs. What we have is closer to a return to the imperial world of old rather than the old nation-state world that we've come to know for so long.

As crazy as it seems, the rise of technology has made the world more imperial whilst destroying the old order of nation-states. The rise of market-state empires is simply the next step in the process.

Wednesday, August 3, 2016

Extractive Industries, Economic Rent, and Henry George's Idea of Taxes on Rents

My most recent posts have been quite political. However, this post will primarily be about economics. In various posts, I've discussed the basics of capital and wealth creation. In those same posts, I touched on rent-seeking and how it's essential to avoid such behavior. This post will largely be a spin-off of htose posts. In order to continue, we must first recall the definition of economic rent: an economic benefit received by adding nothing (usually reducing)--on the net--to productivity.

As I've discussed previously, acts like environmental degradation are effectively a form of rent-seeking. In the case of extractive industries, the firms receiving rents from extractive industries are rent-seekers. Why? When you dig out coal from the ground, it destroys the landscape, the air, and often the water. It's the same thing with fossil fuels more generally. These firms get revenues for something that destroys the landscape, the air, etc..

Usually, the most common form of economic rent would be land rents. So in the mid-19th century, there was a great American economist by the name of Henry George who proposed a Land Value Tax as a way to deal with land rents. In today's world, rents from extractive industries are a much larger problem for reasons ranging from environmental degradation like deforestation to climate change. Obviously, the LVT does nothing to deal with rents from extractive industries.

Hence, I'm now proposing a tax on all extractive industries. Regardless of where an extracted material comes from, there will be a flat tax imposed on the extracted material when used as an input in production. For example, as soon as crude is sucked out of the ground and sold, there will be a flat tax imposed on that price wherein the revenues go towards the federal government.

Although there's a tax on extractive industries, there is no added tax for items refined on those products. For example, there will be no tax on gasoline because gasoline isn't extracted. Gasoline is refined from an extracted material. There also won't be a tax on solar panels, but there will be a tax on the silicon used in the production of solar panels in the supply-chain. So this tax will affect value added industries little, especially if there's a lot of parts in the supply-chain. On the other hand, it's impact on industries who have little value-added in their supply-chain will be much larger (relatively speaking, of course).

I've seen various people think of a value-added tax (VAT) when I say a tax on extractive industries, but this is nothing like the VAT. A VAT is a tax on the value-added section of goods. The Extractive Industries Tax (EIT) that I'm proposing is nothing like that. It's only a tax on the initial purchase of a raw material from a company that does resource extraction. We are not taxing anything across the supply-chain. It is purely a tax on extractive industries to add in the negative externalities of extractive rents that aren't in the market price.

Of course, fossil fuel extraction today isn't just not taxed or encouraged, but the behavior is actively subsidized. In the US, the International Energy Agency (IEA) estimates that fossil fuel subsidies total close to ~$550 billion annually. So we currently have incentives that not don't account for negative externalities from extractive rents, but actively incentivize firms to increase profits from extractive rents. In the line of Henry George, we must first actively eliminate all subsidies that go towards all extractive industries and then place a flat tax on extraction (as described above) that'd bring in ~$500 billion in the first year. I'm proposing a tax that's ~50% on all directly extracted mineral resources both within the borders of the US and for any item that uses extracted minerals built into global supply-chains that wasn't extracted domestically as an addition to the current cost. This would be applied by simply calculating the total valuation of all of the extracted minerals on global markets at the time of importation into the US and then tacking on the tax value to that total valuation.

This tax would clearly incentivize renewable energy by relatively increasing energy costs from extracted sources. Such a tax would also incentivize the use of less raw materials in the domestic economy more generally. It'd reduce the total inputs into our economic system while incentivizing the ability to produce more outputs with less inputs. In other words, this kind of a tax would incentivize genuine capital formation instead of increased income from extractive rents.