I’ve read about the ideology of non-violence, and a question occurred to me. In some “leftist” European countries, mixed martial arts were banned for a long time—they were considered not a sport, but a spectacle that encourages cruelty. How does Ancap-chan feel about this? On one hand, it is a prohibitive measure, but on the other, it is ideologically correct.
анонимный вопрос
Here we see some confusion between cause and effect. Various violent games do not encourage cruelty; they are simply a manifestation of already existing cruel customs, and to some extent, fashion. The desire to thrill the nerves persists in people, but for the vast majority today, it is important that everything be voluntary and slightly “make-believe.” A disaster movie, rather than the actual burning of Rome. BDSM instead of real torture. Combat sports of varying degrees of brutality instead of judicial duels. Cirque du Soleil instead of a traditional circus with its inevitable lions.
What would happen if a mixed martial arts club or some other kind of harsh hand-to-hand combat gym were opened in every neighborhood? Half would go bankrupt (in the Russian case, they would run to the state to beg for sports development subsidies). Forty percent would tone it down and switch to something like capoeira. The “market-chan” doesn’t need that much brutality. But it needs some. I wrote a rather amusing post about this a long time ago.
In Petrozavodsk, the rules for placing signs were recently canceled, and most likely, entrepreneurs will start hanging very bright banners again to advertise their establishments; however, ordinary people will clearly not be very fond of such an arrangement. What will happen to the design code of signs (and to the facades of buildings, since differently glazed balconies and air conditioning units spoil the appearance of the object) under ancap?
анонимный вопрос
This is a typical example of a question about externalities. Who will pay the owner of a historical building for a careful reconstruction instead of a cheap and high-quality modern renovation? Who will forbid defacing the facade with convenient and useful air conditioning units? Who will encourage the creation of banners and signs that please the fastidious taste of an aesthete, rather than those that simply increase sales? Who, if not the state?
You probably already know that any ancap should answer this question. “The market, of course,” an ancap will answer. But how will the market do all this? It doesn’t have hands. The market has invisible hands, don’t worry. Now I will explain where they grow from.
First, the invisible hands take the economy by the scruff of the neck and pull it out of the obvious hole. If no state clings to the economy in the process, it will be easier for the market to pull it out. Every entrepreneur will decide for themselves, based on local cultural norms and their own ideas of what is acceptable, what size and what acidity of colors is appropriate for a sign here in order to maximize profit. And the better their property rights to what is under the sign are protected, the more this profit will be viewed in a long-term perspective.
A poor person will buy a cheaper apartment, as spacious as possible and not too far from work. A well-off person will buy a spacious and cozy one. A rich person will build a beautiful house in which every detail will please their own eye. Somewhere between being well-off and rich, it will already be strange to remember such an archaic problem as an air conditioning unit sticking out in a prominent place.
Some historical buildings will be demolished for the sake of objects that bring more income. When this income turns into wealth and prosperity, the remaining historical buildings will become expensive and prestigious—those who want to live in historical buildings themselves or house tourists there will invest in their careful reconstruction. And whoever finds the old historical buildings insufficient will find a great architect, and they will build a new building that will become no less historical—despite the fact that niches for air conditioning units will be provided in it. And the signs on it will look solid and noble. Or perhaps lush and neon, if that turns out to be the spirit of the neighborhood. Because why hang a sign that violates the spirit of the place, especially if you are not limited in means? It will not be as effective.
And in some places, instead of such subtle matters as spirit, there will be strict rules prescribed by the owner of the territory—or a homeowners’ association. They are within their rights, but most likely they too will use their rules to ensure that their land is worth more, the district is considered more prestigious, and the tenant is not too frightened by unnecessary strictness. They will have a far more direct motivation for this than officials from some urban planning department.
Among the authoritarian right, there is a widespread belief that capitalism and the market can exist and function only through strict state control. They believe that this is the only way to ensure the protection of property rights, the honesty and security of agreements, and to correct certain alleged deficiencies of the free market. Naturally, alongside this, they deny that such state intervention in market processes is an act of violence. In their view, this intervention is precisely what protects everyone from violence. But is this actually the case?
1) State intervention harms market processes
From economic theory, we know that by intervening, the state disrupts market equilibrium. The most obvious example of measures leading to such a process is the establishment of minimum and maximum prices. The first measure leads entrepreneurs to believe that the production of a certain good is more profitable than it actually is. As a result, an overproduction of this good occurs, and the entrepreneurs themselves, unable to sell it, only go bankrupt. The second measure, conversely, leads to a shortage of the good, as it becomes unprofitable to produce and sell, and the fact that the cost is lower than the market price leads to those first in line for the product buying up the entire available assortment immediately, leaving nothing for those who find themselves at the end of the line.
Usually, proponents of state control say that these measures are necessary to support entrepreneurs and to guarantee that all people are provided with a certain benefit, and that the listed problems are solved by additional measures (subsidizing entrepreneurs and controlling the redistribution of benefits among people). But, of course, these measures require additional bureaucratic expenses, which negate the alleged benefits obtained from introducing these regulations.
The state also takes a portion of the population’s funds through taxation, and thereby partially deprives people of the ability to invest their funds in the types of production in which they are genuinely interested. Furthermore, through its regulations, the state makes it difficult for businesses to enter certain economic spheres, which also distorts market equilibrium and complicates people’s access to certain types of benefits.
Let us also not forget that in some spheres, the state declares itself to be an indisputable monopolist. Unable to compare the results of its activities with possible alternatives, and unconditionally receiving profit in the form of tax funds regardless of the quality of these results, the state monopoly is an inefficient producer, which harms the well-being of citizens.
Finally, the state corrupts the private sector. Under conditions of a free market, companies have only one option to continue functioning and increasing their wealth—providing people with benefits of the highest quality and at the lowest prices. Otherwise, people will simply leave for competitors. The state, however, gives some entrepreneurs an alternative option—corruption. An entrepreneur bribes officials (or promotes their relatives, friends, and acquaintances into the state apparatus) and gains legal grounds to restrict competitors from conducting a certain activity. At the very least, he can avoid the application of state regulations to himself and achieve the active imposition of these regulations on everyone else. At most, he can lobby for a law that makes him the only legal producer in a specific economic sphere.
Through its regulations and monopolistic coercive control, the state severely harms economic processes, distorts market equilibrium, and reduces the well-being of people. Capitalism, as a type of economic system in which legal equality as well as the principle of freedom of activity and agreement must be observed, is absolutely incompatible with the actions undertaken by any governments.
2) The state does not protect property rights and does not ensure the security of transactions
An important point in the program of etatists is that the state is necessary for the protection of property rights and guaranteeing the security of transactions, without which capitalism and the market cannot function at all. Minarchists—proponents of a minimal state that should engage only in this—place particular emphasis on this.
Yes, I agree that property rights and the security of transactions are necessary for the functioning of the economic system as a whole. However, the state cannot provide them in any way.
Let us remember that the state is a monopolistic and indisputable instrument of power. Being in specific hands at a specific moment, it serves only the interests of its owners. And nothing can stop them from abusing their authority and violating the norms they themselves have prescribed. Of course, it can be said that this is solved by the democratization of politics, or by creating a system in which only intelligent and kind rulers come to power. But in reality, neither will work. Ensuring the first, even in its absolute (that is, in the form of direct democracy), only means the observance of the interests of the majority to the detriment of the interests of the minority. Ensuring the second completely collapses against the phenomenon of corruption and the potential incompetence of the agents and agencies engaged in searching for and bringing to power supposedly pure and innocent angel-rulers.
Even in the case where the government is more or less reasonable, it still, unlike market and competing agents, has no incentives to act in the most efficient way. It only needs to act as efficiently as the population’s indignation does not exceed a certain critical level, above which the actions of security forces become either ineffective or cause the government significant reputational damage, thereby stimulating the rest of the population and the global community in general to also express indignation.
As Mikhail Svetov always correctly notes, the state is the One Ring of power. And regardless of whose hands this ring is in, one should not expect it to work for the good.
The observance of property rights and the security of transactions can be ensured only by the Balance of Violence Potential and Reputational Institutions. The first concept states that monopolistic power should not exist at all, and that different subjects and groups of subjects should possess approximately equal capabilities to inflict unacceptable damage on one another. In such conditions, cooperation will be far more profitable than coercion. The second concept asserts that reputational institutions and services can be used as tools for guaranteeing the security of transactions. Furthermore, they provide ostracism as an effective and powerful tool for punishing those who were not honest in their intentions.
You can read more about the concept of the Balance of Violence Potential here. You can learn how Reputational Institutions function, why Reputational Services are useful, and what ostracism is here.
3) State intervention is always violence
What do you call a subject (a person or an organization) who unilaterally imposes certain conditions on me, forces me to give them a part of my funds, and threatens to take away even more of my funds or forcibly lock me behind bars in case of non-compliance with the conditions imposed by them? Obviously, this is a rapist and an aggressor, and the actions they carry out are violence and aggression. And the institutionalization of these phenomena in no way changes their essence.
Even in the case where the state exists exclusively to protect its citizens from violence, it still first commits an act of aggression toward them, because it establishes itself as their protector regardless of the desire and choice of the people. In fact, this is common gangster protection (“kryshevanie”). If someone breaks into my house, points a gun at me, and says, “give me this much money, and I will protect you, otherwise you will be punished yourself,” then that too would be an obvious act of aggression.
A rapist and aggressor cannot be your protector, because to provide this protection, they must first apply aggression to you. Based on this, the state, politicians, bureaucrats, and all those who clearly support state activities are rapists and aggressors, because their activities assume that people must be attacked first, covering themselves with stories allegedly about how if we don’t attack you, someone else will. Naturally, the attitude toward the listed subjects should be appropriate.
We can draw the following conclusions: the state hinders the functioning of the economy and market processes, it is unable to ensure the protection of property rights and the security of transactions, and it is merely a rapist who has imposed their will on you through methods of aggression. And after all this, how can one even support the idea of state control and intervention? No sane person will do so, and whoever does—they themselves admit that they lack the slightest competence in matters of economics, public management, and in general are an open rapist and maniac!
According to libertarian law, the sale of alcohol and tobacco should not be prohibited by force of law (nor should it be subject to fines), including to minors, because it is a victimless crime.
Given that I am currently working as a cashier, my colleagues and I ask for IDs from everyone except those who look under 50, because those participating in sting operations are 17-year-olds who look much older than their age: young men with gray hair, thick beards and muscular builds, and girls who are tall, stout, with makeup and “first” wrinkles. Dozens of customers daily harass us, telling us “not to take it to the point of absurdity” or to stop creating “Kafkaesque” situations. The solution proposed to me by the surrounding statistes is even more of a hell—to ask everyone, to lobby for checking documents through the register as in the USA, etc. My old acquaintances and friends harass me by saying that alcohol consumption at a young age increases the risk of alcoholism many times over. Yes, I am aware. Moreover, I myself actively stood by the same prohibitory position, was an active lobbyist and advocate for control measures on alcohol and tobacco, which was sometimes a topic for discussion with these friends and acquaintances or even a reason for meeting. That is why my social networks are under tension right now. But it is inevitable. Much water has flowed under the bridge since then; I have been studying economics and history for three years, and for the last few months, I have openly considered myself a libertarian.
So, the sale of a product that sits on a store shelf for legal money is not violence. But some people believe that by selling to those under 18, I am committing violence. People tell me that advertising and propaganda force one to start drinking, and that until a certain age, a person supposedly has no freedom of choice. As if they acquire it on their 18th birthday. As if they have none at all before that. Simply, parents should handle upbringing while children live with them, not the state. This answer does not satisfy such people.
How can I clearly explain to them that the decision to sell or not sell anything should be made by the owner, and they should not be punished for selling or not selling?
Sergey Sushinsky
I would suggest approaching your argumentation from two sides.
First, you need to demonstrate that the very idea that the state does good through trade bans is a poor idea. Remind them how in the Soviet Union people were imprisoned for trading foreign currency, and in general for any entrepreneurship involving reselling (for this, a seemingly neutral economic term, “speculation,” was used as a condemnation). Later, currency trading was permitted, but no one compensated those previously imprisoned for currency operations for their losses. All over the world, the trade of marijuana is gradually being legalized, while in Russia, more people are imprisoned for the distribution of substances than for theft. And when marijuana trade is permitted in Russia, it is likely that no one will compensate the losses of all those previously convicted under Article 228 of the Criminal Code of the Russian Federation. Remind them that in many Islamic countries, the sale of alcohol is illegal not only to children but to adults as well. In short, there are many restrictions on free trade that are introduced by the state and then repealed. So why did they decide that the ban on selling alcohol to children is actually necessary and will not subsequently be repealed by the same state as mistaken or even criminal? And who will then reimburse alcohol traders for their losses in fines and bribes during the period of the ban?
Secondly, point out to them that if the satisfaction of a need is pushed out of the legal field, it begins to be satisfied illegally. A child was unable to drink beer and smoke cigarettes—they have an unsatisfied need and unspent money. Tomorrow they will buy mephedrone. Maybe it would have been better to sell them beer?
What needs to be done to achieve clean air with the help of the state? You need to launch a public campaign, convince politicians that ecological regulations can generate both political capital and a decent amount of embezzled money—and eventually, the state will squeeze those who pollute, reducing their income, and bestow favors upon those who want clean air. This is, of course, if you live in New York, and not in the city of Sibay in the Republic of Bashkortostan.
What happens to the environment in a free market? Where existing technologies mean that you either pollute and make money, or you don’t pollute and make jack shit, you will pollute. And around you will live those who also pollute and make money, or are otherwise tied to your business. Those for whom the smoke is harmful simply leave for wherever it is cleaner and start their own business there, linked to the sale of beautiful views and clean air. For example, in the USA in the 20th century, New York and other Detroits and Los Angeleses were polluting, while connoisseurs of healthy recreation mass-developed Florida, which rapidly transformed from a land of swamps into a land of beaches.
The market very reliably compels people toward peaceful coexistence when everyone minds their own business and does not try to suppress competitors by force. When the state began to actively fight for clean air in cities, businesses found places to pollute and began moving to third-world countries; the country paid for this with the emergence of the Rust Belt—cities where it was impossible to find any other more or less profitable activities besides polluting. Of course, I am simplifying greatly, and it wasn’t just about ecology—the state was advancing on many fronts.
Of course, business can be criticized for often starting to solve problems as they arise, meaning that for some time a problem remains unsolved. But the state, with its manic-depressive style of reacting, either forces you to swim in an empty pool or demands that you march along the bottom of one that has already filled up. If ecological regulations are introduced before the emergence of sufficiently cheap emission cleaning technologies, you will either get corruption or destroy businesses, and a vast number of people will suffer needlessly from poverty. Conversely, if you try to centrally suppress ecological protests, a vast number of people will also suffer needlessly from poor ecology.
At the same time, business in a free market, even without any state regulations, will look for ways to pollute less, produce less waste, spend less energy, and so on. A dirty enterprise is located on the outskirts; skilled workers must be lured there with good money, the produced goods must be transported to consumers in far-off lands, waste must also be hauled away, and so on. If it were possible to produce the same thing with comparable costs right next to the mass consumer, it would provide a significant competitive advantage, which means investing in technologies that reduce ecological damage.
The main means of improving the environment is the prosperity of the people. As long as people are poor, they will turn a blind eye to everything that hinders the satisfaction of their most urgent needs. Only after becoming wealthy do they begin to think about how to organize a comfortable life. Trying to organize their life for them immediately, at their own expense, while preventing them from becoming wealthy, is a crime.
If you live here, it means you need this for some reason
There is a well-known assumption that if government regulation regarding zoning, green spaces, parks, building height, etc., were abolished, developers would begin to squeeze profit from every square meter of land, building continuous masses of hundred-story skyscrapers.
In fact, it is by no means always profitable for a developer to sell as many square meters as possible in a building where there is no park or greenery nearby. The average price per square meter in such a building would be much lower than in an identical building with appropriate landscaping of the surrounding area. This is confirmed by the example of New York, where the cost of housing with a view of Central Park is significantly higher than similar real estate a block away. Anyone who tries to build over that area would be dragged through the courts by residents of nearby houses, as it would crash the value of their assets.
Skeptics might object—look at Hong Kong, where there is indeed minimal government regulation and the development looks like “concrete anthills.” In reality, firstly, the state intentionally built such blocks to provide “affordable housing” to its voters. Secondly, Hong Kong is a special free zone with a tiny territory in the midst of vast totalitarian China. Accordingly, the demand for real estate far exceeds the supply, and people are willing to sacrifice environmental comfort for the sake of economic and personal freedoms. For a country as huge as Russia, or for European countries, the problem of lacking free space is not nearly as acute.
I wanted to insert a photo of New York’s Central Park first, but no, here is a concrete anthill without any zoning.
Actually, modern China is not only the People’s Republic of China, but also the Republic of China, as well as Macau, Hong Kong, and to a considerable extent, Singapore. And specifically in terms of citizen welfare, the People’s Republic of China fares worse than all the other states I mentioned, despite the fact that the starting conditions for economic development in the PRC, the Republic of China, and Singapore were roughly the same.
Therefore, from a libertarian perspective, one must explain China’s failure rather than its success. Yes, of course, Deng Xiaoping proved better for the PRC than Mao Zedong. But the residents of the Republic of China achieved far more significant success without any world-famous reformers. What is the role of state regulation here? As is easy to see, it is negative.
In reality, of course, there is a degree of cunning here; it is much harder for a large continental country to escape poverty and socialism than for a small maritime one. But any city on the coast of mainland China could today live no worse than Hong Kong or at least the Republic of China, and if that is not the case, the responsibility lies solely with the leadership of the PRC. The guiding and directing role of the Communist Party is too great, the share of the state sector in the economy is too high, and too many resources are spent not on what people are willing to buy, but on the construction of the Great Firewall and the social credit system.
The Great Firewall of China and its role in the success of modern China
The economic crisis that began in 2014 hit the Russian mechanical engineering industry hard. Compared to 2008, the situation for enterprises was complicated by political sanctions against Russia. On one hand, the twofold drop in the ruble became a positive factor, increasing the cost of similar foreign machines and reducing competition in the domestic market for domestic producers. On the other hand, imported components, on which the production of Russian equipment heavily depends, became more expensive. The cost of mechanical engineering products rose. Manufacturing plants became concerned with import substitution, but so far this task has not been solved.
Another negative factor was the decline in economic needs. With the exception of orders placed by the military-industrial complex and state corporations, the rest of the market slumped sharply. Total demand for the products of mechanical engineering companies decreased more than it did in 2008.
Unlike our enterprises, foreign companies quickly reoriented and began to additionally stimulate demand for their products in Russia by introducing new financial services. They began providing buyers with unprecedented discounts, long-term interest-free installments, leasing, and practicing other methods to stimulate purchasing activity.
In the crisis situation, domestic companies chose different tactics. A number of enterprises (for example, a crane manufacturing plant in Chelyabinsk) diversified sharply, changing their assortment and concentrating efforts on exports and working with key clients. However, most mechanical engineering companies preferred to sharply reduce the amount of products manufactured, focusing on various ways to optimize expenses and reduce costs.
One of the enterprises caught in the whirlwind of these economic events and experiencing the negative consequences of the crisis was the Mashinstroy holding (name changed).
About the company
The Mashinstroy production holding has a long history and tradition. It includes production enterprises, a design bureau, and its own sales unit. The holding produces tractors, municipal equipment, bulldozers, and special-purpose equipment for the military-industrial complex with a fairly wide range of modifications. It is one of the few mechanical engineering companies in Russia that has preserved the engineering competencies and production base necessary for producing modern products.
Sales Market
Mashinstroy works with customers from Russia and small developing countries, to which sales are carried out largely through political channels. The competitive environment in which it offers its products is not very saturated. On one hand, there are Western manufacturers, whose equipment, after the fall of the ruble, exceeds the cost of similar products from the holding by 30% or more; on the other, there are Chinese plants, whose equipment is lower in quality and currently not widespread in Russia.
Management
The mechanical engineering holding consists of a number of independent enterprises located in different regions of Russia. They are managed by a management company located in Yekaterinburg. The powers of plant directors are limited to solving only operational issues. All strategic tasks are formed in the management company. In most cases, all communications between enterprises were also carried out through the management company.
The formalized development strategy of the mechanical engineering holding became irrelevant under the current conditions. A new anti-crisis strategy has not been adopted. In this situation, each head of an enterprise within the holding independently seeks solutions to exit the crisis.
Finances
A high level of fixed costs remained in the holding. At the same time, product output dropped sharply, leading to a fall in turnover and profitability. High indebtedness and the inability to take new bank loans increased the need for working capital. For this reason, the deadlines for several contracts were missed. Against this backdrop, financial flows decreased even further.
Personnel
As a result of the reduction in production volumes, salaries fell in most divisions of the holding. Key specialists began to resign. The level of motivation and engagement of personnel dropped sharply. Gradually, some enterprises began switching to a part-time work week, which served as another push for the resignation of several important specialists.
Products
The range of products is quite wide: municipal, agricultural, quarry, and construction equipment. In addition, a number of enterprises have competencies in producing military equipment. The engineering company constantly develops new equipment, including innovative types. New modifications of existing products are constantly being developed, and models that have proven themselves in the market are being updated.
General Situation
Starting from 2014, the situation in the holding has been constantly deteriorating. A shortage of working capital makes it impossible to ensure the deadlines for existing contracts. Despite the demand for the holding’s equipment, the ability of the enterprises to meet the needs of the mechanical engineering market has also decreased. Parallel to this, the capacity of the Russian market is shrinking.
In the absence of an actual strategy in the field of sales and marketing, a large amount of work-in-progress has accumulated, which, against the backdrop of a shortage of working capital, further exacerbates the situation of the mechanical engineering holding.
With rapidly falling turnover, the holding’s fixed costs remained at the previous level for quite a long time. Profitability began to drop rapidly, going into the negative within a year. Having a large loan portfolio, the holding began to delay loan payments. Delays in salary payments appeared in each of the business units at the enterprise.
Questions
What solutions do you see for bringing the Mashinstroy holding out of the crisis?
How should these solutions be integrated into the overall development strategy of the holding?
Answer
1. What are the downsides of this type of enterprise organization, such as a holding? First and foremost—transfer pricing. The owner of a holding always has the temptation to sell the products of one of their enterprises to another of their enterprises not at a market price, but at an undervalued one. What does such a protectionist policy lead to? Exactly the same thing that protectionism at the state level leads to. The holding’s enterprises become less competitive compared to their direct competitors in the global market, as they may not care much about sales. Why bother if the buyer is “one of their own”? They will buy anyway.
During a period of economic growth, this all seems like trivia, but in a crisis, there are no trivialities.
Thus, the first and obvious direction of optimization is increasing the autonomy of the holding’s enterprises.
2. A crisis is always characterized by a decrease in the share of CAPEX and an increase in the share of OPEX in enterprise budgets. So, the second obvious direction of optimization will be reorienting from the finished products market to the production of spare parts, warranty and post-warranty service; as for finished equipment, the goal should be not so much to fight for the shrinking Russian market as to push into the global market with all possible strength.
3. A strong point of Russian mechanical engineering is still a fairly powerful design school. It makes sense to negotiate with the Chinese about production in China based on Russian projects. Yes, this means that the holding’s design units act directly to the detriment of the production units. From the perspective of social obligations, it is not very “comme il faut” to reduce labor-intensive production, but from the perspective of the holding owner, developing a potentially more high-margin research and design direction is certainly profitable.
4. When the price of labor drops even further compared to the Chinese, production in Russia can be resumed, and “made in Russia” mechanical engineering products can be sold in the Celestial Empire, which sounds fantastic for now, but the Russian leadership is confidently moving the country in exactly this direction. Of course, this will mean the entry of Chinese comrades into the capital of the corresponding enterprises of the holding. It is also possible that the enterprises could be offloaded to them entirely, and even for a relatively decent price. Of course, this move might not work, because you never know exactly when the state will decide to tie the hands of a drowning man, imagining he actually intended to save himself. However, this caveat applies to absolutely any step taken by a legal business, so it is not necessary to repeat it every time.
5. A lack of working capital means that strategic investors must be sought. For this, it may be necessary to take some of the holding’s enterprises public through an IPO, which, in essence, would mean their exit from the holding while the current owner retains, say, a blocking package of shares. In return, refinancing, a change to more effective management, and involvement in new technological and sales chains could give these enterprises a development impulse, and for the current owner, mean a transition from losses to profits.
A scientist and talented manager, let’s call him SM, headed an experimental laboratory at the sunset of Soviet power, and after 1991, created a private firm to monetize its scientific developments. The partnership proved successful. A clientele emerged, placing commercial orders, and a steady flow of cash followed. The scientists’ earnings increased, and it became prestigious to enter the laboratory, including for the purpose of defending a dissertation. In the new economic conditions, SM strengthened his good name—his personal brand, as they say now.
The scientist was wise and understood that he would not live forever; in the mid-2000s, well into his sixties, he chose his best student (BS) as his successor, who owed the boss a great deal. They verbally agreed that after a few years, the teacher would hand over his scientific post and a share in the business to the student under certain conditions. Until that happened, the successor was appointed as SM’s deputy with signing authority.
Time passed. But the “grandfather” aged slowly. On the contrary, developing an enviable energy, he managed to marry yet again—this time a young (very young and beautiful) student, a PhD candidate from the provinces. SM intensively began arranging the life of his new family: he solved the housing issue on a large scale, started traveling to resorts with his young wife, took up downhill skiing in his old age, and meanwhile devoted less and less time to work. But business was going well: the deputy did not let him down, and money arrived in SM’s account regularly. Commercial orders grew, and the laboratory was strengthened by new staff brought in by BS. For his part, SM did not mistreat the future successor and, as he believed, paid him generously, very generously. Everything was fine; for the boss, a warm, almost “Boldino” autumn had begun.
The Climax
However, complex and unpleasant questions were accumulating in the deputy’s soul, such as “how long must I wait?”. He had the same thoughts as Pushkin’s Onegin regarding the uncle who was, as is well known, of the most honest rules. The best student continued to remain No. 2, although he was eager for the No. 1 position. BS could not ask the boss directly when he would take over. Yet he received indirect signals from SM that the agreements were still in force. The message was: wait, my friend, and happiness will be yours; meanwhile, our business is my personal business.
Not immediately, but BS realized it was time to stop worrying and start acting. He began with something simple: creating his own client base by poaching his boss’s clients. He registered his own company and nudged customers toward the idea that, for tax reasons, the contract for the work should formally be concluded with his company rather than the boss’s firm.
Over time, BS attempted to switch the largest companies to himself, whose executives knew SM personally. They signed the documents, extending the trust they had in the teacher’s name to the student. Perhaps everything would have slipped through here as well, but every now and then BS began to let slip in conversations with old clients that he, BS, was actually conducting all the business in the scientific company, while the “grandfather” was useless. He claimed the boss was pushed around by his young wife, understood little about the business, and it was long past time for him to retire. All of this did not escape the attentive ears of the interlocutors. Some of them informed SM in polite terms about the danger he had failed to notice, being preoccupied with an intensive family life.
The Resolution
Several years passed this way. SM’s wife successfully defended her dissertation and, through patronage, obtained a very good position, remaining as young and beautiful as ever. The same could not be said for her husband, who had crossed the threshold of his seventies. He remained impeccable in providing for the family’s material needs, but he could no longer maintain the greatly increased spiritual and other needs that such a beauty craved and undoubtedly deserved. However, some other men, far from being Doctors of Science, were quite capable of providing these other needs. The professor eventually reached this discouraging conclusion after connecting the corresponding dots. The family life cracked and quickly came to a logical end. The spouses separated, and in doing so, the wife managed to secure the enviable shared living space as a memory of her husband.
The teacher, left alone, was as if waking from a faint, and after a short period of reflection, returned to his laboratory—or, to put it in modern terms, to business. His business. It turned out that his professional skills had not vanished; his favorite work not only comforted him but again began to bring pleasure. But the euphoria of the return did not last long, only until SM conducted a detailed analysis of the orders and contractual relationships. First, suspicions arose that orders were disappearing somewhere, and then he looked at the documents, quickly remembered the warnings of his friends, and met with them. The truth revealed itself to him in all its harsh guise, and he finally understood, turning to the facts, that his deputy was brazenly and effectively openly stealing his business.
A conversation took place between the teacher and the student, if it could be called a conversation. After that, having calmed down and reasoning concretely as businessmen—but without the extremism sometimes characteristic of businessmen (they were, after all, intelligent people)—SM and BS realized they were in a difficult situation and began to think about how to live further. Initially, each saw emotional arguments for an immediate and harsh “divorce.” But upon more detailed analysis, factors emerged in favor of continuing cooperation, whatever that might entail.
Meanwhile, the rift between SM and BS became exposed, consequently alienating the employees. Strangely, the battle line was drawn not between the “old” and “new” staff brought in by the boss or his deputy, but along the moral positions of the parties, mainly on the question of who cheated whom. Furthermore, the confusing scheme of how orders were processed began to affect the quality of the work. Mistrust grew among clients toward the laboratory, its head, and the deputy: from the outside, it was impossible to tell who was right and who was wrong. Other negative factors appeared, which ultimately led to a weakening of the flow of orders and affected the financial situation of the employees.
With each passing day, the situation became worse…
Questions
How should the characters in the case have acted to avoid such a situation?
How can the current conflict be resolved? What would you recommend SM and BS undertake to reach an agreement?
Is it possible to preserve the profitable business created by SM in such a situation? How can this be done?
Constraints. The company owner is already over 70 years old. Even if he returns to the operational management of the business, he will not be able to engage in the company’s development for long. Additionally, it is important to note that the private research firm was created thanks to the owner’s authority and connections based on a state laboratory. One part of the business cannot exist without the other.
Answers
1. How should the characters in the case have acted?
As is easy to see, all the misunderstandings in the given case arose due to vague agreements. The first vague agreement: BS is forced to do all the work for a salary, based on a promise to inherit the business in an undefined future. The second vague agreement: the absence of a prenuptial agreement and, consequently, a conflict of expectations between SM and his spouse. The third vague agreement: the dubious legal status of the entire business, since officially it all remains a laboratory within a state research institute, and it is precisely this legal form that forces the first agreement to remain vague.
It is clear why SM preferred to stay under the wing of the state in the early nineties: it provides enormous savings at a stage when the business has not yet stood on its own feet. Here you have premises in the institute at the budget’s expense, plus a wealth of various informal connections in state structures of different levels, which can be used to pull off various schemes.
In the new post-Soviet economic reality, passing on the position of laboratory head as an inheritance is somewhat archaic. The timely establishment of a more adequate company structure could have provided the tools to prevent the conflict between SM and BS. For example, SM could have received a share in the business in addition to a salary and gradually increased it. The business itself could have been scaled more confidently instead of being confined to the size of a laboratory—but that, of course, is a matter of taste, ambition, and market conditions.
In general, the only task of a business owner that cannot be delegated to managers is controlling that management does not plunder the business. If the business owner does not perform this single task, then he alone is ultimately responsible for the business slipping through his fingers. To the extent that the state can be likened to a commercial company, the people are certainly responsible for the appalling quality of state management and the plundering of state property into the pockets of civil servants—but that is an off-topic in this case.
Thus, if regarding the business, the solution lies in removing it as completely as possible from state regulation, then regarding marriage, such things are not permitted by family codes. According to the code, a prenuptial agreement cannot provide for economic sanctions for extramarital affairs, which makes SM’s position in this deal more vulnerable. However, this is not so important. All agreements could have been concluded in advance. On the other hand, such romantic infatuations in old age are inevitably accompanied by a certain affectation, so it would be strange to expect a sober view from SM during the “mating season.”
By the way, if the company had been separated from the research institute in its time and represented an independent business, the appearance of SM’s spouse on the horizon would have inevitably led BS to demand clear guarantees of receiving the business; otherwise, it would have by default passed as inheritance to SM’s spouse, without all these dances with appointing a new lab head at the scientific council.
2. How can the current conflict be resolved?
I would advise formalizing the separation of roles. SM remains the lab head in the research institute until he decides to retire, and also holds the status of a scientific consultant with a good salary in BS’s company. BS retains his position as head of sector (or whatever it was) in the boss’s lab and remains the general director of his own company. As for what form to keep SM’s company in, I won’t venture a suggestion. Management could be transferred to BS. One of the companies could be liquidated. They could be merged into a holding. It’s not fundamental.
The point of the proposed solution is that each party has tools against the other, but no incentive to use them without extreme necessity. SM continues his scientific work, which should have a positive effect on his mood and zest for life, and the salary in BS’s company will allow him to continue living in style, as he is used to. At the same time, he no longer needs to ensure the business is not being plundered, since the business has already been transferred; only the rent remains. BS retains all clients and operational management, which means he has guarantees of maintaining control over the business and incentives to develop it in every way. He could fire SM, but then he would lose his position in the laboratory.
The “pump and dump” scheme exploits the bounded rationality of economic agents and, of course, information asymmetry—in short, those very “magic bullets” that government regulators love to cling to when they need a justification for regulations.
As long as such a scheme is practiced by private individuals on exchanges not affiliated with them, this is, firstly, behavior that is difficult to distinguish from honest trading, and, secondly, it does not guarantee profit, but carries risks just like any other trading strategy.
If an exchange is caught in such activities, it leads to a loss of volume—serious players prefer more serious platforms. For example, Bitfinex, a fairly old exchange by cryptocurrency standards, was suspected of manipulating the Bitcoin price by using the Tether stablecoin it issues, which may have had incomplete backing. As a result, the exchange that was once first or second in the world by volume has now slipped toward the end of the top ten, and a couple of new popular coins have appeared in the stablecoin market, which first and foremost underwent a full audit for one-hundred-percent dollar backing. Bitmain tried to manipulate the Bitcoin Cash price and almost went bankrupt because of it. Obviously, many are haunted by the laurels of George Soros, who successfully played against the British pound, but this is a bad topic for a long-term game.
The institution of reputation rules better than any regulators.
