Тег: Regulations

Case study on the crisis in mechanical engineering

Miloš

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

  1. What solutions do you see for bringing the Mashinstroy holding out of the crisis?
  2. 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 case about stealing a business

Miloš

The Setup

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

  1. How should the characters in the case have acted to avoid such a situation?
  2. How can the current conflict be resolved? What would you recommend SM and BS undertake to reach an agreement?
  3. 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.

What am I doing wrong?

From the perspective of AES, why does the “pump and dump” price manipulation scheme on exchanges not need to be regulated?

анонимный вопрос

I have already analyzed this topic in quite some detail, so it wasn’t even clear what else to add, but then I wrote a post about behavioral economics.

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.

Let’s imagine that some crazy landowner in the city put up a giant-sized poster with, say, an image of an erotic nature.

Out of common sense, it would be right and fair to punish such a stunt immediately and force the poster to be taken down. Under a state, that is exactly what would happen. But what would happen under ancap?

Anonymous question (paid in the amount of 0.0005 BTC)

First of all, I want to apologize for not noticing the donation transferred on Thursday immediately, and therefore I am only answering now. I will try not to disappoint in the future.

Under a state, we actually see huge erotic images all over the city in the most prominent places, from billboards right in the middle of sidewalks to banners covering the entire side of a high-rise building. The image usually features some minimally dressed girl enjoying a Coca-Cola or checking how comfortable it is to sit on the hood of a sports car. I don’t know about feminists, but I like such advertising, especially now, because it reminds me of summer.

If tomorrow marketing research in focus groups shows that sales can be increased by advertising of a homoerotic nature, or scenes of violence, or something along those lines, then either we will soon see and gladly welcome fresh advertising imagery, or this will be preceded by lobbying work to obtain permission from the state to display such things, if it currently prohibits it directly.

But your question, in essence, concerned something slightly different. What if someone decided to place not an advertisement, but an image of a deliberately repulsive nature, which does not call for buying anything but simply evokes disgust? In a state, even if the current laws do not provide a ban on such things, the image can be dismantled by a simple order from some law enforcement agency, or, if it is a civilized state, there is a chance for a private lawsuit to succeed.

Quite some time ago, I wrote about some possibilities for harmonizing the urban environment under ancap; now I will consider a slightly different aspect.

In the absence of a state, a scandalous image will remain as long as the owner is willing to pay for it. Some will organize protest actions, call for a boycott, some will try to buy the building in order to destroy the image, some (the vast majority!) will limit themselves to flame wars on the internet, some might even risk pelting the owner of the object with eggs — and some will release souvenirs and begin to glorify the city’s new symbol. Imagine, a magnet of the Eiffel Tower, which was considered disgustingly ugly and people demanded its demolition in the early 20th century! Now imagine a magnet of our city’s fucking cunt-thing! Not much time will pass, and it will be impossible to imagine the city without this monument. The free market is always eclectic, and nowhere offline is this manifested as vividly as in the appearance of cities.

How does libertarianism view human cloning?

анонимный вопрос

Human cloning is a long-known natural phenomenon, the consequences of which most of us have encountered without experiencing any undue difficulties. Clones, due to their peculiarities, are loved in fiction—so much so that introducing a clone into a plot is becoming a sign of a certain cliché. Cloned people are actively used in psychological and other medical studies when it is necessary to exclude the influence of genetic differences and focus on environmental factors. In short, the fact that human clones exist is as commonplace as the existence of albinos. So what if they are monozygotic twins; have we never seen identical twins?

At the end of the last century, advanced biotechnologies made it possible to clone adult organisms. Theoretically, nothing prevents cloning humans in a similar way. How would clones obtained from adult humans differ from clones obtained at the zygote division stage? Only in the fact that they would be of different ages. In other words, the social consequences would be significantly fewer than with natural twins—at least those can be mistaken for one another, although, for example, their fingerprints already differ—whereas it is much harder to mistake twins of different ages.

What is the point of cloning an entire adult human? Practically zero. Making ordinary children is much easier and cheaper. What is actually capable of bringing benefit is tissue cloning. An organ grown from oneself will graft much better during transplantation.

About the horror stories

I will immediately dismiss the religious ones, since groundless fantasies can be absolutely arbitrary, and it is impossible to analyze them all. 

People will be cloned, grown, and then sliced for organs. Well, guys, that’s like claiming that cars will be assembled and then dismantled for spare parts. Growing a less differentiated cell culture is much easier and cheaper.

Rich people will copy their consciousness into their clones. We are currently further from consciousness copying technologies than we are from a manned flight to the edges of the Solar System. We can at least plan the flight with existing technologies, but there are not even any approaches to consciousness transfer. When such technologies appear, it may turn out that clones are completely unnecessary there, and that people have mastered rejuvenation procedures in general.

I have been asked repeatedly how fundamental science will develop without the state. Well, cloning is precisely an example of how the state directly prohibits science, so without the state, it will at least be able to develop, whereas now, in a number of areas marked with red flags, it is forced to move forward along strange detour paths.

Clones are among us!

How to explain to a statist-hoplophobe that such a funny thing as state regulation of crypto is not only pointless, but will not make the world even slightly safer?

анонимный вопрос

I don’t quite understand why we are talking about a statist-hoplophobe, and not a statist-guitarist, for example, if the subject is the control over cryptocurrency circulation.

By design, most cryptocurrencies do not require the participation of a trusted intermediary, let alone one necessarily authorized by the state. So, avoiding state regulation of cryptocurrency circulation is very simple, and banning it is pointless. The only thing the state can regulate more or less effectively is the conversion of crypto into fiat, meanwhile, money earned in cryptocurrency still has to be spent primarily in national fiat currencies.

So, a state wishing to regulate cryptocurrency circulation can act like the United States, which pressures crypto exchanges on its territory and demands they snitch on their clients, while crypto exchanges in the rest of the world have simply told these pushovers to get lost and require confirmation during registration that you are not a US citizen. Thus, it is not so easy for a US citizen to perform uncontrolled exchanges of crypto for fiat in significant amounts.

That is why unfortunate US citizens continue to buy drugs with good old cash dollars, and use cryptocurrency far less widely than they could. What does the need to buy drugs with physical cash mean? The need for personal contact with a pusher, additional security measures for everyone involved in the distribution chain—since they are easy targets for robbery—in short, blood, filth, and endless street clashes. Does the world become safer because crack-dealing gangs are dividing territory?

Compare this situation with peaceful and safe Russia, where the only danger for a “zakladchik” [dead-drop courier] and a drug user is the cops, while the level of street violence related to substance circulation has decreased considerably with the arrival of cryptocurrencies in this industry. Where would violence come from if the producer, the buyer, and the courier are physically separated and do not know each other?

It is completely irrelevant how you personally feel about psychoactive substances, but the fact that this market has switched to crypto has made the lives of ordinary, uninvolved people safer, whereas where the market has not switched, everything has remained as it was. Even this single consideration should be enough to convince a person who is truly concerned about their safety that crypto should not be regulated.

Now, if he—as is common among statists—is convinced that the state should regulate absolutely everything that can be somewhat shoehorned into the market of anything even slightly dangerous, because “control is needed, how can we do without control,” then conversation is useless; only personal experience will change his mind.

And if only the guy had a short-barreled—excuse me—a bitcoin…

Why not sell libertarianism through the idea of the absence of state regulation, especially when there is the example of the flourishing of entrepreneurship in 1998-1999, when they left business alone and let it develop?

анонимный вопрос

This question was clearly inspired by my post “to whom and how to sell libertarianism?“, and is an invitation to develop the topic.

But the example you chose was not very successful. In 1998-1999, there was no conscious deregulation; the state simply defaulted on its credit obligations, which led to it stopping borrowing for quite some time. Investors, no longer having such a tempting option as investing in government securities, began to invest more actively in the real sector. Moreover, the financial crisis sharply lowered the cost of assets, and the fall of the ruble lowered the cost of labor. In general, in full accordance with the Austrian theory of the economic cycle, recovery after a crash happens quickly if one does not interfere with the process, which is what happened—not because the government was so wise, but because it was bewildered and did not know where to start.

So the example you proposed is more about the fact that state non-interference in the economy during a crisis has a very beneficial effect on the economy. Even to illustrate that state non-interference in the economy has a beneficial effect on it in general at any moment, additional examples are needed, and better yet—logical arguments. Although, of course, people love history precisely because it is a set of instructive tales for any life situation, so do not hesitate to provide historical examples if you see that they are in demand with the audience. You won’t prove anything with them, but you certainly can sell an ideology.

After all, for people, 1998 is more associated with something like this, rather than with the liberation of business…

What arguments do Keynesians bring in favor of government regulation? They claim that the Austrian school cannot prove its theory. And how do they prove their own?

анонимный вопрос

The triumphant march of Keynesianism across the globe is based on simple trickery. The Great Depression was declared a failure of the free market, rather than a failure of state regulation, and a set of state regulation tools was proposed to counteract such phenomena. From the very beginning, Keynesian theory was criticized by the Austrian and neoclassical schools, and throughout the entire time it dominated, no convincing answers to this criticism were provided.

Why did the Keynesians defeat the Austrians? Because the governments themselves acted as the arbiters in the dispute over which economic policy governments should pursue. This violates the fundamental legal principle “No one should be a judge in their own cause,” and it is no surprise that governments with grim regularity preferred those teachings that offered to grant them more significant powers, rather than those that proposed, on the contrary, full deregulation of the economy.

Fortunately, in democratic countries, some feedback remains between the government and the voters, and when stagflation occurred in the seventies—directly contradicting Keynesian theory—the monetarists, with their less clumsy methods, took the place of the Keynesians in the courts of the sovereigns. Countries with dominant Marxism were not so lucky; there, Marx’s teaching was declared omnipotent by virtue of its correctness; in other words, the feedback between theory and reality was absent.

I had to make this historical excursion to make it clear immediately: the success of Keynesianism is based not on logical justifications of the theory’s correctness, but on the fact that its implementation brought direct benefits to those implementing it.

Now I will touch upon the Keynesian proofs directly: after all, even if factual considerations did not match the public justifications, the Keynesians still had to provide some justifications.

At the heart of any theory lies a certain model of reality. Keynes refused to consider models of interaction between agents and focused instead on models of relationships between abstract entities such as aggregate demand, aggregate supply, total employment, the general price level, gross product, the velocity of money, and so on.

Thus, the model of a crisis according to Keynes looks like a system with positive feedback: the lower the demand, the lower the production, the higher the unemployment, the lower the demand. Within the framework of such a simple model, everything is logically flawless. Keynes’s conclusion: the government must stimulate demand through public works, regardless of what they are—even digging holes and filling them back in—and this will allow an exit from the vicious circle. It is evident that such a theory is perfectly suited for propaganda purposes: first, you frighten them properly, and then you promise to save them if they buy your miracle cure for the problem.

In general, the resulting model is completely counterintuitive: a crisis is caused by the overproduction of goods (according to the AES, it is caused by the overproduction of money, and when there are many goods, that is actually great, which fully corresponds to the worldview of any average person); the chief evil in the economy is savings (according to the AES, it is precisely savings that allow for the implementation of increasingly indirect production chains, which ensures economic growth); the best way to fight crises is the destruction of savings and the squandering of resources. Why the implementation of such madness is a sure path to ruin at the level of an individual household, but somehow magically saves the economy once the state begins such a practice for the entire country at once, the Keynesians did not explain. There is a complete logical gap between micro- and macroeconomics for them; they are two entirely unrelated disciplines.

Modern Keynesianism has mutated greatly compared to the original theory, merged in ecstasy with monetarism, and formed a single mainstream current that continues to create increasingly sophisticated models for various areas of life. If Keynes began by promoting the very necessity of state regulation of the economy, now the necessity of state regulation is no longer questioned, and economists are having a field day, infinitely refining specific ways to do it in the most sophisticated manner. 

Hi. And how, under ancap, can the harmony of the urban environment be ensured? What would stop one guy from building houses in the Baroque style, while another builds right next to him in the Constructivist style (let’s say)? Or is this not a problem worth thinking about at all?

anonymous question

Strictly speaking, even under a state, in most cases, nothing prevents two developers from building houses in completely different styles next to each other. There is a set of formal criteria regarding something like insolation, number of floors, and parking area; once those are met, it’s done. If the verdict of the chief city architect or some other expert bigwig is required, then corrupting them is simply a matter of time.

At the same time, there are many cases of self-organization in condominiums, where the purchase of land for development or a finished real estate object is accompanied by a set of restrictions common to the entire condominium—on fence height, number of floors, roof color, or even damn curtains on the windows. As long as such easements allow for increasing the value of the property in the condominium, the market supports them. As soon as a restriction leads to a decrease in the price of the properties, the market sets in motion the forces to abolish them, and suddenly the condominium board decides to lift the ban on building a second garage on a plot, or the requirement that roofs must necessarily be red. In the described mechanism of restricting property disposal rights, there is nothing that could not be implemented under ancap.

Here you go, an addition to baroque under state regulation

I recently came to the conclusion that antitrust services are not very effective in handling their task (one can use the recent situation with the collusion of memory chip manufacturers or with video cards as an example). And how can the free market resolve a monopoly?

anonymous question

This question is so common that when a memo for arguing with schoolchildren was being compiled, it was listed as number one.

Indeed, antitrust services are not needed. Monopolies are either formed where the optimal business size turns out to be comparable to the total market size, or where government regulations have created the monopoly artificially (for example, through licensing of activities, exclusive procurement from a single supplier, issuance of patents — in other words, by prohibiting anyone but the monopolist from entering the market).

In the first case, the monopolist successfully meets the demand, the market grows, and over time it turns out that there is now room for several more companies; any attempt by the monopolist to fight them using market methods leads to such a loss of profit that it becomes more profitable for the monopolist to invest in other industries rather than cling to a market share where they are still a monopolist.

In the second case, the monopolist becomes arrogant, raising prices and degrading the quality of services, while the state has to deal with consumer dissatisfaction. Sooner or later, either lobbyists for potential competitors will push through the deregulation of the industry (this is how Novatek secured the right to export liquefied natural gas, which previously belonged exclusively to Gazprom), or a black market will develop, which, without doing anything about the de jure monopoly, will undermine its de facto monopoly. Despairing of fighting the black market through state power, the monopolist will be forced to make concessions — and finally start lowering prices and improving quality.