The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

A Declining Rule of Law

One of the most important aspects of a functional society is the rule of law. Laws must be non-arbitrary and must be enforceable. Today, corruption has begun to take full control of our government and, through it, our economy. This is happening not only in the United States, but also across the developed (and developing) world. History comes in large cycles. At one end, we have freedom which leads to great prosperity. On the other, we have corruption which leads to economy turmoil. Just look at 1920s politics or the political economy of late colonial America. We thought despotism was gone, but that trend has clearly reversed.

The Daily Bell has some interesting thoughts on this subject:

Every once in a while a technology comes along that upsets an entire industry.

Digital cameras put Kodak out of business. The giant of the photography industry had the opportunity to adopt the technology early. But their profits depended on selling film more than selling cameras.

And this is not a new phenomenon.

When the printing press was invented in the 15th century, it revolutionized education for everyday people. The cost to create books plummeted. Knowledge became widely distributed. When monks were transcribing books by hand, the cost of a single volume could be astronomical.

But the printing press allowed books to be mass produced. Poor people could finally get their hands on an important tool which was previously only available to the rich. The benefits of an educated populace cascaded into further developments in science and technology. Europe boomed. It was the internet of the day.

But just like today, certain segments of the economy are threatened by new inventions. In the Ottoman Empire, hand scribing books was a big business. There was a large lobby to make sure the printing press didn’t put scribes out of work. They had the support of the government who used the intellectual class to control information and hold onto power. The printing press was declared unholy and banned. This move was likely the beginning of the end of the Ottoman Empire.

People need the freedom to make use of a new technology. Places like the Ottoman Empire which issued arbitrary decrees did not allow people to produce the type of wealth and advancements that freer countries did.

Countries which advanced more rapidly tended to have rule of law. Instead of arbitrary proclamations by governments, the law in the west derived from common law. Law was a way to solve disputes and avoid violence. It wasn’t perfect. There was still power imbalance. But overall, respect for objective law created an environment where new technology could be used to advance the quality of life.

And rule of law today is still what creates wealth in advanced nations.

A report estimated that 46% of all wealth in advanced countries comes from the rule of law. The amount of natural resources means far less. Look at oil-rich Venezuela which just defaulted. Compare that to a Singapore which is basically just a rock, but is the third wealthiest nation in the world.

So it really doesn’t matter how promising a technology is if a country can ban its implementation. China is repeating historical mistakes by banning Bitcoin. And the reasons are the same. Cryptocurrencies threaten the banks’ control over exchange. Banks and government collude in the same way that the scribes did with the Ottoman Empire.

Rule of law is why Europe advanced quicker than China. Europe was fragmented enough so that a country had to adopt new technology, or risk being outcompeted or conquered by their neighbors. But China was a large united country. A faction took control of the Chinese government and dismantled the shipyards because they were controlled by their rivals. 1,000 years before Columbus, China was able to sail halfway around the world, but by the time 1492 rolled around, they didn’t have a navy to speak of. So even though the technology had been there, without rule of law, it could not increase wealth or raise the standard of living.

Luckily, much of the world more closely follows European rule of law. There has been enough competition among government so that most technologies have some opportunity to advance.

But the thing is, law is still relatively arbitrary. Some countries are better than others, but rule of law comes and goes like the seasons. And in some places, how the courts will rule comes down to little more than the flip of a coin.

Despite all this, an enormous amount of wealth and advancements have been produced. Worldwide poverty is at historical lows.

But there really isn’t much competition when it comes to rule of law. There are only 195 “products” out there when it comes to government. More than half of them can be written off outright as dictatorships and banana republics.

Industries are routinely upset by new technologies. Rule of law is a product in need of innovation. The way to govern a society needs some experimentation to improve it.

If revolutionary changes happen in the structure of governance, other advancements could continue at exponential rates.

Despite the primary importance of governance, there is little true disruption in governance compared to other areas of the capital stock such as equipment or machinery, where “creative destruction” is common. Moments of true innovation in governance are so rare that they capture worldwide media attention such as the emergence of Dubai as a financial and research hub.

Dubai was once a sandy desert. Today it is a leading center of international finance, commerce, and research, and one of the wealthiest places on earth. Dubai has the fifth-fastest growing economy in the world thanks to its many “free zones” that place virtually no taxes or restrictions on foreign trade. Dubai studied and adopted “best practices” in global financial governance, embracing English common law and global trade. This has attracted private capital and entrepreneurs, lifting countless others out of crushing poverty.

The product is starting to emerge. There are proven ways to govern which make wealth creation easier. There are methods of governance that lift people out of poverty. Right now, we are still at the stage where the big powers are fighting the new technology. They are protecting their own power and attempting to stifle emerging modern methods of government.

Much like the Ottoman Empire banned the printing press, and China dismantled the shipyards, big governments are trying to insulate their industry from competition. That is why secession movements are put down with such vigor. It is why government monopolizes law and courts. It is why central banks are hostile towards Bitcoin and blockchain technology which puts power into individuals’ hands.

Cities like Dubai and Hong Kong, and countries like Singapore and Liechtenstein are emerging products. They are the prototype governments which are starting to offer hope for an upset when it comes to the industry of rule of law. And with 46% of wealth deriving from the rule of law, it is certainly an area worth innovating.

My view:  The above reflects our own observations over several decades. Corruption takes over, first in government and then throughout the entire nation, it means the end of freedom, free enterprise, and healthy economic growth. The corrupt people will always crush the honest members of society because they don’t have to worry about the laws. Everyone is paid off.

We saw this happening in the United States some years ago. The recent revelations of what some observers call the “Clinton Mafia”, which engineered the sale of 20% of US uranium deposits to Russia, in return for apparently $100 to $145 million to the Clinton foundation, and people at the highest level of government, some of which are still in government at this time are involved, you Rule of Law is gone.

When the Clinton campaign pays a firm to produce a phony dossier which alleged that the successful presidential contender was in collusion with Russia, thus breaking federal laws, and the DOJ does nothing, you have to assume that the fix is in. The dossier is a total fabrication as has been proven now. The company that created this dossier, is now found to have bribed reporters to plant stories with innuendos and inferences supporting the agenda.

Yes, what has happened to the US over the last 30 years is so similar to what has happened in other prosperous nations when corruption becomes the order of the day. Today, the lobbyists in Washington receive more corporate money from the big companies than these firms pay in taxes. Such a system leads to the eventual destruction of the free enterprise system.

The swamp monster appears to have won. There is no going back. When even the top members of the law enforcement agencies are involved, all hope is lost. When even the major news media with one exception is totally corrupt, publishing only lies and deceptions, you know that the lunatics have taken over the asylum.

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