False Economy - Alan Beattie [57]
The great paradox of capitalism is that destruction brings creation. Companies trying to put each other out of business in fact put many more businesses into existence, and people into jobs, as they strive for better technology, for more efficient ways of operating, for a smarter way of pricing their product—for anything that will win them more customers and give them an edge over the competition. But this only works if certain rules of the game are observed. Competition has to be based on agreed norms and within set boundaries, rather than on aiming to win at any cost. Football (as in soccer), as the philosopher Bertrand Russell once observed, would not be such an enjoyable sport if defeated teams were put to death or left to starve. (Admittedly, though, there would be fewer accusations of a lack of 110 percent effort as the teacups flew at halftime, and it would surely rake in millions on pay-per-view.)
Nor would it produce great football if teams could use any means necessary against the opposition to score a goal—gouging, maiming, knives, cudgels, assault vehicles, calling in airstrikes. Similarly, business produces benefits when there is fair competition over products and pricing within the law, such that the most efficient one wins. Consumers do not benefit when companies are free to do whatever they want to get a competitive edge, including cheating, stealing, bribing, intimidating, and assaulting.
One of the problems with a limited natural resource is that once possession has been gained (by whatever means), it is hard to challenge. Absent the ability to find another deposit of the same mineral within the same economy, it is often insulated from competition. Mineral resources often give a return far above what it costs to produce them. This is because, unlike conventional economic activity, supply is limited by nature, and hence excess profits cannot be competed away. The state oil company—and many oil companies in developing countries are nationalized—may be making gigantic profits from its refinery, extracting oil at a cost of one dollar a barrel and selling it on the world market at $100 a barrel. But no private operator can open a rival oilfield in the same country and undercut the incumbent unless there is a new oilfield to find. High oil prices will induce companies to go searching for new fields, of course, or make it economically viable to extract oil from existing but inaccessible deposits, but the process of discovery and extraction is slow and expensive.
In economics terminology, the oil companies are earning "economic rent," which refers not to a slum landlord putting the frighteners on his tenants but a producer being paid much more than he actually needs to continue production because other companies are not allowed to compete away the profit. Controlling a resource for which there is a permanent ready market and little or no competition, and which requires nothing more than keeping the drills going, should produce one of the supreme benefits that all monopolists crave—a quiet life. But when the government gets involved, to keep it that way requires spending enough on armies and presidential guards to prevent anyone else seizing control. This kind of competition does not benefit the country as a whole. The economy becomes a fight—frequently an illegal and violent one—over the control and benefits from a given resource, not an open competition to build a better mousetrap.
Extractive industries are notorious for their corruption. They hang out, as it were, with the wrong kind of company. There is a theory about currency, known as Gresham's Law, that states that the circulation of counterfeit money eventually results in the legitimate notes and coins being hoarded. If you know your gold sovereign is genuine, you will not want to use it as currency in a transaction where you might end up with fake coins in change. Thus the bad currency drives out the good. The same can be true with companies. It is not the best companies for the job that get oil contracts, necessarily, but those willing to bribe, since