…is “keeping it simple”
This post is a series of observations and comments on one of the most vital aspects of management and its application to the current situation in Brazil.
Democracy: Democracy is conceptually rather simple but operationally complex. Simply stated it is little more than the right to swing your arm ends where someone else’s nose begins. It is respecting the right of the “other” in order to defend your own. It should be the right of anyone in a society to receive the benefits of his own work and be the owner of his own decisions (subject of course to the law). For its part, the law (often embodied in a formal constitution) is little more than the manifestation of the shared values of a society as regards what it considers to be right and wrong. There are various forms of democracy but its substance is basically everywhere the same. The UK, for example, does not even have a formal constitution. Its democracy is based on jurisprudence based on precedent and the shared values of the population.
Politicians tend to complicate the exercise of democracy. They appear to love to regulate human behavior. More often than not, the results are disastrous and create more problems than they solve. In his famous work on Civil Disobedience, Henry David Thoreau observed that the best government is one that governs least – i.e. that government should not intervene in the lives of its citizens any more than necessary. The result is often the emergence of single issue constituencies that demand laws that are often repetitions of some fundamental principal already envisioned in a constitution.
Kleptocracy: This is the antithesis of democracy. It involves the confiscation of the rents of society and the use of what is public as if it were private. In short, it is theft pure and simple. The only difference is that when it is a form of government it is theft by the governing elite and its chosen beneficiaries (i.e. friends of the “king”). It can be practiced under the umbrella of duly constituted authority and laws to make it seem legitimate. It promotes authoritarianism, the inefficient use of society’s resources, and fosters the poverty of those left out of the inner circle of power. You can’t be the owner of your own decisions if someone pre-empts them by confiscating and thereby denying you the necessary resources.
“Free Goods”: In earlier times, Economics postulated the existence of some goods that were free. Examples provided in basic Economics courses included free air and sunshine. We have since learned that those goods are not, in fact, free. We have polluted our air to the point that we sometimes block out the sunshine with clouds of particulate matter. The cost of learning that our actions have consequences that complicate our life and reduce its quality has been high.
Free Lunch: The time-worn adage that there is no such thing as a free lunch is a universal truth whenever resources used for “A” have an alternative use. Free lunches can exist for a given individual (as in kleptocracy) but only because the cost of the resources consumed are paid by someone else or society-at-large. All economic resources (i.e. scarce resources) demand a “price” that reflects their value in their alternative use(s).
Profit: Many years ago I read an article by Peter Drucker in which he argued that “profit” is an illusion. The balance sheet of an enterprise is an equality of two sides of an enterprise equation: Total Assets = Total Liabilities + Equity. The income statement for a given period is the flow of activity that determines the balance sheet figures. In that sense, Drucker argued that “profit” (i.e. the bottom line of the income statement) is used either to remunerate the owners of the capital employed in the enterprise (i.e. added into the equity account), used to pay for the resources used to produce (i.e. subtracted from the liabilities accounts) or to acquire additional assets (i.e. added into the assets accounts). When all has been properly accounted for the difference between the two sides of the balance sheet is zero. (i.e. there is no such thing as pure profit). The better word is “earnings” that are allocated to the continuation of the enterprise or to the shareholders. Using Drucker’s approach, it becomes patently obvious that kleptocracy or corruption denies the enterprise a share of the rents that accrue to its owners, suppliers, and/or management. In summary, for the enterprise, every penny counts!
Analysis:
The rather simple concepts considered above can be applied to Brazil’s current circumstances. It’s obvious that kleptocracy and democracy cannot exist in the same space. You can’t be free to choose if a portion of your efforts and decisions are simply confiscated and become someone else’s “free lunch”.
Societies that allow kleptocracy to flourish while paying lip service to democracy are doomed to fail. As kleptocracy expands, society lacks the resources to ensure sustainable growth and the prosperity of the populace.
Initially, Brazil’s kleptocrats would “back off” when kleptocracy generated periodic crises. They would allow for the reduction of their confiscatory actions until the economy stabilized after which the confiscation would be resumed.
However, as economist Herb Stein observed,“Things that cannot go on forever, don’t.” New kleptocrats emerged to compete for the rents of society and the confiscation began to exceed what society needs to survive.
Brazil’s chronic inflation was a marvelously efficient confiscatory “tax”. It was regressive and unavoidable. It served as a brake on the freedom to choose for the bottom tier of the income pyramid.
The Real Plan, for reasons I have written about ad nausea in this blog, ended the confiscatory nature of Brazil’s inflation until it was replaced by the entrance of the PT to power.
As I have reported (also ad nausea) in the past, rather than build on the end of inflation the PT simply introduced a confiscatory model of its own. The PT’s model was the ideological antithesis of the previous confiscatory model and hence, the models were mutually exclusive. Society faced an either/or choice: permit confiscation by the PT or by Brazil’s traditional kleptocrats.
Society-at-large chose neither. The Judiciary rose to the occasion with the Lava-Jato investigation that sought to remove the kleptocrats from power. Anyone, regardless of their kleptocratic ideology caught confiscating the rents of society would be sanctioned. And they have been, as witnessed by the number of kleptocrats currently living in prison cells.
The kleptocrats, for their part are now trying to reconcile two mutually exclusive models while each group seeks to gain ascendency over the other. It’s an impossible task as long as Lava-Jato exists and the problem is that neither group of kleptocrats can stop the conflict without abandoning its lip service to democracy. This is essentially what happened in 1964 with a military takeover.
The conflict has shredded the social fabric of Brazilian society only this time it’s the Judiciary that has intervened to defend democracy with the military vowing to defend it if necessary.
Both groups of kleptocracts are confounded by the equality of treatment afforded to the thieves found in either group. They turn on each other to avoid going to jail by negotiating with the authorities to turn in their former friends and associates. They don’t refer to the “rule of law”. Rather they complain of the “dictatorship of the law” to describe the actions of the judiciary to enforce it. The supreme irony is that the law was largely written and promulgated in the 1988 Constitution and the enabling amendments and regulation, by the PMDB, many members of which are now under investigation for violating it. (So much for lip service!).
Brazil’s fiscal accounts are not expected to be written in black ink until 2022. Presidential elections are scheduled to occur in 2018 and with few exceptions most of the possible candidates are under investigation by Lava-Jato.
No one can currently forecast how this is all likely to play out. Going back to the status quo ante is contrary to the wishes of society-at-large and the path forward is fraught with uncertainty. The economy needs a political model within which it can operate and at present the emergence of an appropriate model is in its earliest stages. It’s likely that the process of re-building Brazil will be on a two-steps-forward-one-step-backward basis for at least another year.
A very faint light burns at the end of a long, dark tunnel! Adapt the enterprise to the challenge at hand and ride the wave to the shore.
That’s as good as it’s gonna get for a while.
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