Wednesday, November 28, 2012

Happy Anniversary, Boston Tea Party!

In the 1760’s and 70’s, the East India Company was struggling as a consequence of poor management and reckless financial speculation. To bail out the company, Lord North and other British ministers enacted a law granting the company a monopoly on sales of tea in the American colonies. On the face of it, this was not a bad thing for most Americans. The price of tea went down, even after taking into account the small tax added to the tea before it reached American shores. But the colonists would have none of it. On November 29th, 1773, a shipload of tea was seized by Sons of Liberty and tossed into Boston Harbor.

Political cartoon depicting British ministers forcing America to drink its tea.

If the reader knows a bit about American history, he or she will recognize that the East India Company symbolizes a set of economic policies known as mercantilism. In essence, mercantilism refers to an alliance between government and private business, designed to benefit both their interests. If the government helps the business and it succeeds, sales of taxable goods and services increase, the government benefits from increased revenue and individual members of government will receive gifts from the company as a token of appreciation. Of course, the people who don't benefit are the consumers, who come into the picture late, and are obliged to pay whatever the asking price happens to be.

So let’s honor the anniversary of the Boston Tea Party by reflecting on the evils of mercantilism. As Americans, it is incumbent on us to remain alert to usurpations of power by oligarchs who trade in money and political influence. 

A monopoly is an easy way to succeed in business. There is little pressure to keep prices lower than competitors’ prices, and little need to ensure that the quality and availability of one’s products remains superior to that of competitors because, very simply, there aren’t any competitors. 

Nowadays, the biggest monopolies are located in China. Foxconn, for example, has over a million employees and earns hundreds of billions of dollars in profits each year. Foxconn manufactures the iPhone on behalf of Apple. Yes, Android phones like Samsung’s Galaxy Nexus do compete with the iPhone, but the fact is, Foxconn manufactures parts for both Apple and Samsung

Foxconn, unlike many of China’s vast and lucrative companies, is not (as far as I can tell) a state-owned enterprise. But it does receive generous subsidies from the government to help it keep prices low. And it is willing to sell its products at a loss if necessary to maintain its dominant position in the market (source). In the old days, selling at a loss would have been considered an anti-competitive practice, but nobody seems to be complaining. 

Foxconn (aka Hon Hai Precision Industry) is also one of the top ten stocks held by Goldman Sachs in its Growth and Emerging Markets Equity Portfolio. So, when Foxconn succeeds, so does Goldman Sachs. So, if you ever wonder why Goldman Sachs donates so much money to the political campaigns of Republicans and Democrats alike, or if you ever wonder why the United States doesn’t do more about the unfair trade practices that have cost America so many jobs, reflect on these facts.

1 comment:

  1. Great post! Enjoyed the Goldman Sachs reference at the end as well as the comparison between today's marriage between government and business and eighteenth century mercantilism.

    Always a pleasure to read your posts.