Friedman, Hong Kong & Economic Arguments

Here is an obituary on Milton Friedman from the successor to the Far Eastern Economic Review.  It is on the topic of Hong Kong, and it is a good example of bad economic arguments.  Let’s observe and comment:

Written by Our Correspondent   

MONDAY, 27 NOVEMBER 2006

At one time 60 percent of the people lived in subsidized housing, mostly rented cheaply from the government, and some in Home Ownership Scheme flats, provided with cheap land and sold to lower-middle-income households.  Even now that public housing has low priority and the home ownership scheme has ended, some 50 percent of the people still benefit from this massive intervention in the marketplace.

The intervention also partly accounts for the low apparent ratio of spending to gross domestic product. If the cost of the subsidized housing land were accounted for at market prices in the government budget, the ratio would be significantly higher.

” If, then.”  Well the “if“  is not the case, so the “then” is just a wild guess.  A better way of thinking is to take the facts at hand, and then look for an alternative that is also a set of facts.

We cannot know what prices would be for land in a free land market in Hong Kong, because that is not the situation in Hong Kong.  So what do we see in Hong Kong.  And what do we see in places where  there is a free market in land?

The fact is the “government” owns almost all of the land in Hong Kong.  Well true, but misleading. 

First off, they make the mistake of learning looking at a snapshot, and not the video.  if you look at the situation in 2006, without looking at the situation on a much larger time frame, you miss much.

From wikipedia:

The British East India Company made the first sea venture to China in 1699, and Hong Kong's trade with British merchants grew rapidly thereafter. In 1711, the Company established a trading post or "factory" in Canton. Hong Kong was governed under Xin'an County (新安縣) and became one of the foremost military outposts for Imperial China. By 1773 the British reached a landmark 1,000 chests of opium imported to Canton with China's consuming 2,000 chests yearly by 1799.

So note that Hong Kong was being formed and settled as a western entity in the mid 1700s and earlier.  (And note that by in essence, dope dealers.  This should give us hope regarding the Mexican violence.  It seems Mexicans are doing to USA what the British did to China.)  At this point in the story, all of the land belongs to the emperor, so anything the British set up is at his forbearance.

Who were these Brits (actually Scotsmen) setting up for business?   

Here is David Hume. Adam Smith’s tutor, in his 1752 essay on commerce.

Foreign trade, by its imports, furnishes materials for new manufactures; and by its exports, it produces labour in particular commodities, which could not be consumed at home. In short, a kingdom, that has a large import and export, must abound more with industry, and that employed upon delicacies and luxuries, than a kingdom which rests contented with its native commodities. It is, therefore, more powerful, as well as richer and happier. The individuals reap the benefit of these commodities, so far as they gratify the senses and appetites. And the public is also a gainer, while a greater stock of labour is, by this means, stored up against any public exigency; that is, a greater number of laborious men are maintained, who may be diverted to the public service, without robbing any one of the necessaries, or even the chief conveniences of life.

Sound familiar?

Adam Smith went on to write The Wealth of Nations (1776).  These were the ideas in place at the time.  And from these people come the leading businesses to this day in Hong Kong, Jardine Mathison and Hong Kong Shanghai Banking Corporation, to Scottish companies.

If we want to make useful comparisons, let’s look at the progression of two polities formed at that time USA and Hong Kong, same people, same ideas. same time, mid 1700s.  The USA was not the only experiment in freedom at the time.

Now back to the land ownership issue.

From wikipedia again  http://en.wikipedia.org/wiki/First_Opium_War

From the inception of the Canton System by the Qing Dynasty in 1756, trade in goods from China was extremely lucrative for European and Chinese merchants alike. However, foreign traders were only permitted to do business through a body of Chinese merchants known as the Thirteen Hongs and were restricted to Canton (Guangzhou). Foreigners could only live in one of the Thirteen Factories, near Shameen Island, Canton and were not allowed to enter, much less live or trade in, any other part of China.

This Island is a luxury district of Canton to this day.

There was all this time a struggle between the believers in mercantilism and the free marketers who believed the state (or king) has not business in business.  again from wikipedia

In late October the Thomas Coutts arrived in China and sailed to Guangdong. This ship was owned by Quakers who refused to deal in opium, and its captain, Smith, believed Elliot had exceeded his legal authority by banning trade. The captain negotiated with the governor of Canton and hoped that all British ships could unload their goods at Chuenpee, an island near Humen.

In order to prevent other British ships from following the Thomas Coutts, Elliot ordered a blockade of the Pearl River. Fighting began on 3 November 1839, when a second British ship, the Royal Saxon, attempted to sail to Guangdong. Then the British Royal Navy ships HMS Volage and HMS Hyacinth fired a warning shot at the Royal Saxon.

So here we have the powers that be struggling with their own subjects who wish to be free to trade and free from the odious drug trafficking that was official policy. Note the Quakers are in the world but not of the world. integration without complicity.

The upshot is, as mentioned above, the British got Hong Kong Island, a rather useless rock, but  token surrendering of Chinese sovereignty  It may not seem like much, but then the union busting in Wisconsin does not seem like much.  To start.  Anyway, the British government owns a rock.

By 1860, the UK got Kowloon up to Boundary Street in perpetuity as well.  And in1898 the UK got a 99 year lease on the New Territories, the sum total of which is now referred to as Hong Kong.

So the land we are talking about is owned by the UK government or the Chinese government, either under a lease or no.  The option of private ownership of land was never in play, nor is it to this day.  The situation is not so unique, most states claim to own the land under their territory.  In USA it is common for the State to seize private property and transfer it to other private property owners.

What makes Hong Kong unique is the degree in which the largely self-governing people will not tolerate such USA style actions.

And, as an aide, if 60% at one time, and now 50% live in subsidized housing, then that is the first time in history a government reduced subsidized housing, let alone by 20%.  Go Hong Kong!

What the reporter left out is to this day, some 250 years in, less than 5% of the hong Kong territory is developed.  The state may own the land, and the state may auction off leases, but is the the free market that buys it, and decides to do what it would on the land it does develop.  We see the state providing housing in response to squatters etc,  but we also see fantastic developments when both housing and transportation is in private hands.  We get soaring all view apartments on top of excellent transportation.  We get a polity and economy no central planner could achieve.

And finally in London there is a Free Market in land, and in Hong Kong no such thing.  That state controlled anything is at a higher price is no surprise.

Hong Kong people have also enjoyed almost free medical treatment at government clinics and hospitals. Friedman was against “free” medicine elsewhere but failed to notice it in Hong Kong. Likewise, education, at least up to the secondary level has long been almost entirely funded by the government.

There is no such thing as free medicine and free education.  Someone has to pay.  Since there is no free market in land, since the state has money, since there is a crisis with countless refugees from war flooded into hong Kong, why not drain those state reserves on the immediate needs of housing and medicine for these massive dispossessed.  it is not to say the free market could not have done a better job, it is only to say we as a polity have these fund, let’s earmark them here and now.

And note, far more critical than housing and medicine is food.  There was never a need to feed the people in Hong Kong, the free markets did that well.

In the days when Friedman was writing his praises for Hong Kong, the territory also had a relatively youthful workforce compared with western countries and thus less need for spending on pensions and help for the aged. 

Oh, sheeesh...  Hong Kong has a Chinese culture so there was never a need for spending on pensions, there was never a chance the elderly would go without.  And further, there is no need in western cultures to spend on the aged, because it too is another example of hue solution to a tiny problem.  The writer is trapped in the false dilemma of state providing or nothing.

Nor did Hong Kong have to spend anything significant on external security, the responsibility of London and now Beijing.

Here again, there are so many countries that spend near nothing on external security, and experience no lack for it.  That the USA spends more on the military than the next 7 countries combined is a condemnation of USA, not Hong Kong.

Friedman could actually have helped Hong Kong if he had criticized rather than ignored the excesses of these interventions in the marketplace. They had originally  been spurred by fears of social unrest as the then-colony attempted to absorb waves of migrants from the mainland with nowhere but squatter huts to live.

The author misses the subtle difference between hong kong where the people have a say so in what govt does with its money, and the western capitalist regimes where the people are burdened by state intervention.

Friedman was not a champion of freedom, but of maximizing state efficiency.  A huge difference.  Tiberius told his governors to sheer his sheep, not slaughter them.  Friedman merely argued the paradox of less state means more stable power.  he can talk freedom all he wants, but it is meaningless if his prescriptions are grounded in the coercive power of the state.

It was necessary intervention in the marketplace.

No, it was a casual decision to eliminate some excess reserves.That progressives feel they must descend into paroxysms of panic and “do something” huge in response to every little problem does not mean the Scots/Chinese syndicate in hong Kong is obliged to feel the same way.  That the Scots/Chinese syndicate does do something does not mean it is with the same brio as a progressive. For all of its energy, hong Kong is essentially calm.

Hong Kong’s problem now is that policy change has not kept pace with changing economic and social circumstances. It is hooked on high land prices for the private sector as a revenue-raising measure, which leaves a large proportion of the public trapped in the subsidized housing sector.

Nobody is trapped anywhere.  That once subsidized land exists, and there is no possibility of private ownership of land now that China owns it, then who is in a hurry to change things?

Likewise the free if basic medical system is stretching the government as the population ages, drug and equipment costs rise and public expectations rise. But it is difficult to push people back to the private sector because that thrives on providing very expensive services to the top 15% or so of the population. Indeed, private medicine in Hong Kong is so expensive that instead of being a money earner for Hong Kong, as it is for Singapore, it is often cheaper to fly to Sydney or Singapore, let alone Bangkok, and get better treatment.

Yes, when govt gets in anything, people flee.  Medicine will revive in hong kong, and become as cheap and plentiful as food, when the state withdraws from the field.

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