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Response to Block and Barnett,
‘A Positive Programme for
Laissez-Faire Capitalism’
Jonathan A. Batten
Macquarie University, Australia
Peter G. Szilagyi
Tilburg University, The Netherlands
block and barnett (in this issue)
focus on the exclusive role of property
rights, the freedom to contract and trade
for the achievement of economic goals.
Though persuasive, this view ignores
institutional aspects of equal importance
and leads to the erroneous conclusion that
a stateless social order is appropriate.
Implications for corporate governance
and citizenship are discussed.
This contribution is not intended as a
systematic critique; rather it aims to provide a general discussion—a placing into
a broader context—of the ideas proposed
by Block and Barnett (this issue), and the
implications these views have for corporate citizenship and governance in the corporation. The central tenet of the Block
and Barnett paper originates from ideas
advanced by the early 20th-century Austrian economist, Ludwig von Mises,1 who
espoused the pivotal role of property
rights, the freedom to contract and trade
for the advancement of societies and individual welfare, while simultaneously
opposing taxes, price controls and regulation. Such an approach differs from oth-
ers—notably the neoclassical and Keynesian schools—on the role of markets and
governments, with the latter advocating
an interventionist role, the former a more
limited approach, and Mises none at all.
There is no doubt that the Mises and later
Block and Barnett (this issue) views are
persuasive. Stylised economic facts2 show
that the wealthiest countries and also
those where individuals are also the most
wealthy, are those with the best property
rights.
Of critical concern is the manner of
property ownership, whether state or private, how it is protected and the implications that change in ownership may have
for public policy. Whether governments
should spend to stimulate sluggish
economies, the privatisation of stateowned industry, the manner of support for
education, the environment, health and
welfare, as well as the role of the institutional extensions of government in
domestic and international affairs, such
as central bank involvement in the management of inflation and exchange rates
and the role of the United Nations, are all
1 For a general discussion of Mises and the Austrian School of Economics, see www.mises.org.
2 See Table 1, which is discussed later in this response.
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jonathan a. batten and peter g. szilagyi
examples of issues that are approached
differently by these schools of economic
thought.
Early in their paper Block and Barnett
(this issue) make it clear that government
should be a ‘referee’, not a ‘player’, property should, by and large, be privately
owned, there should be few, if any, institutional intermediaries ‘between members of the private sector’ and that many,
if not all, of the traditional areas of government attention and spending (welfare,
security and the environment are specifically discussed in their paper) should also
best be left to the private sector (individuals and corporations) and the markets in
which they operate. Here, we believe the
problem lies in the nature of individuals
and markets—really, the efficiency of the
latter and how the moral and ethical fortitude of the former might affect the corporation, or vice versa. In the case of the
corporation, shareholders via voting
rights are able to impose conditions and
managers must be made aware of the legal
and institutional framework in which
their corporation operates. While an individual’s behaviour may have a higher purpose owing to perceived moral and ethical
responsibilities, an important question
remains: how do these beliefs translate or
affect the corporation? Thus, Gibson
(2000) rightly questions how individual
and group influences are brought to bear
on the corporation and how organisational objectives3 or outcomes of a higher
order can be influenced and achieved. The
other dimension to this same question
concerns the power that a powerful corporation may impose on other organisations and individuals at the expense of
stakeholders. There may also be a disproportionate influence within an industry.
As Jones (1999) notes, an industry is ‘little more than the aggregation of the dominant firms which constitute it’. There
remain a host of ethical, moral and legal
dilemmas in the management of these
various arrangements between stakeholders.
Block (1995) debates the irrelevance of
price controls, while identifying the key
problem concerning their implementation: the efficiency of markets. Economic
theory suggests that markets are made
efficient by the wholesale actions of buyers and sellers being able to freely enter
and exit, preferably at no cost and in great
numbers. Transaction costs, differences
in tax treatment between buyers and sellers, product illiquidity and an inability to
arbitrage between similar products all
provide explanations for the fact that markets are rarely, if ever, efficient. For example, there is now an abundance of
academic studies4 that demonstrate statistically that the ideal of efficiency is
rarely achieved in currency, commodity
and interest rate markets, let alone in markets as highly segmented as labour and
transport markets. Accordingly, how can
the purpose of institutions established by
government to address and correct market
deficiencies (such as securities commissions) be challenged? Certainly, it is likely
that the operating efficiency of these institutions and the manner in which they
address market imperfections may be
improved. However, this does not mean
the institutional framework should be
abandoned in the hope that markets will
magically self-correct. The recent corporate scandals involving Worldcom and
Enron are testament to a need for supervision beyond that offered by the industry
itself.
3 An example would be a corporation that acts to achieve the Millennium Development Goals
(effective September 2003) of the United Nations, while also maximising shareholder interests. The
eight goals are: 1. Eradicate extreme poverty and hunger; 2. Achieve universal primary education; 3.
Promote gender equality and empower women; 4. Reduce child mortality; 5. Improve maternal
health; 6. Combat HIV/AIDS, malaria and other diseases; 7. Ensure environmental sustainability; 8.
Develop a global partnership for development (Millennium Project, commissioned by the UN
Secretary-General and Supported by the UN Development Group, see www.unmillenniumproject.
org/goals/index.htm).
4 For example, see Kothari 2001 for a discussion of capital market efficiency.
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response to block and barnett, ‘a positive programme for laissez-faire capitalism’
While the appropriateness of the various claims by Block and Barnett (this
issue) may be questioned, there are a
number of caveats and extensions that
also require consideration. First, it is
important to note that the manner in
which property is conveyed and protected
is of consequence in law as well as economics. Thus, it is not surprising that the
form of legal jurisdiction—extensions of
the common and civil law systems that
originate in the United Kingdom and
Europe—matters. For example, one can
observe that financial markets are larger
and more sophisticated in countries with
a common law jurisdiction, while in others banks and financial intermediaries
dominate the allocation of savings to productive investment. These facts offer the
possibility that, while legal jurisdiction
matters—specifically common law appears
to offer better investor protection and so
encourage market development—there
remain implications for stakeholders and
the requirement for corporate governance
that interests are managed appropriately.
Addressing these issues has been of
recent academic and professional concern: for example, the works of La Porta et
al. (1998, 2000). These and other related
studies link in with the understanding of
the general nature of the relationship
between property rights, individual wealth
and economic development.
One way of assessing the expression of
these relationships is through the construction of an index that would include as
many as possible of those institutional factors that could impede, or facilitate, the
actions of markets. Table 1 provides a
breakdown of one such index, the Economic Freedom Index (EFI)5 as constructed by Beach and O’Driscoll (2005)
for the Heritage Foundation in the United
States. Most importantly, the EFI comprises ten factors compared with the sin-
gle factor (property rights) of Block and
Barrett (this issue). These other factors
are: the scale and scope of the banking system, informal market activities, capital
flows and investments, the fiscal impact of
government, government intervention in
the economy, the success of monetary policy, property rights, regulation, trade policy and the manner of wage formation.
Details of each of these measures are provided in the Appendix.
The individual score for each of these
factors ranges from 1 (most free) to 5 (most
repressed). In Table 1 these scores are
compared with individual income in a
specific country, adjusted for differences
in the value of goods and services (termed
a purchasing power price adjustment).
The most recent income figures (2003)
are used and compared with the equivalent EFI scores. At that time, individuals in
Norway and the United States had the
highest per capita adjusted income (an
average of US$36,500), whereas Sierra
Leone, Malawi and a number of other
African states, had the lowest (about
US$550). For the same year, the overall EFI
score was lowest in countries with the
most economic freedom, Hong Kong, Singapore and New Zealand (about 1.5) and
highest in countries with the least economic freedom, Cuba and Laos (4.45).
The number of countries in each category
is also provided in the table.
In a previous empirical study Szilagyi
and Batten (2004) found that high levels
of growth are positively associated with
the level of financial development and
property rights, and negatively with the
independence of the banking sector.
Although Table 1 does not provide a longitudinal assessment of the relationship
between economic growth and property
rights, it does highlight the positive association between individual income and
property rights, an observation consistent
5 Beach and O’Driscoll (2005) note that, since 1995, the Index of Economic Freedom has offered the
international community an annual in-depth examination of the factors that contribute most
directly to economic freedom and prosperity. As the first comprehensive study of economic
freedom ever published, the 1995 Index defined the method by which economic freedom can be
measured in such vastly different places as Hong Kong and North Korea.
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jonathan a. batten and peter g. szilagyi
Notes: For each component, the score categories are statistically different using tests of analysis of variance
(ANOVA), at least at the 5% level. There were 132 countries in the sample.
Table 1 per capita income of countries categorised by components of the economic
freedom index
Sources: World Bank Group 2005; World Heritage Foundation 2005
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response to block and barnett, ‘a positive programme for laissez-faire capitalism’
with the claims of Block and Barnett.
These fortunate 18 countries with an average individual income of US$27,406 include the major industrial countries as
well as the successful trading nations of
Hong Kong and Singapore. Though supportive of the property rights argument,
those nations also had the best and freest
banking systems, least impediments to
capital flows and investment and a sound
monetary policy. In contrast, those countries that lack these policies all have significantly lower incomes (generally individual income of less than US$5,000 per
year). This result is consistent with a complex synergistic institutional structure,
where government-directed economic
policies, supported by property rights for
investors, have, over time, created wealth
for select nations and individuals.
The interconnected relationships between the components of the EFI are highlighted in Table 2, which provides a matrix
of the correlation between the various
components. The range of the correlation
statistic is from −1 to +1. The closer to +1,
the higher the positive association between
two variables; the lower the number, the
higher the negative association between
two numbers. A correlation of zero suggests that there is no association between
two variables. In our case, the lack of presence of informal markets, quality banking
systems and property rights are all significantly positively related (correlations of
about 0.8) to high EFI scores, while the
degree of government intervention and
the fiscal burden of government all have
low correlations. Consequently, countries
JCC 19 Autumn 2005
with interventionist governments and
governments that place a large fiscal burden on their country have a negative impact on the overall EFI score.
Table 2 also highlights a role of government that runs contrary to the proposals
of Block and Barnett: those countries with
interventionist government and institutions all have the highest individual incomes. Those European countries within
the Economic and Monetary Union are
ready examples, although Japan is another. This observation is more evident in
Table 1, where the 51 countries with the
highest scores for fiscal burden all have
significantly higher income (greater than
US$12,894) than countries with low fiscal
burdens. Interestingly, while property
rights appear to be important for trade policy (correlation of 0.63), other factors such
as the absence of informal markets and
appropriate regulation, which acts to protect the investor, appear to be just as
important.
Overall, while there is some merit in the
arguments of Block and Barnett (this
issue) in support of the primary importance of property rights, it is important to
recognise that this is just one of a number
of important dimensions that must be
addressed to facilitate and improve individual and societal well-being. In turn,
property rights must be supported by an
appropriate institutional framework that
acts to correct the natural imperfections
that affect the proper functioning of markets.
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jonathan a. batten and peter g. szilagyi
Table 2 correlation matrix of the ten components of the economic freedom index in 2003
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response to block and barnett, ‘a positive programme for laissez-faire capitalism’
Appendix: Beach and O’Driscoll
(2005) components of the
Economic Freedom Index
The index of economic freedom includes
the broadest array of institutional factors
determining economic freedom:
1. Banking and finance
– Government ownership of banks
– Restrictions on the ability of
foreign banks to open branches
and subsidiaries
– Government influence over the
allocation of credit
– Government regulations
– Freedom to offer all types of
financial services, securities and
insurance policies
2. Informal market activities
– Smuggling
– Piracy of intellectual property in
the informal market
– Agricultural production supplied
on the informal market
– Manufacturing supplied on the
informal market
– Services supplied on the informal
market
– Transportation supplied on the
informal market
– Labour supplied on the informal
market
3. Capital flows and foreign investment
– Foreign investment code
– Restrictions on foreign ownership
of business
– Restrictions on the industries and
companies open to foreign
investors
– Restrictions and performance
requirements on foreign
companies
– Foreign ownership of land
– Equal treatment under the law for
both foreign and domestic
companies
– Restrictions on repatriation of
earnings
JCC 19 Autumn 2005
– Availability of local financing for
foreign companies
4. Fiscal burden of government
– Top income tax rate
– Marginal rate for the average
taxpayer
– Corporate tax rate
– Government expenditures as a
percentage of GDP
5. Government intervention in the
economy
– Government consumption as a
percentage of the economy
– Government ownership of
businesses and industries
– Share of government revenues
from state-owned enterprises and
government ownership of
property
– Economic output produced by the
government
6. Monetary policy
– Weighted average inflation rate
from 1992
7. Property rights
– Freedom from government
influence over the judicial system
– Commercial code defining
contracts
– Sanctioning of foreign arbitration
of contract disputes
– Government expropriation of
property
– Corruption within the judiciary
– Delays in receiving judicial
decisions
– Legally granted and protected
private property
8. Regulation
– Licensing requirements to
operate a business
– Ease of obtaining a business
licence
– Corruption within the bureaucracy
– Labour regulations, such as
established work weeks, paid
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jonathan a. batten and peter g. szilagyi
vacations and parental leave, as
well as selected labour regulations
– Environmental, consumer safety,
and worker health regulations
– Regulations that impose a burden
on business
9. Trade policy
– Weighted average tariff rate
– Non-tariff barriers
– Corruption in the customs service
10. Wages and prices
– Minimum wage laws
– Freedom to set prices privately
without government influence
– Government price controls and
the extent to which government
price controls are used
– Government subsidies to
businesses that affect prices
– Government role in setting wages
References
Beach, W., and G.P. O’Driscoll, Jr (2005) ‘Explaining the Factors of the Index of Economic Freedom’, in M.A. Miles, E.J. Feulner and M.A.
O’Grady (eds.), The Heritage Foundation/Wall
Street Journal Index of Economic Freedom (New
York: Heritage Books, www.heritage.org/
research/features/index/index.cfm): ch. 5.
Block, W. (1995) ‘Professor Modigliani on Price
Controls: The Baneful Influence of the Perfectly Competitive Model’, International Journal of Social Economics 22.5: 27-30.
Gibson, K. (2000) ‘The Moral Basis of Stakeholder Theory’, Journal of Business Ethics 26:
245-57.
Jones, M. (1999) ‘The Institutional Determinates
of Social Responsibility’, Journal of Business
Ethics 20: 163-79.
Kothari, S.P. (2001) ‘Capital Markets Research in
Accounting’, Journal of Accounting and Economics 31.1–3 (September 2001): 105-231.
La Porta, R., F. Lopez-De-Silanes, A. Shleifer and
R.W. Vishny (1998) ‘Law and Finance’, Journal of Political Economy 106.6: 1,113-55.
——, ——, —— and —— (2000) ‘Investor Protection and Corporate Governance’, Journal of
Financial Economics 58: 3-29.
50
Szilagyi, P., and J. Batten (2004) ‘Corporate Governance and Financial System Development:
Asia–Pacific in Comparative Perspective’,
Journal of Corporate Citizenship 11 (Spring
2004): 49-64.
The World Bank Group (2005) ‘World Development Indicators 2004’, www.worldbank.org/
data/wdi2004, accessed 10 October 2005.
World Heritage Foundation (2005) ‘Economic
Freedom
Index:
2002–2005’,
www.
heritage.org/research/features/index/index.
cfm, accessed 10 October 2005.
q
Jonathan A. Batten is Professor of
Management (Finance) at the Graduate
School of Management, Macquarie
University, Australia, Honorary
Professor of Arts, Deakin University,
Australia, and co-editor of Research in
International Business and Finance, which recently
published a special issue on governance and social
responsibility. Jonathan has published work in many
journals, including The Journal of Business Ethics, The
Journal of International Business Studies and The
International Review of Financial Analysis.
u
Graduate School of Management, Macquarie
University, CBD Campus Level 6, 51–57 Pitt St,
Sydney, NSW 2000, Australia
!
[email protected]
Peter G. Szilagyi is undertaking doctoral
studies in finance at Tilburg University
in The Netherlands, and is a member of
the European Corporate Governance
Institute. Previously, Peter worked as a
freelance correspondent with the BBC
World Service and as a financial markets consultant for
the Asian Development Bank. He has published in The
International Journal of the Economics of Business and
has co-edited a volume, European Fixed Income Markets:
Money, Bond and Interest Rate Derivatives, as part of the
Wiley Finance series.
u
Department of Finance, Tilburg University, B928,
PO Box 90153, 5000 LE Tilburg, The Netherlands
!
[email protected]
JCC 19 Autumn 2005