Wednesday, February 22, 2006

CNOOC, Krugman, Bayer, Property and Force

"If it were up to me, I'd block the Chinese bid for Unocal." - Paul Krugman

"Property is theft". So claimed Pierre-Joseph Proudhon in his What is Property? Or, an Inquiry into the Principle of Right of Government. While his anarchism has sunk to the level of a bad joke told too often by silly children, as with the Marxism he influenced, he did hit on one very basic point in the above quote.

Alas, it's one that manages to be missed by Paul Krugman, Senator Ron Wyden (D-Ore.), Representative Richard W. Pombo (R-Calif.) and nearly every politician who deigns to comment (read: pose) on the issue.

The fact is, property = control. The most a caveman stuck in Hobbes' "solitary, poore, nasty, brutish, and short" natural state can "own" is what he can survey or hide from the surveillance of others. And that maximum is in no way guaranteed, since it also requires that he be able to apply force more effectively than those he might run into.

The actual state of nature was likely a bit better, since we can surmise that mankind evolved within a social context not unlike that of the great apes, with extended family groups perhaps as large as 100. A built-in possession-enforcement mechanism thus likely existed, with a given group defending group possessions against other groups and probably enforcing internal rules for the use of resources within the group. Property rights, in other words. Rights not dependent on line-of-sight and happening to have the biggest club-arm on the ground at any given instant. The same model has been elaborated extensively, but still underlies modern property systems. At base, property-rights still rely on the ultimate arbiter of force. Leaving aside whether you or I own something, or the details of what we might be allowed to own or how we might transfer said ownership, the basic idea is that the social system guarantees said claims outside of the sphere of our personal sight and power, and that the social system is capable of doing so because it disposes of more power and sight that any individual or sub-group.

This means that property is meaningless without said social guarantee. I can claim title to a house, you can claim title to a house, the winner in court or the halls of bureaucracy gets the backing of the state. Not always timely backing, as House of Sand and Fog reminds us, but it is there, either implicit or explicit. And it can be taken away. I have a notion that I can lay claim to some nifty beach-front real-estate in Havana and Cienfuegos. I can back it up with paperwork, eye-witnesses (for the moment), documents (if they aren't long burnt), local neighborhood history and the like. But the social system that obtains in those parts today says otherwise, and there the matter rests.

So what does this have to do with modern power-politics and CNOOC's bid for Unocal? The historical link lies via the Bayer Corporation. Bayer was a chemicals giant at the turn of the last century, with extensive overseas holdings, including some in the U.S. Come U.S. entry into WW1, one can only imagine the consternation. What of coal-tar dye-stuffs? What of Aspirin? What shall our boys Over There do, since surely the perfidious Huns will refuse to sell us their goods Over Here? The answer, of course, was that we took them. Expropriated. Ripped-off. Grab, and there wasn't even any Smash required as prep work. Bayer held real property, patents and machinery in the U.S., but those holdings, as with all property, relied entirely on Bayer being a part of the social fabric of the U.S. And come war-time, all things German were unceremoniously ripped out of that fabric. They had and then the next day they had not, right up to their brand name. I doubt the guys in the factory even noticed.

The same, of course, applies to the current bid for Unocal by CNOOC. There has been much hemming and hawing about the sneaky Chi-Coms and their attempts to snatch our valuable assets out from under our noses. And oil, no less! And in a time of rising prices! (Rising because said same Chi-Coms are using a heck of a lot more of the stuff making us Star Wars Episode 3 Action Figures and toilet plungers, but I digress.) Here's Krugman again, comparing to the old "The Japanese Are Coming!" panic of the 80s:

"The more important difference from Japan's investment is that China, unlike Japan, really does seem to be emerging as America's strategic rival and a competitor for scarce resources - which makes last week's other big Chinese offer more than just a business proposition...

Unocal sounds, in other words, like exactly the kind of company the Chinese government might want to control if it envisions a sort of "great game" in which major economic powers scramble for access to far-flung oil and natural gas reserves. (Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.) So the Unocal story gains extra resonance from the latest surge in oil prices."

He's being a bone-head, of course. But this time I can't just blame him, because every pol anywhere near this issue is echoing him. It's still boneheaded, though, for precisely the same reasons that anybody who was worried about Bayer in 1917 was being boneheaded. Approximately half of Unocal's assets are in Asia. Were war to ever come between the U.S.A. and the P.R.C. (let's hope not), those assets will belong to whomever gets there firstest with the mostest, and legalisms be damned. Because at the opening of hostilities, the global fabric that currently binds our two states together to some extent will be ripped apart, and neither side will be worrying particularly much about what foreign (or even domestic) shareholders are thinking. Those assets are currently Unocal's because the U.S. was so successful in propagating a global trade regime in the post-WW2 world that allowed firms to safely hold foreign assets (in the non-Soviet world, at least) underneath legal systems that, if not uniformly identical the one obtaining in the U.S, at least afforded similar protections to property. But come the war, the social/legal interconnection will cease to exist. Think of this as the opposite of Norman Angell's "Great Illusion" Angell argued that economic and financial interconnectedness had made war terribly costly (true) and unlikely (false). I argue that war, where sovereign states see their vital interests and perhaps survival at stake, they will simply sweep aside that interconnectedness, as they have always done.

But isn't this a terrible mistake, you ask? Expropriation must perforce damage the social fabric and so scare investors silly. Who will invest in the U.S. if we're found to do such things? The same folks who invested in us after we expropriated Bayer (and many others), obviously. A state that has a reputation as a general and recurrent expropriator will surely scare off international capital. A state that does so as a targeted assault against a mortal foe in the midst of a titanic struggle will scare off investors for precisely as long as hostilities are on, and only from belligerents (probably not allowed to invest by their home state, anyway) and neutrals who stand a chance of becoming belligerents. Any other view would lead to logical conclusions like "U.S investors would clearly not have purchased British war bonds during WW2, because the Brits expropriated Nazi property." Don't be ridiculous. War trumps social fabric. The same, BTW, applies to their current purchases of U.S. Treasuries. In the midst of a shooting war, they would surely quit buying. But in the midst of a shooting war, what else would you expect them to do? Finance widgets for us? Finance guns for us? No, we'd return to tried and true methods laid out in "A Free Nation, Deep In Debt".

No, in this case Krugman has managed to shred his last vestiges of economic and historical thought in order to don the clothes of the hysterical protectionist and the political shill. And our political class is happy to help him out, because saying you want to hang onto oil company assets makes good press right now, if nothing more.

BTW, in case anybody is wondering, my position in PTR leads me to hope that he succeeds. Yes, succeeds. Because the Chinese management of CNOOC is making the blunder of noisily buying assets in an already overpriced market. I'd much rather they hung on to the cash, from a shareholder's perspective. C'est la vive.

Link to original Tacitus post