Fonterra: The Free Market is the Solution. Why Has Fall-Back For Everyone Become More Statism?

There currently exists a desperate need for a contrarian view of the Fonterra food contamination debacle. Although some commentators are coming out with their predicable viewpoints, there’s far too many turncoats finding all the wrong words in their scrabble sets and spewing them over their op-eds. It frightens me the majority of journalists seem to think the state must step in with inquiry and oversight, for answers to problems created by the state in the first place. No, nationalisation of Fonterra is not the solution here, free markets are.

As a quick overview, Chris Trotter, famous for his unblinkered view of free markets - that's irony, John Drinnan - opines how Fonterra’s problems this last week proves we can’t be unblinkered about free markets. No surprises there. Fran O’Sullivan; I respect Fran, but she does the statist misstep far too often, to which end I cite the near-nationalisation of Christchurch call after the earthquakes, then gender quotas in politics (fine) and legislated in private boardrooms (not fine), and now telling John Key that a full inquiry on Fonterra is the only option. Then one of my heroines has come out with this shocker:

Never thought I'd say this but the market doesn't work. Too many greedy egos.
— deborah coddington (@debcod) August 9, 2013

And to top it off, National stalwart Matthew Hooton,  assuming the need for an inquiry also, ends his piece with this:

Fonterra exists only because of the support of the government, parliament and ultimately the New Zealand people – which gives all three the right to demand it performs a hell of a lot better than this.

In this paragraph Matthew has unwittingly found the problem, but then driven his $160,000 farm Jeep right by it and up the well-worn old hill track leading to that vertical cliff of farm debt too much of our dairy industry is built on. The view from the top of that cliff is scary, because conscious of economist Tyler Cowan’s great stagnation thesis, which I shall post specifically on at a later date, applying it to our dairy industry, we might hypothesise the major productivity gains, the low hanging fruits of profit, have been made already by this capital intensive agriculture, noting as proof there’s a ballooning $82 million plus, beyond schedule irrigation scheme being built not thirty minutes drive from where I’m writing this. I believe it will be dubious when interest rates are in double figures again, whether return on the asset will outweigh the cost of debt, and when Labour get in and start taxing equity, the party is definitely over. Given the dairy debt cliff, an alarmist could forecast a bust coming, given the right circumstances, to rival 1987. Milk is a commodity, and commodities follow cycles, and even on these historically high payouts, many corporate dairy farms are still hurting: before moving to the contamination scare, that's the major alarm bell in this industry. So, if or when such a bust happens, and everyone will be, as in this debate, blaming free markets, remember you read it here: Fonterra was stillborn of crony capitalism which is to capitalism as sea horses are to horses - which is not the same at all, in case I need to make that clear. Fonterra is not a beast of free markets at all, but a beast of burden.

And that’s the sleight of hand in this debate.

The debate lines have been drawn mistakenly assuming this is an issue between private enterprise and what Orwell called state capitalism, with some commentators pressing the need, even, for semi-nationalisation of Fonterra: no. This truly is Irish, as free enterprise has never had a look in with Fonterra. Matthew stated that earlier: Fonterra is a monopoly product of government, parliament, and the herds at the voting booths.

I’m not a journalist, I write this blog mainly because I enjoy putting one word from my scrabble bag after the other, thus I can’t remember the full regulatory narrative – for the farmers, narrative is a word smart people use, apparently, read feminist discourse - … I can’t remember the full regulatory narrative of Fonterra’s set up, but Matthew’s quotation reminds me of the broad strokes of it, plus Kiwiwit has this great piece on the monopoly powers granted this firm, explaining why, from its inception, I disagreed with my dairy clients over the formation of Fonterra because it was in essence a state granted monopoly, and thus there would be no transparent free market pricing mechanism – for either farm suppliers or the consumers of milk -  or the resource allocation system of a free market, that miracle of economics. That is, no true market signals. These US farmers complaining about Fonterra’s monopoly are correct in essence, although such a claim is 100% pure cowshit when considering how the US farmer is one of the world’s most protected.

This is what I know. A government messes with the resource allocation of a free market with peril. Given the size of the numbers involved in the dairy industry, then as we have gleaned with even this contamination hiccup – and that’s all it was actually – extreme peril. So, think about this: the monopoly given Fonterra gave it an edge over other land use that the banks with their fiat money and cheap credit were then given the confidence to bankroll, and bankroll it they certainly did, even as the cost of conversions rose ludicrously, as did underlying land values unrealistically. Thus dairy grabbed a bigger allocation of resources than it could have under free markets, which would have allocated resource, land, capital, et al, in a far slower manner. That’s one thing the spontaneous order arising from markets is relatively good at: coordination. We have all seen the price of this too rapid expansion: degradation of the environment in New Zealand, and a PR sales machine caught flat-footed in China – bet Fonterra wishes they had more than a single science degree (the CEO is a food technologist) on the board now, and in the PR team.

If readers of this stop and keep very still, you’ll hear a huffing and a puffing: I have just breached Austrian school economics orthodoxy by professing an implied worry over externalities. I confess to being conflicted on this matter, and willing to announce so publicly, because as I mentioned in this earlier post on literature, of all things, I seem embarked in this self-indulgent blog on a futile odyssey to match that of the little fella in Hitchhikers Guide to the Galaxy, trying to piss everyone off; albeit he was doing it alphabetically, I’m being a bit more random.

Dairy’s quick and artificial growth - artificial because government initiated and protected - looks to have done harm; real harm. It has led to an allocation toward this single agriculture at the expense of diversified land use by a range of complementary, biodiverse agricultures that couldn't catch the banker's eye, given they were so smitten by the big sad bovine eyes of the large herds. Dairy has outpaced its resources of capital and skills, despite how it has saved our economy through the world financial crisis – and all the naysayers don’t ever forget that or that it remains the lynch pin of our economy.

Speaking personally, though hypocritically, as I have done well off the cows back also, I would love to still be living in at least a partially pastoral landscape in South Canterbury; a landscape of fields, woodlots and carefully planned hedgerows for stock to shelter behind. I’ll repeat that for the factory farmers reading this:

FOR STOCK TO SHELTER BEHIND. That is, humane animal husbandry - (remember that; it's what real farmers do).

I say the above because instead of the pastoral idyll, driving around I see a War of the World’s movie set with giant pivot irrigators striding across paddocks denuded of trees and shelter, and far too many reports, lately, and growing, of starving and abused herds because of the lack of skill-set in farm labour, and sometimes just straight cruel bastards. Look at my posts against animal testing over last month, and you’ll see that animal welfare is the chink in my rationalist armour. Though more than that: I can’t think of a quicker way to destroy milk sales in all of our markets other than images of animal neglect.

That’s my spleen vented. From it, the answer to this latest Fonterra debacle becomes obvious.

The way to ensure Fonterra takes on rigour, right down to the basics, is to take away every piece of law delivering them any sort of monopoly, whatever those rules, regulations and laws are – I’m not looking them up, I only need to know they exist. Look at how well competitive private enterprise in New Zealand handles food safety issues in the dairy sector. My little township of Geraldine has a cheese-maker, one of many hundreds across the country: they’ve poisoned no one. On my apple pie this Sunday lunch-time I’ll be eating Clearwater’s – the original organic dairy co, ten minutes drive away – glorious new clotted cream product, and Mrs H has been eating their organic yoghurts for years without being poisoned also. Private enterprise lives by the fact that the best way to keep a customer, is not to kill them, or even piss them off.

In league with this, I suspect one thing the commentators have got right, is looking askance at the culture of Fonterra, remembering further its a co-op, not a private company, and the culture may well be more in the nature of a bureaucracy protecting its statutory monopoly, than using its full resources for innovation; and its eye may be too much on Parliament, not enough on its customers, suppliers and basic processes. Think, even, when Campbell Live was covering escalating dairy prices for consumers, how much energy this firm had to expend explaining its idiotic price setting book: hint, no company needs to run a little red pricing formula book where you have pricing under the transparency of competitive free markets. And speaking of a nascent competition, it exists already, just let it live: I’ve heard of Fonterra suppliers shifting to Synlait before this scare, based on little more than an annoyance with the arrogance from Fonterra's head office over sharing-up issues.

So don’t go the nationalisation route. Fonterra doesn’t require more oversight, and I don’t want my taxpayer money wasted on government inquiries. In a free market, the government has no place at all in Fonterra governance issues. Simply open the Co-op up to full competition and management will realise pretty quickly, just like the cheese-maker and the clotted milk makers down the road, the importance of a food testing regime that delivers the test results before product leaves the factory, rather than when it’s being bought off the supermarket shelves. And if proof were needed on why government would be no help with that, well this is the government that has just set up an expert panel to assess the necessity or not of animal testing for stoners, after they have passed an Act enacting animal testing for stoners. You can no more sell food on such an uninformed basis than you can pass legislation.

In ending, just so I can truly offend every party in this: to the Chinese Embassy councillor on The Nation this Sunday: you idiot. Some important final facts on this current issue:

Number of people who have died: none.

Number of people who got a tummy ache: none.

Indeed, Fonterra’s main incompetence may well end up there was no harmful contamination at all. So I enjoin the Chinese councillor to leave Fonterra product on the shelf, if he is so worried about their food safety record, and consume instead Chinese dairy products: perhaps you could buy them from that part of your country where you displaced millions of your own people to build that dam; or any of the villages in China I saw on some doco or other recently the inhabitants of which were dying from pollution.  The land of the world’s biggest state monopoly is only drinking Fonterra milk, because they don’t trust anything produced in their own country.

Right, let’s see:

Journos pissed off – tick.
John Drinnan - tick (not above, some sort of free hit on Twitter last night via John not being able to see into the depths from the shallows he must be writing his op-eds on).

Fonterra – tick.

My farming clients – tick. (Nah, not really: by clients are 'real farmers' to a last one).

Government – tick.
US farmers - tick.

Libertarians – tick.

Statists – tick.

Statists and socialists – tick.
Statists and Gareth Morgan - tick.

China - tick.
Ireland - tick.

Yep, my work is done. It’s an Oyster Bay 2013 for lunch.

Oh, Deborah, I forgive ya ... this time. Outside of that, I've really got to start pushing some work through, so my blogging has to be scaled back for a little bit.

Fran O’Sullivan, Youth Unemployment & Another War in the Pacific.

Fran O’Sullivan’s mind may well cause another war in the Pacific, and possibly a pan-European war. Fanciful? Note I’m attacking Fran’s ideas, not Fran – on Twitter she has a great sense of life, plus is something rarer and rarer these days, polite: I like her. However,  it’s ideas, philosophy, that makes a society what it is, so let me join the dots from her piece this weekend on youth unemployment, though noting the road signs first.

Other than for clarification purposes I am largely going to stop employing the Left versus Right political tagging system in this blog. A former US president, the last one that had a clue anymore, Ronald Reagan, said the health of a society did not come down so much to Left versus Right, but up versus down, or, more significantly, freedom versus statism.

And so the first dot: Fran has the mind of a statist, with all the contradictions that entails. Fresh from advocating the nationalisation of private property for the ‘common good’ of the Christchurch rebuild, now Fran is advocating we continue the nationalisation of our youth in order to solve youth unemployment.

Of course, I’ve written on how our youth are already nationalised by a state education system where the state demands it be the alpha and omega in every child’s life, despite the ideas of their parents, but the contradictions in Fran’s piece demonstrate why Western civilisation is now falling apart at the seams on its headlong rush to the statist gulag, again.

I have no dispute with the opening part of Fran’s analysis:

It is truly bizarre that the number of unfilled skilled jobs is increasing at the same time as we have record youth unemployment and many graduates find themselves working in jobs that don't pay them enough to get on top of student debt and have enough over to save for their futures.

They have been sold a pup.

Many have been brought up on a "follow your dream" diet only to find out too late that just following dreams doesn't always result in a job. An injection of realism is long overdue.

The problem, and the first contradiction, is Fran then sees realism as not coming from the free market, that real world expression of the complex needs and desires of every individual in society finding voluntary resolution without the force of the state gun; rather, she finds realism as coming from the artifice of the state gun itself:

Key could start by cancelling the top personal tax break and "reinvesting" the hundreds of millions of dollars that would otherwise have gone into Bill English's Treasury coffers into a massive state-backed scheme to train young people in the skills needed for today's workforce.

First contradiction clearly stated:

Fran rightly refers to the current disastrous state-devised bums on seats ‘follow your dream’ tertiary funding system, which in her own industry is probably turning out ten media graduates for every media job. However, her solution is to fix this by more of the same: keep higher taxes, taking away the earnings and choices of private firms, so the state can train youth in the skills required by those private firms. Well if the state couldn’t get the skills match right with the current iteration, why are they going to the next time? Evidence shows bureaucrats are the last group to be entrusted with such an important task.

The real problem with Fran’s solution is it avoids the elephant in the WINZ queue: the welfare state that is so huge it has become a cushion obstructing the view from the market signal of skills needed, to those who need the skills. And that cushion is so huge because it’s been embedded for so long, and growing every year – even in every Bill English budget, the government dollar spend has continued to increase. Indeed, I am a prime example of the long term nature of the dilemma.

I finished high school, Form 7, in the early eighties, and because I liked reading and writing, with no thoughts to a job at all - I didn’t need to, after all, because my education was ‘free’ on the effort and risk taking of businesspeople and workers who were being forced to pay for it – I went straight into an Arts degree, English language and literature, at Canterbury University. I got my degree and had a great time, on the whole, but then found first year out that with no experiences to write about, and a bestseller novel in New Zealand considered to be 5,000 copies sold, ie, a hobby, I had no way to earn money other than teaching, and I couldn’t stand children. At that stage I had the option, which I suspect is the most taken one now, to simply puddle around on welfare, ‘doing my thing’, however,  I chose, based on my upbringing, to find work, and of all things - yeah I have many regrets at the particular choice - to first work part time at IRD, then a CA firm, while gaining undergraduate and Honours degrees in Accountancy from Massey University, which Mrs H and I paid for. My point being here, that the disconnect caused by the welfare state in the market for jobs, existed way back then and if anything it’s worse now.

Fran’s miss here is shown by another of her contradictions. She says that the state needs to train our young rather than employers relying on immigration to get the right skills at the right price, using the example of our dairy industry:

… as with the dairy industry - farmers would rather import low-paid but highly skilled workers from the Philippines who will work long hours, rather than set up an optimum working environment for young Kiwis.

In an attempt to not misrepresent Fran too badly, yes, she writes that many employers complain Kiwi kids come to the job interview not wanting the job, rather just a tick to ensure the ‘WINZ cheque keeps rolling in’, and on that note she’d finally cracked the reality of it, saying families of such children needed to take responsibility, but then, when so close, took instead the road to my serfdom of saying that responsible families couldn’t be relied upon, at least that’s the inference I must draw from her recommendations, thus the state must step in with my tax money, missing the point that the welfare state is what is destroying families, self-responsibility and self-reliant communities. Youth unemployment in New Zealand and the mis-match of skills is not down to something so simple as ‘training’: it’s systemic.

To prove my point, there was a fascinating documentary on New Zealand telly last week about smart animals. The most interesting segment on it was about two birds from North America; they were the exact same breed of bird, but one was the offspring of a bird that lived in the hostile, cold, north of the continent, the other offspring of a bird from the south of the continent where food was plentiful and the weather mild. Each of the birds was given the same task of getting food out from under glass: the bird born of the harsh environment found the job easy, the bird from the soft south couldn't do it, and would’ve starved. The harsh environment had led to the bird from the north being far more innovative and intelligent, and remarkably, this was hard-wired into it.

Now, join the dots to that bird from the harsh north and ‘highly skilled workers from the Philippines who will work long hours’, and figure out why far too many Kiwi children wouldn’t have a bar of being away from their iPads to get up at four in the morning to go milking. Many of them are not employable, and that has little or nothing to do with 'skills', but attitude and what I would call 'nous'. Or put simply: the ability to get out of bed each morning, not just when you feel like it, and go to work. Surprisingly, this stuff’s not hard.

Here’s the solution of a free man. Get rid of the minimum wage, get rid of welfare outside anything other than a safety net in-extremis, get rid of the government cheque that ensures too many children are not being born of love to prudent and the sensible ‘families’, instead, get the state out of lives, stop the profligate, irresponsible spending of other peoples money by politicians so incompetent I wouldn’t trust most of them walking my dog, so we can start building responsible families, again, that will keep their youth at home if required and pay for their keep while their child transacts voluntarily with employers willing to put their own resources into training them for their jobs, including paying for any tuition needed specific to those jobs, through the trade-off of a low wage early on in order that both parties are availed of opportunity.

Yeah, yeah, I know, I can hear the bleating already at what I've just written. Before traveling to the wars this statist mindset is about to cause, let me first close off the statist complaints to what I have just said:

The statist will say this will lead to child slavery: employers will take the cheap labour, then cast them adrift? Yes, some will, but very few: most employers want to build their businesses and their profits long term, thus such bad behaviour will be counter-productive to them. More, most employers I know are simply nice people: statist’s would be surprised looking beyond their own cynicism at just how nice most people are, if left to their own pursuit of happiness.

The arty statists will say but what about culture if training and education is not paid for, planned and directed by the state? The realism of that is, despite an A+ grade average across stages two and three in my arts degree – um, stage one I’d met women for the first time after a country high school - do you know what I remember, or additional thing I have taken from it? Nothing. If I had not done that degree would I still love reading books? Yes. Would I still be doing my personal writing projects and blogs such as this? Yes. In fact, I’m just one chapter away from finishing a novel I’ve been working on for two years now in my spare time. Culture just is, and it’s a travesty to promote any other notion of it that is dependent on tax slavery of one stranger to another.

I say all the above in earnest, because looking at the world around me, with the brutal and huge Western surveillance states we’ve built, disregarding the lessons of the twentieth century, the world now teeters on the verge of violent conflagration, arising from the economic conflagration that has already occurred on the back of big-Keynesian-statism.

Japan’s economy, stifled in low growth for the last three decades by one of the biggest government debt loads in the Western world, coming in at a staggering debt-to-GDP ratio of 229% (compared to Greece on only 120%) has always been, as the phrase goes, a bumblebee in search of a windscreen: well, unfortunately it’s just found the driver, and already he’s got his foot on the accelerator to build an ever larger Keynesian hubris of debt that may well finally destroy the heroic Japanese saver, leaving no one to buy their government debt. That driver is new Prime Minster, nationalist war monger, Shinzo Abe who is right now embarked on one of the biggest government spending programs that country has seen, as well  as the type of null-minded nationalistic brinkmanship that may well see war in the Pacific again.

If you had told an European in 1935 that in just four years their world would be in a vicious war where the big state would set about the wholesale slaughter of civilisation, by which I mean, people, they would have laughed. I put it to you who’s to say Europe is not at 1935, again, with the Nazi Golden Dawn – a party up to half the Greek police force voted for - marching the saluting fist in Greece; and the far right in the Austrian parliament demanding a written register of Jews in that country. And who’s to say the Pacific at the hands of big state Abe, is not back already to 1939 waiting for its next Pearl Harbour? Hell, the ships already are on the way.

Could all of this have been avoided? Yes, by having fostered a classical liberal, individualist, based ethic, of the society that set about only protecting the rights of its smallest minority, the individual; and that ennobled the voluntary contract and the voluntary trade, rather than the big gun of state running every damned thing. Instead welfarism has become so pervasive, that well-spring of the arts, creativity, and innovation in business, individualism, is now confused by generation airhead with a selfishness that must be erased under state redistribution.

It's always about philosophy, and it’s the ideas in Fran’s mind that are the cause of all this. I’d buy Fran lunch at any winery in Marlborough, but she must not mention the state once as the solution for anything other than the means to enforce a contract, or police my personal safety.

Statism vesus freedom.

We were the free West, once; we almost had it, but look where we went instead: what were we thinking? …. Sorry, I’ve covered this already; we weren’t thinking at all, were we - that was the problem.

Right, I'm taking Daisy Dog kayaking. From pretty soon, I'm onto sixty and seventy hour working weeks, until the end of March, so until April blog entries will be thin on the ground.

Footnote: I meant to work in this important piece on Greece versus Latvia, but ran out of time. Recommended reading regardless: Latvia Gives Greece a Lesson in Austerity.