Fundación Atlas para una Sociedad Libre

DON'T CRY FOR ME, ARGENTINA

y Josep C. Vergés
verges@valles.com

Lecture in ESADE, Universitat Ramon Llull, Barcelona, Catalonia, Kingdom of Spain, October 29th, 2001.

1. Why Has Argentina Failed?
Argentina has a bad press. Alfons Quintà says in his article Sick and Corrupt Argentina: "Argentina is an incredibly wealthy country. Colonised by the English, perhaps it would be another USA. But they were Spaniards. There are many highly cultivated and pleasant people but collectively they suffer some kind of a curse. There is a great tendency to go to the extremes and the corruption and cynicism of the political class is unacceptable. When the political malaise turns anthropological, there are no easy or quick fixes." The Argentine press agrees. The front page of Clarín had three headlines last year when I visited the country to lecture on corruption in Spain: "The police arrest 59 innocent people with fabricated charges," "No one is likely to be jailed for the coimas (payola) by IBM, the biggest corruption case in history," and last, but certainly not least, "Corruption in the Senate with employment funds." Perhaps this sounds familiar with the misuse of European Union funds in Spain. La Nación wondered: "Ali Babá had 40 associates. How many are there in the honorable Senate of Argentina?" The editorial explains the gravity of corruption: "Corruption reaches its most dangerous level when society adapts to its presence so that nothing seems wrong and it is tolerated and everything functions in a way that all is corrupted. Anyone who acts ethically is at a disvadvantage. Corruption is the worst type of egoism. Simply put it has the capacity to undermine trust in democracy and contributes to discredit politicians." La Nación says that Argentina today is going through the worst crisis since the restoration of democracy in 1983: "The only possible way forward towards a modern, plural and dynamic society is to cement the Rule of Law. Cronyism in the Establishment knows no party colour nor jusridictional limit. An expensive and inefficient State structure, mindful solely of the wishes and worries of the the Establishment, ends up conspiring against itself because of persistent institutional manipulation." The Argentine malaise is thus defined: "At the centenary celebration we thought we led the world. We were well on our way to becoming the largest of small nations or the smallest of big nations. But Perón proved that democracy is fragile among us and misspent our national wealth in a statist policy of redistribution and populism. Raymond Aron said that Argentina is the greatest disappointment of the 20th Century. We have passed from euphoria to despaìr. But we have not experienced the devastation of war, nor the destruction of natural disasters, nor do we suffer racial or religious divisions, yet our collective spirit feels as though we were facing a catastrophe."

2. The Constitution of Political Mismanagement in Argentina
Argentina until 1930 had a higher standard of living than Europe. Phyllis Deane divides Argentina into four periods of development:
1) 1810-1870: Formation of the dual economy
2) 1870-1914: Failure of self sustained growth
3) 1914-1929: External crises
4) 1929-1982: Economic nationalism

2.1. The Dual Economy: The Litoral and the Interior
From independence in 1810 up to 1870 there is no European immigration and a dictatorial form of government with economic stagnation. By the end of the period the country has less than 2 million inhabitants and 600 kms of railways with 25% of the population in cities. Capital is floated in London but little reaches Argentina with much defaulting, which makes Argentina a bad risk and capital dries up. There is an abundance of fertile land and cattle rearing is not technologically complex and does not require unavailable labour. The estancia is the first capitalist enterprise in Argentina and the introduction of fencing consolidates land ownership. As Ricardo Ortiz explains: "the business association of colonisers, Gremio de Empresarios de Colonización, obtained vast tracts which they made into plots that were rented to those who accepted their imposed conditions. Tenant farmers who accepted their terms found it difficult to invest in the adequate equipment and resources, and the high costs and short term contracts stimulated extensive cultivation. This favoured the circle of big landowners or latifundios of the landowning bourgoisie. In the province of Buenos Aires 50 landowers controlled 4.5 million has."
From the beginning Argentina develops a dual economy of the Litoral and the Interior. Free trade is favoured because both commercial and livestock interests want to expand exports. Growth is in livestock, in cities and in government, whose finances are 90% dependent on exports. Deficits are financed with inflation and the Litoral kills the production of the interior by sending imports to compete directly with regional manufacture.

2.2. Unsustained Growth
From 1870 to 1914 political stabilisation attracts immigration from Spain and later Italy and capital from England. By 1914 one third of the population is foreign born, but stays in the cities because the most fertile land is already taken. Power is concentrated in a few landowners who control the government. Exports are one third of GNP with 70% of agricultural production exported. But only 5% of foreign investment goes into agriculture and the government spends 40% of the budget in foreign interest payments. The inflow of capital is in railways and public securities. Foreign investment represents 9% of the world total and 40% of Argentine investment, with two thirds English. Argentina is an export economy obtaining its capital and demand from abroad. But the internal economy is mismanaged, with the peso inconvertible and budget deficits financed by printing money. When exports fall interest on foreign capital cannot be paid and the government resorts to selling land in big chunks reinforcing land holdings based on the latifundio, with most people poor and inequality growing. Inflation makes imports attractive but agriculture benefits from rising prices which also reduces debts, so landowners do nothing to force the government to control inflation. Great inequality of income leads to the concentration of consumption in luxuries and urban building. Technological change, -the steamship, railways and refrigeration-, had put Argentina on the map but only as a byproduct of the industrial revolution elsewhere. Wheat yield was lower, and distribution, handling and farmers undercapitalised. Argentina failed to make the structural changes necessary for sustained growth. By the First World War there were 8 million inhabitants and 35,000 kms of railway with 53% of the population living in cities and one third middle class.
From 1914-1929 two external crises at the beginning and at the end of this period, the First World War and the Great Depression, had a profound effect on the Argentine future. The crises were external but political mismanagement, homegrown. Population grew more slowly, to 11 million, but exports still remained at 24% of GNP as they had been since growth began in 1869. During WWI GNP declined because links with Europe snapped, with no more foreign investment or immigration. Local capitalists invested in real estate rather than in business, so that when competition returned after the war Argentina was not ready. Growth was still fast per capita because there was less immigration while exports recovered. Economic nationalism also grew with lower inflow of capital and by 1928 fixed capital per head was still 10% lower than prewar.

2.3. National Socialism
The Great Crash showed the weakness and vulnerability of Argentina. In three years exports fell by half in value while interest payments rose from 22% to 37% of external payments. England established Imperial Preference, a further barrier to exports. When foreign exchange ran down exchange controls and import restrictions were established. The impossibilty to import capital equipment meant investment was concentrated in production with low capital requirements so that productivity suffered. The strangling of imports led to an inefficient use of manpower and capital. The choice was between promoting exports or import substitution, that is agriculture versus industry. Increasing government intervention promoted self-sufficiency, but the fall in exports had reduced internal demand and the tariffs and controls produced high priced import substitutes while budget deficits continued. Between 1933 and 1939 manufacturing increased by 43% and there was limited growth, but during the Second World War this stopped. Changes had been superficial, based on the forced redistribution of income from rural to urban centres and import substitution with low investment, so that the economy was undercapitalised with energy deficits, deteriorating transport and low growth in employment while population continued to expand. By 1950 there were 18 million inhabitants but exports had fallen from 24% to 7% of GNP and income per head was only 16% higher than before the Great Depression a generation earlier.
After World War II Argentina could have returned to the export model on favourable terms but wasn't able to. It had to feed its population and General Perón threw away foreign exchange buying the bankrupt English railroads in the name of economic nationalism. The government did not have the resources to prevent the decline of the infrastructure. Subsidised industries grew while oil exploration was neglected and foreign investment discouraged. At the same time there was massive social expenditure while the government extended controls over the economy. The growth of employment in services and building was not the result of an increased standard of living, but lack of employment elsewhere. By 1950 investment was down to one third of the twenties, imports had fallen by half, and consumption of steel reduced from 130 kg to 40 kg per head. Argentina had no capacity to export and could not supply internal demand while budget deficits generated inflation. The Interior suffered worse than the Litoral. The radial system meant that the regions were incommunicated while big landowners did not spend their income productively. Inflation prevented agriculture from recovering and shows the resistance of the urban Litoral to redistribution. Insufficient integration of the dual economy is the main cause of inflation. Capital and labour continued to move out of discriminated agriculture while the running down of transport limited the capacity to export. Foreign exchange was spent in buying food and there were even meatless days in what had been a leading beef producer.

2.4. The State Oligarchy
Argentina become independent from Spain very early but never abandoned the Spanish despotic model of the central role of an oligarchy controlling the State. The father of the Argentine Constitution Juan Bautista Alberdi criticised in 1854 this Spanish model: "Spain had paid with the loss of population and industry its mistaken economic policy which resolved all questions in the opposite direction from freedom. The worst enemy of the wealth of the country is the wealth of the Exchequer. We owe to the past colonial regime this fundamental error of the Spanish economy." Spanish despotism favoured the unproductive: "Spaniards are an unhappy race and in South America doubly so. During three centuries we were forbidden to produce anything Spain could bring over. We became lazy by right, legally unproductive. We learnt to consume without producing. Our capitals are schools of vagrancy and our people lack not bread but education because of our impoverished mentality. We have lived for centuries accepting what was decided for us and at our least need we look up to daddy." Spanish suppression of liberty promoted corruption: "The Constitution is undoubtedly a precious thing but it is an idea not a fact, the seed not the tree of liberty. Liberty acquires body and life through the law, that is by the actions and executions of laws that establish what the Constitution only states or declares. The absolutist monarchs of Spain allowed no freedom or guarantees subject to law. Yet individual freedom and property shine as sacred rights in many an ancient Spanish code. To allow liberty to be defined by law is to let legislators restrain or extend freedom at whim. As Beumarchais ironically said: "Madrid has established a system of freedom which extends to the press so long as nothing is said about religion, politics, morals, public officials, corporations, opera, other public events, nor of anyone or anything, then the press is free to publish under the supervision of three censors.""
It is no coincidence that the industrial revolution in Spain happened in the regions most hostile to Spanish centralism which continue to be today the fastest growing, with the exception of Madrid, sustained by massive Government investment. Alberdi was aware of this: "During the 12th to the 14th centuries the commerce in the Kingdom of Aragon (the Catalan speaking Mediterraenan of Spain) was immense. But Charles V organised despotism methodically, with his barbaric Customs policy which ruined the nation. Customs policies have turned the Spanish world into a desert, silent like a necropolis. Centralisation of power does not lead to a unified nation. Spain is an example of this system." Argentina is quite Spanish, with Buenos Aires a Madrid without the stiff competition of dynamic regions, once agricultural exports were destroyed with national socialism prefering Buenos Aires and the Litoral unproductive middle class. Excess government expenditure was criticised by Alberdi: "In these countries government is understood as spending. There is no preciser barometer of reason and civilization than the budget and public expenditure." He contrasts the 200,000 inhabitants, 6,188 soldiers, 698 officers and 15 generals in Buenos Aires province with the 14 million inhabitants, 2,134 soldiers, 116 officers and three generals in the USA. Alberdi wondered how long freedom would survive with the Spanish model: "Liberty is a dogma in South America but the fact is that despotism dominates our government. Phillip II was contemporaneous with Machiavelli, but Machiavellism is backward politics, the normality of semibarbarians. This is our school in colonial America, organised in the sombre image of Phillip II and his successors. Buenos Aires is the capital and monument to the colonial system. Chile is the most advanced because it was the poorest and most backward colony. The first duty in Argentina should be to organise itself far removed from the centre where colonial and royal prerrogative reigned. Buenos Aires obtained great economic and political privileges. Argentina is quite the opposite of North American government. Argentina descentralizes a unitary country while the federation in North America is the union of many States."
When the export model of growth went into crisis in the thirties all structural changes were oriented to a return to Spanish autarchy run by an oligarchy which had never disappeared, as shown by the radial nature of transport and the preponderance of the port of Buenos Aires. When agriculture contracted with the loss of exports during war and depression, resources did not go to other productive sectors. The share of capital in productive sectors has been lower as the 20th Century progressed, while unproductive services continue to expand. The policy of import substitution could not provide for machinery, unavailable without foreign exchange from food exports. Agricultural undercapitalisation was aggravated by the State policy of funding urban areas. Investment in agriculture fell from 21% in the twenties to 5% in the fifties while 74% of total investment went to unproductive uses. Agricultural exports were also hurt by the American policy of providing food aid. Foreign exchange dried up while inflation was fuelled by income redistribution and by trying to maintain investment with generous fiscal and monetary inducements.
Argentina took the wrong course when its leading sector, agriculture, went into crisis. Growth was artificially maintained by import substitution but the failure of agricultural exports to recover made self sustained growth impossible. The home market was too small and current alliances equally fruitless.
After independence the State continued to play the leading role of Spanish colonialism. Military conquests made landowners dependent on land gifts so that capitalism was institutionalised from the beginning. Expansion of the State sector was also caused by failure to generate employment elsewhere. This expansion of the State permitted the growth of the middle class while landowners still controlled the State. They were dynamic and open to European ideas but obsessed with power because they identified the State with growth, as would later the middle class. Landowners found growth relatively costless because of land gifts, cheap labour and infrastructure provided by foreigners. Institutional rigidity increased with national socialism, from Perón to the triple A goonshow of the Juntas, with institutionalised corruption in an economy incapable of export led growth. "Se quebró la dorada imagen del indefinido progreso" The golden dream of indefinite progress has been shattered.

3. The Institutional Basis of Freedom
3.1. The Western Tradition of Political Economy
Aristotle, is quite clear that politics corrupt: "Nobody would ask for office if he were not ambitious. Yet surely ambition and the love of money are the motives that bring about almost the greatest part of the voluntary wrongdoing that takes place among mankind." Good government requires honest politicians: "A State must pay attention to virtue, because the law is a covenant or a guarantee of men's just claims, but it is not designed to make the citizens virtuous and just." It is preferable to be governed by good laws than by good men, because even these are ruled by passion: "The individual's judgement is bound to be corrupted but the multitude is more incorruptible, just as the larger stream of water is purer. A thing that does not contain the emotional element is generally superior. Now the law does not possess this factor but every human soul necessarily has it. Passion warps the rule even of the best men. Therefore the law is wisdom without desire. When men seek for what is just they seek for what is impartial. The law is that which is impartial." The Rule of Law, not people, is sovereign: "Where the laws are not sovereign, then demagogues arise. The decrees of the assembly override the law and, not being ruled by law, becomes despotic. Where the laws do not govern there is no Constitution. It is impossible for a voted resolution to be a universal rule." The Rule of Law is paramount: "To have good laws enacted but not to obey them does not constitute well ordered government. There are three things that claim equal participation in the Constitution: freedom, wealth and virtue." Good goverenment must control corruption: "The best State and the one that does well is that that is happy. There is no good action either of a man or a State without virtue and wisdom. Courage, justice and wisdom belonging to a State have the same meaning as on an individual." Corruption will always exist but should never be the defining element, nor a sustained event, in democracy. In Aristotelic terms democracy is the fullnesss of being, not the emptiness of corruption.
Aristotle centres Western political thought. He was the Prince of Philosophers for Maimonides and the Philosopher for Thomas of Aquinas. Maimonides fled Cordova and the Peninsula because of Almohadi extremism against Jews and Christians. His Guide of the Perplexed follows Aristotle by basing reason on morality: "Moral virtues are the basis of rational ones. Perfect rationality is only possible in a balanced and serene individual who respects morality. A just man gives to each his merit." Law cannot be determined to please the corrupt: "Evil men believe restrictions are a heavy burden to the evil they delight in because of their depraved morality. The ease or harshness of law should not be measured by the passions of evil men, of corrupt and low life, but by the just price of the perfect man." It is mistaken to believe evil prevails: "Many believe that good things are seldom found in the world while evil is widespread and permanent, but the majority of evil befalls to those who have brought it onto themselves."
Political economy is about justice, not charity. The Scholastics saw economics as an appendix of ethics and law and applied natural law to determine the rules of justice that govern social relationships. Political economy is about human action, said Thomas of Aquinas and he added a moral dimension: "Human and moral virtue justify human action and man himself. Human action is good when governed by reason." Morality, composed of the several virtues, is dominated by justice which is a superior virtue because justice relates men to each other. Human action takes place through our will, but we must avoid lies and search for the truth, and he quotef Aristotle: "What is true is good for the mind and what is false, evil." Corruption, moreover, is the same as stealing. The object of rapine is the possession of something, just like the object of rape is the enjoyment of a woman, and he quoted Isidore of Seville: "The abductor is a corruptor and the victim, corrupt." Thomas of Aquinas proposed a political economy based on happiness, a society of quality in contrast to today's materialist Welfare State. We are responsible for others because the State is corruptible. As Augustin said, when there is no justice a State is merely big scale exploitation, just like a gang of thieves is a miniature kingdom.
Medieval thought always tied political and economic progress to ethics. Our democratic tradition is born out of this moral marriage. Josep Trueta explained in his Oxford exile that fifty years before the English Magna Carta the Usatges (Customs) of Catalonia established the first democratic structure of a State in the Constitution of 1283 Una vegada l'any (Once a Year) of Jaume I that created a Parliament (a Catalan word) twelve years before Westminster. As Robert Hughes said in the Festes de la Mercé of Barcelona speaking in the Consell de Cent (Council Hall of the One Hundred): "Nobody who loves democracy can come here without being moved. This hall is the symbol of the oldest and most profound democratic impulse in Europe. Those who are not Catalans believe democracy was born at the end of the 18th Century through American genius. But the roots go back to a far remoter era. The Council of the One Hundred is the most ancient protodemocratic assembly. Everything was ruled by contract not divine right. The famous and exceptional oath of allegiance to the King embodies this spirit: "We who are worth as much as you swear before you that you are no better than us, that we accept you as king and sovereign so long as you respect our freedoms and laws, but if not, no." Francesc Eiximenis in the 14th Century described the Catalan character as individualist, in the sense that he subordinates any social arrangement to the preservation of individual freedom and welfare, combining individual freedom with a well integrated sense of family, in opposition to the control of society by an amorphous mass or the tyranny of some individual. The need for morality was also well understood: "Freedom is one of the fundamental excellencies of honest men. This freedom is of sovereign necessity to a Community. Nothing is good for man if man himself is not good."

3.2. What the School of Salamanca Has to Say in the Age of Corruption
The Inquisition promoted by Phillip II marks the beginning of the Spanish Black Legend of despotism. The Inquisition dominated Spanish society by giving official sanction to attitudes and practices already in existence. Suspicion of those who deviated from the established norm were profoundly rooted. Despite the Inquisition, the School of Salamanca successfully developed the ethical principles of political economy of Thomas Aquinas and Aristotle. The School of Salamanca has been quite forgotten. The first contemporary economist Alfred Marshall explained that the voyages of Columbus and Vasco da Gama put economic matters in the forefront of public affairs, but added that a systematic attempt to develop economic thinking did not appear until the mid 18th Century in France. Spain, where these changes took place with the discovery of America, still believes this. The respected Lluc Beltran, in his History of Economic Doctrines, follows Marshall's lead in placing the origins in Mercantilism. Beltran modified this conventional approach with the establishment of democracy in Spain, admitting that liberal thinking did exist in Spain, but was weak and suffocated by the tradition of interventionism which connected with collectivism, the real Spanish intellectual tradition: "In our country liberal movements have been weaker and interventionists stronger, despite the fact that according to Friedrich von Hayek, economic liberalism was born in Spain in the School of Salamanca. Hayek states that in their thinking they give birth to the central idea of a market economy, namely that there is an order in human actions which is not the product of the activity of the rulers but rather of the spontaneous coordination of all men. But it was a pale dawn." Marjorie Grice-Hutchinson begins her PhD on the School of Salamanca, directed by Hayek, quoting Cervantes in Don Quixot that there are no new birds in old nests. She wonders why only Spain seems to have had no capacity for abstraction. It did, but has been succesfully suppressed.
The School of Salamanca regenerated the ties between economics and ethics, defending freedom. We are not used to seeing in these Scholastics the origin of laissez faire liberalism, but Joseph Schumpeter finds a surprising affinity between the Classical English liberal John Stuart Mill and Luis de Molina. John Stuart Mill was aware of a common ethical tradition. Like the School of Salamanca he said that individuals must guide themselves by their responsibility, judging themselves all the more strictly when they cannot be judged by others: "If we never act on our opinions, because those opinions may be wrong, we should leave all our interests uncared for, and all our duties unperformed. It is the duty of governments, and of individuals, to form the truest opinion they can and never impose them on others unless they are quite sure of being right. But when they are sure, it is not conscientiousness but cowardice to shrink from acting on their opinions." Despite his ignorance of the School of Salamanca, Mill was well aware of the loss of their way of thinking: "The school disputations of the Middle Ages formed powerful dialectics to which the modern mind owes far more than it is generally willing to admit. A student today is under no compulsion to hear both sides. In mathematics there is nothing at all to be said on the wrong side of the question. The peculiarity of the evidence of mathematical truths is that all the argument is on one side. There are no objections and no answers to objections. But on every subject on which difference of opinion is possible, the truth depends on a balance struck between two sets of conflicting reasons. He who knows only his own side of the case knows little of the truth."
The School of Salamanca observed that the discovery of America had changed for the worse Spanish society through inflation. Martín González de Cellórigo pinpointed the origin of Spanish decadence: "Gold and silver leave in such quantity this kingdom that we seem merely the depositories who return wealth to the real owners in other kingdoms. True wealth is not owning a great quantity of gold and silver, because money is not real wealth. Everything noble attracts whatever has no value. Our gold and silver have gone to where there is real wealth. Our misfortunes arise from our laziness and foreign productivity. Wealth flies away in papers, contracts, censuses, notes of exchange, money, silver and gold, instead of merchandise which is productive. The reason Spain has no money, gold or silver is because she has too much. Spain is poor because she is rich."
The School of Salamanca applied their liberalism to politics. Juan de Mariana defended the overthrow of a ruler who imposes arbitrary taxes, defrauds public revenue and prevents Parliament convening: "Tyrants wants to hurt and ruin all but are violently against the rich and just. They see good as more dangerous than evil and the virtue they lack they finds the most dangerous." Interventionism leads to bad government: "How mindless that the blind want to lead those who can see. Government has not the knowledge of individuals or the facts, at least in all their circumstrances. Invitably it will make many serious errors which will displease public opinion and make such a blind government unpopular. Rule by fiat is madness. Too many laws which cannot be obeyed lead to the loss of respect for all laws." Power corrupts: "How sad for the Republic and how hateful for good men to see many enter Public Administration, poor, with no resources, and to see them a few years later happy and opulent!" Pedro Fernández de Navarrete stressed the importance of public accountability: "Wealth is thrown away in excesses and then everyone is to blame. It is so easy to accept slush money, to steal and to engage in other bad practices that trample the laws of justice, because when expenditure exceeds the resources of the Exchequer, honesty is no longer certain nor ministers incorruptible nor judges straight."
The ideas of the School of Salamanca arrived very early to the New World with Juan de Matienzo, Bartolomé de Albornoz, Pedro de Oñate and the famous Tomás de Mercado right up to Domingo Muriel in the 18th Century, when the French Revolution, according to Marjorie Grice-Hutchinson, "made everyone believe that French civilization and everything French was a model worthy of admiration and emulation" and the idea that politics and economics depended on ethics was abandoned.
Ethics must be applied to political economy not to do good, which good men will always practice, but to avoid evil. Corruption and evil exist, and government is the great promoter of corruption and evil. As Alejandro Chafuén explains: "Bad men will take more and put less into the common wealth. The Scholastics warned that evil men would end up holding the highest offices. Modern economists who defend freedom have a greater debt with the School of Salamanca than they are aware of. The same is true for our free society."

3.3 The Suppression of Ethics
Spanish despotism was no friend of the School of Salamanca. Samuel Johnson said in 1763: "I love the University of Salamancha for when the Spaniards were in doubt as to the lawfulness of their conquering America, the University of Salamancha gave as its opinion that it was not lawful."
The debt our free society owes to the School of Salamanca is recognised explicitely by John Stuart Mill in his famous essay on liberty: "What is morality has been gradually built up by the Catholic Church and though not implicitly adopted by moderns and Protestants, has been much less modified by them than might have been expected. For the most part indeed they have contented themselves with cutting off the additions which have been made to it in the Middle Ages. Mankind owes a great debt to this morality and to its early teachers." This conscious suppression of the School of Salamanca is the great tragedy of rationalism. Adam Smith represents no real progress in the formulation of value and prices. There was nothing fundamentally wrong in the School of Salamanca basing value and prices on utility and scarcity. Antagonism between Scholastic Aristotelian thought and Protestantism had led to a theory of value based on costs. Calvin places work in the centre of his social theology. Any intellectual exposed to Calvinism will also place work in a central position by combining work with value. Value becomes identified with the value of work, both as a scientific theory and as a spiritual link between Divine Will and everyday life. Murray Rothbard is highly critical of the widespread belief that political economy was founded by Adam Smith, who he calls a hardline Calvinist.
Hayek praised the School of Salamanca: "These ancestors of ours thought and acted under a strong impression of the ignorance and fallibility of mankind and, for instance, argued that the precise mathematical price at which a commmodity could be justly sold was only known to God because it depended on more circumstances than any man could know and that therefore the determination of the just price must be left to the market. In the discussion of the problems of society by the last of the schoolmen, the Spanish Jesuits of the 16th Century, naturalis became a technical term for such social phenomena as were not deliberately shaped by human will. In the work of one of them, Luis de Molina, it is for example explained that the natural price is so called because it arises out of the thing itself without considering any law or decree"
Rationalism has suppressed this social evolution. Reason, which meant the ability to distinguish beween good and evil and therefore what agreed or went against established rules, after the Enlightenment became the ability to derive these rules from explicitly established premises, specifically rejecting any religious explanation to traditional moral and legal rules when these could not be explained rationally. The concept of natural law became assimilated to the law of reason and has come to mean exactly the contrary of before. The rejection of a religious justification to traditional moral and legal rules has led rationalists to reject what could not be explained rationally. Lord Keynes, the father of macroeconomic intervention in a free society, also led in rejecting morality: "We rejected from the start any duty to conform to general rules. We did not recognise the existence of any moral duty nor intimate feeling susceptible to serve us as a guide. I remain and shall always remain contrary to moral standards."
The invisible hand of Adam Smith has substituted the ethics of the School of Salamanca as facilitator of market equilibrium but it has also facilitated intervention says Carlos Rodríguez Braun: "It transmits the wrong picture by stressing the image of a hand which manipulates and coordinates the economic system. Intervention is based on a triple fallacy, that the State knows more than individuals, that it has a right to intervene to correct their mistakes, and that it never causes a greater evil by intervening. Thus we come to the current odd situation of a huge State that generates disappointment in the hands of powerful politicians who generate contempt. The ancient principle of equality under the law has been substituted by equality through the law. The new rights are called social as if society was the protagonist of these changes when in fact it is the State."
Amartya Sen calls the foundations of the Welfare State a black hole because it bases human action on egoism, free from ethics. Rationalists believe moral rights and freedom are simply legal formulas with no practical use. But rationality is not our human way of life because we can be highly moral while not submitting to egoism. A responsible and charitable person cannot be called irrational when his acts are just and therefore based on moral reason. The Argentine newspaper La Nación is a good example, reserving its highly profitable last page for Clasificados Solidarios, (Solidarity Ads), quite irrational to profit maximisers. The Welfare State overcompensates mediocrity and discriminates intelligence, because rationalists identify welfare with equal resources. Equal opportunity, not equal resources, is the basis of our freedom and our weapon against corruption. Egalitarian materialism ignores talent and promotes cronyism. We should compensate those born blind, but there is no reason to compensate those born without ambition.
Frédéric Bastiat already denounced intervention in the 19th Century with the political equation + x + = -: "The State is merely all public officials, but do they produce for workers or the other way around? We tend to believe that what is legal is legitimate. Reformers, legislators and publicists do not demand despotism now. They are content with formulating laws. But what is law? Law is justice. Some think spoils are not immoral if legal. Behind the apparent good of a public expenditure there is a bad much more difficult to see. Immersed by what is visible, men have not learnt to understand what is not. The law is manipulated to exploit the majority in the name of some minority." Values he said are inseparable with freedom, and we must be permanently on our guard against corruption and despotism..
Amartya Sen wonders why reason, which he equates with rationality, inspired despots such as Stalin and Pol Pot, while we suffer still from intolerance, despotism and genocide. Are Western values of freedom and tolerance in conflict with discipline and order? There is, however, a world of difference between rationality and reason. The perfectionism of rationality is what motivates despots and interventionists alike. Reason is more modest by admitting that men make mistakes and hence need ethical morality as a standard. The constant fight beween good and evil has been ignored by rationality, because corruption does not exist in perfectionism. But without ethics there is no justice. Corruption is a trangression of all values. Corruption will always exist, so that justice and our individual conscience are more important than rationality. Freedom must be based on values and empty rationalism is no substitute, David Hume warned: "a false philosophy, sifting and scrutinising by every captious rule of logic. The only rule of government known and acknowledged among men is use and practice. Reason is so uncertain a guide that it will always be exposed to doubt and controversy. Let them enjoy that liberty with moderation. The chief source of moral ideas is the reflection on the interests of human society."

3.4. The Constitution of Liberty
Spain and Argentina are part of the same Western family, but both countries have repeatedly fallen into political and economic despotism, despite developing substantially the idea of liberty. Alejandro Chafuén and Eugenio Guzmán show that corruption is an obstacle for growth but freedom does not eliminate corruption automatically without properly functioning institutions. Not one single Spanish speaking country is among the ten freest countries in the world while there are two among the ten worst, Honduras and Venezuela, next to such beacons of freedom as China, Russia, Nigeria and Vietnam. They conclude that intervention is the gateway to corruption.
David Hume explained why the Rule of Law was so important: "The influence of useful inventions in the arts and sciences may perhaps extend further than that of wise laws, but the benefit arising from the former is not so sensible as that which results from the latter." He proposed to reinstitute the graphe paramonon, the process against illegality by which Athenian democracy tried politicians who voted for bad laws. This anticorruption law was so effective it was the first to be struck down by dictators. There is nothing noble in corruption nor contemptible in public virtue, he said: "There is little ground, either from reason or observation, to conclude the world eternal or incorruptible. To be a spy or to be corrupted is always infamous under all ministers and is to be regarded as shameless prostitution. The corruption of the best things produces the worst. Those philosophers that have insisted so much on the selfishness of man are led astray. Virtue like wholesome food is better than poison. It seems a contradiction in terms to talk of a vice which is in general beneficial to society. Should men have so little regard to anything beyond themselves, a free Constitution of government must become a scheme perfectly impracticable among mankind and must degenerate into one universal system of fraud and corruption. The governing of mankind well requires a great deal of virtue, justice and humanity but not a surprising capacity." Adam Ferguson also warned that corruption leads to despotism: "In the disorder of corrupted societies the scene has frequently changed from democracy to despotism. The most equitable laws on paper are consistent with the utmost despotism in administration. Where the strong are unwilling to suffer restraint or the weak unable to find protection, the defects of law are marks of the most perfect corruption. The one becoming imperious and arrogant, the other mercenary and servile, both regardless of justice and of merit. The whole mass is corrupted in proportion as its members cease to act on principles of equality, independence or freedom."
The idea of liberty was born in Spain much earlier than commonly acknowledged, as I have shown here with the examples of Catalonia, Sephardic philosopher Mainonides and the School of Salamanca, whose teachings rooted early in the New World. Spanish despotism suceesfully suppressed these developments of freedom but liberty was born anew spontaneously in England in the fight bewteen absolutism and Parliament, almost as a byproduct. From England the idea of liberty travelled to the American Revolution, and back to France where the rationalists of the Enlightenment ended up establishing a reign of terror. In the introduction to the Spanish edition of Alejandro Chafuen's Christians for Freedom, Rafael Termes supplies a direct link beween the School of Salamanca and the first Constitution in America, the Fundamental Orders of Connecticut of 1638, which could not be derived as believed from John Locke, then 6 years old, but from Francisco Suárez and his Defensio Fidei, publicly burnt by James I of England because of his attack on absolutism.
During the Second World War Hayek asked how Germany had become so despotic and he concluded that national socialist or Marxist socialist intervention led to serfdom. His famous book The Road to Serfdom is dedicated "To the socialists of all parties." Democracy is an integral part of the market process because the market can only operate unde the Rule of Law. The Rule of Law is the linchpin of our free Western society, which was developed in England, in America and in France, as Hayek shows in another great treatise The Constitution of Liberty. He contrasts the catastrophic German experience trying to impose the Rule of Law by rationalist perfectionism: "The Constitution had been given, the Rechtstaat proclaimed, in fact the police State continued. Who was to be the guardian of public law and its individualistic principle of fundamental rights? Nobody else than the very Administration." Liberty is the origin and the condition of the moral values which the perfectionism of intervention destroys. Intervention suffocates the social order as Hayek explains: "If all attempts that seemed wasteful in the light of generally accepted knowledge were prohibited and only such questions asked, or such experiments tried, as seemed significant in the light of ruling opinion, mankind might well reach a point where its knowledge enabled it to predict the consequences of all conventional actions and to avoid all disappointment or failure. Man would then seem to have subjected his surroundings to his reason for he would attempt only those things which were totally predictable in their results." Do we want to live in a predetermined and corrupt society as Argentina, and increasingly Spain, or in a society that is uncertain and free?

4. Are There Any Answers?
Institutions are the basis of our freedom but political mismanagement leads to the perversion of the same institutions that have developed to defend freedom. Rationalists complain that liberal policies encourage corruption. Political and economic freedom in both Spain and Argentina seem to show that corruption also increases and Latin American, if not Spanish, corruption is certainly well known. According to a Wall Street Journal business survey, 69% answered that it was serious and 88% that it had become worse in South America. Chafuén and Guzmán have correlated corruption and economic freedom based on Transparency International and the Index of Economic Freedom of the Heritage Foundation, Economic Freedom for the World of the Fraser Institute and Survey of Economic Freedom of Freedom House. The three indexes give remarkably similar classifications. Correlating them with corruption shows that the higher the economic freedom the lower the level of corruption. There are political exceptions like Singapore, with top marks in an Orwellian society, and Argentina, with good scores in economic freedom and widespread corruption. Spain is not far behind.
Is corruption essential to government, as Alexander Hamilton suggested to the disgust of American Founding Father Thomas Jefferson? Corruption in fact is intolerable. The same corrupt activity that allows one person to avoid an unjust law also allows many more to avoid complying with just laws.

4.1. Institutional Corruption
The dual economy of the Litoral and the Interior is closely allied to the dual economy of private and public. Juan Pedro Merbilhaa explains the public and private dual economy as the difference between those who get paid whether they work or not, and those who do not get paid if they don't produce. In Argentina bureaucrats fail to fufill the three tasks of government: taking account of private needs, managing public money, and responsible administration. Bureaucrats sit tight in jobs they have landed for which they are not prepared, practising the "politics of power" without taking any initiative or creative risk as in the private sector. The problems faced by society are not their problems, nothing gets solved, and everything is politicised by civil servants who are intellectual dwarfs misgoverning and fostering corruption. The Rule of Law is the basis of society but where the law rules least is in government. This institutionalised corruption has broken down morality among the general population.
Corruption is a measure of institutional failure, argues Enrique Ghersi. Why is there so much corruption, despite many laws and widespread criticism? The failure of the Rule of Law and of institutions is expressed by the level of corruption. Corruption is the result of the high cost of legality and the black economy is fathered by institutional failure. Corruption is an illegal tax which evades criminal prosecution but insures against corrupt officials. It is not enough to expose corruption and punish the immoral, if the cost of legality is not reduced. When legality is defined by power, there are no limits to power or to corruption. The solution of centralising power even more has made matters worse because what is needed is competition for power.
An analysis of legislative performance shows not one single law in 2000 reducing government spending, out of 1,736 introduced into Parliament. Salvia's Burocratómetro measures on average four new laws per week that increased government spending, 36% of the total creating new supervisory bodies, 36% new spending programmes, 16% increased funding of current programmes, and 14% more subsidies. Despite his reformist platform, President Fernando de la Rúa failed to control government spending. Government employees in Parliament have metastasized from 432 in 1930 to 11,550 in 1993 and, despite all promises to streamline, in 2000 there were still 9,987, only 13% less. One third show up for work and all are paid eight times the basic scale.
Corruption is the cost of obtaining privileges that only the State can legally grant, the influence to property rights through the judiciary, and market distortion through bureaucratic regulation. Black markets are the indicator that corruption exists. Chafuén and Guzmán list six examples of the institutionalisation of corruption:

1) Soft government loans for the disadvantated which end up with political cronies.
2) Foreign trade permits which have created one of the largest sources of corruption in Venezuelan history.
3) Public work contracts to political cronies.
4) Price controls are no longer fashionable, but regulation is, fostering cronyism.
5) International debt given as an example of good government by corrupt officials.
6) Corrupt procurement policies in State ventures, including misuse of advertising.

4.2. Institutional Justice
The breakdown of Argentine institutions has proven impervious to reform, as the country again and again restarts from square one since the recovery of democracy. One recurring obstacle is the Rule of Law, or lack of it. Adrián Guissarri compares the cost of the Rule of Law in different countries, that is the cost of justice, of government, of health and of security, and Argentina comes out very unfavourably. A survey of 200 businesses had only 4% answering that the justice system worked well. The cost of the Misrule of Law has decreased GNP by up to one half. This Misrule of Law is a consequence of the abscence of separation of powers, despite appearances: "Our government is closer to autarchy than to representative government" he says in reference to the Spanish system of despotism. The continued violation of the Rule of Law is closely associated with the recurring economic crises. Conditions for growth may be similar the world over, but sustainability is determined by the institutional base. He compares the Rule of Law in the US and Argentina in 1999, with Argentine GNP 30% of the US. Under equal operation of the Rule of Law Argentine GNP could be 50% of the US. In a parallel evaluation, using the answers of the business survey, which showed that 63% of businesses would have increased investment a total of 18% and 54% of businesses would have increased employment a total of 10% under an American grade judicial system, and projecting for the period 1940-1985 Argentine GNP would be 36% higher. Both methods of measurement show similar results, but not all GNP is lost because some goes into the black economy. The cost of the Misrule of Law can be evaluated as between one third and one half of income in Argentina.

4.3. Institutional Politics
The perversion of institutional politics is the consequence of the political structure of candidatures according to Adrián Guissarri. He quotes the Edinburgh Review in the 19th Century: "Candidate lists are the worst invention of bureaucratic despotism." Political corporatism is unlikely to relinquish voluntarily the control of power of the electoral system in Argentina. Single seat districts force candidates to discuss local problems, while multirepresentational districts, no matter the election, are based on general national issues. This benefits the owners of parties, not the voters. Parties agree and act on issues outside the institutions of the Constitution in an oligopolistic behaviour because politicians owe the responsibility of their decisions not to voters but to the owners of the party. The abscence of voter control invariably leads governing parties to irresponsibility, well aware of their impunity. Exclusion reinforces the corruption of the political market because, like any oligopoly, politicians impose high costs to the entry of rivals. Candidates are promoted who have excelled outside politics in a two pronged strategy to lower the cost of political promotion and also to windowdress politics as reputable. Power is concentrated in a bipartisan system extolled as mature and stable but which is simply oligopolistic. The voter is forced to buy on credit, but politicians do not have to deliver on promises and cannot be punished by the voter. There is however a second vote, which is the rejection of government policies, and this alternative vote has shown regular landslides against the ruling party in power. The defense of the Rule of Law generated three revolutions in the 19th century, in 1860, 1874 and 1890, against political injustice and abuse of power. Then, as today, the real reason was that politicians were far removed from voters. The list system has discredited politics in Argentina as it is fast doing in Spain. Elections change little, despite a wealth of political representation, which represent no one in particular, says Juan Pedro Merbilhaa. Elections are an insider corporation of politicians who ignore voter needs and merely want a beauty contest to see who is better placed to advance into a weak government without any real mandate and therefore incapable of imposing real change and agreements to solve the crisis. Gabriel Salvia adds that politicians see their seat in Parliament as a direct business opportunity for monopoly and privilege. Parliament also promotes corruption indirectly by imposing restrictions on private activity through supervisory bodies open to trade offs to facilitate business. These direct and indirect payoffs to politicians provide pseudobusinessmen with advantages they would never have under competition. These cronies do not enter into business to satisfy customers but to satisfy politicians. Legislative extortion, like any other form of corruption, is only possible when the Rule of Law is not obeyed by institutions.
Politicians battle solely to transfer resources from the private sector, in a system reminiscent of the mafia. In 200 years of democracy only two systems have proved politically stable, the US and Britain, and both are based on single seats. Olipolistic behaviour in parties must be stamped out and deregulation is the only way, that is greater political competition. Without political mafias, the Rule of Law would be sovereign and GNP up to 50% higher. Of course, one third of the loss goes underground, into the black economy, beyond the reach of democracy and justice, but also of money grabbing politicians.

4.4. Institutional Economics
Carlo Cipolla in his Economic History of the Decline of Empires says taxes and regulations fuel corruption, tax evasion, and redistribution to powerful bureaucrats and political cronies. Ana Isabel Eiras adds that Argentina shows, not the failure of capitalism, but the abscence of capitalism. The world's 10th wealthiest nation in 1913 is today 38th, behind Chile. Spain is 26th, which does not reveal the real situation in Argentina. The Index of Economic Freedom is even more misleading. Argentina has improved dramatically from 99th in the world in 1990, the current status of Bangladesh, to 11th today, better than Canada or Chile. The indicators for Spain have not changed since the Stabilisation Plan of 1959, 25th in the world at the end of the liberalisation measures in 1970, 27th in 1985 and 29th in 1999, three times worse than Argentina today, which is quite unconvincing.
So where is the real Argentina? Inflation has been cut from 3,080% in 1989 to 10% in 1999, state enterprises privatised, foreign trade liberalised, and families below the poverty line fell from 38% of the population in 1989 to 13% in 1994. Eiras fills in the black shadows in the rosy picture:
1) Government expenditure has grown from 9% of GDP in 1989 to 21% in 2000. Per capita debt today is greater than Korea during the Asian meltdown, at 52% of GDP. Public employment remains bloated. In Formosa province half the employed work for the government and most only turn up to get paid once a month. These are known as ñoquis, as a homage to Italian mamas' pasta making once a month.
2) Mercosur is the sick man's common market, with the other backroom boys, Brazil, Uruguay and Paraguay, abandoning free trade with competitive nations under a high protectionist wall.
3) The judicial system, weakened since 1930, coupled with the huge bureaucracy, fosters corruption. The black economy is 23% of GDP and evades $15 billion a year, equivalent to all tax revenue in 1991 and half current tax revenue. One tax dollar in three is evaded.
Pablo Guido adds further black misery:
4) In the last five years almost every single day a public highway was cut in public protest and the last government faced a general strike once every three months. There have been 27 general strikes since the return to democracy in 1983. Unemployment has doubled in the last decade. The poverty line has improved from the days of hyperinflation but has worsened since 1994. Defined as income below $151 a month, there were 3.5 million poor in 2000, including almost one million with less than $62 a month.
5) Only government has increased as a percentage of GDP, with its share greater by half in the last decade, a 90% growth of public expenditure financed by privatisation and debt and tax hikes. All the growth in productivity has been appropiated by the government. Finance Minister López Murphy was unceremoniously sacked because he proposed cutting back government expenditure a modest 2%, which, says Guido, the social parasites (university, trade unions, politicians and business cronies) violently rejected arguing it would lead to social breakdown: "The ruling class believes the sweet dream of the nineties that simply selling off some public enterprises and tinkering with public expenditure will let everything stay the same."
6) International lending is drying up because of disbelief in economic recovery and in the ability to finance debt. The government has systematically broken all its promises on public expenditure and public productivity (the ñoquis continue to thrive) and none of its growth predictions have materialised. Convertibility is threatened by the rigging of public debt issues, and uncertainty has hit the private sector hard while tax privileges distort markets towards the usual political and trade union cronies. The productivity effort of the majority of the population has been misspent while the oligarchy dreams of a new foreign bailout.

Ana Isabel Eiras points out that IMF easy money has encouraged moral hazard: "After two decades of misguided recommendations and nearly continuous funding, the IMF's involvement in Argentina actually strengthened the power of political vested interests at the expense of economic growth." Since 1983 the IMF has lent $31 billion while the government failed to implement reforms, specifically in cutting expenditure. The predictable IMF bailouts signalled to markets that investment risk was mitigated while the government has had no incentive to reform because funds were always forthcoming. Current debt of $124 billion is three times exports and debt payments consume two thirds of foreign exchange. Argentina is back in the 19th Century debt situation, without the export led growth and massive foreign investment that made Argentina one of the world's richest nations.
Carlos Rodríguez Braun compares Spain and Argentina. Why has Argentina become so poor when the country is so rich? Spain, he argues, is more like Chile than like Argentina because of greater institutional stability and economic policies that went from bad to better, while the devastating tax of inflation has been more contained. Spain is also better located, surrounded by rich countries (but what about Chile?). The recovery of democracy almost simultaneously in Argentina and Spain has not led to an equal outcome. Liberalism is not just a matter of economic stability but also of institutional respect for the Rule of Law and the control of abuse of power and corruption. Spain today is perceived as half less corrupt than Argentina. As Adam Smith said: the wealth of nations requires peace, easy taxes and a tolerable administration of justice."
When I was in Argentina last year to lecture on Spanish corruption, in Buenos Aires University a professor told me: "Now I understand why we call Spain the motherland." Their misfortunes can easily become our own, as I have warned with the widespread Spanish corruption. Just like Catalonia, Italy was also said to be an oasis, before the collapse of the party system because of corruption. As Thomas Jefferson said: "Human nature is the same on every side of the Atlantic and will be alike influenced by the same causes. The time to guard against corruption and tyranny is before they shall have gotten hold of us. It is better to keep the wolf out of the fold than to trust to drawing his teeth and talons after he shall have entered." Argentina is not alone. Don't cry for me, Argentina. We're almost there.

Chafuén, A.A. and E. Guzmán: (2000) "Economic Freedom and Corruption," in G.P.
O'Driscoll, jr., K.R. Holmes and M. Kirkpatrick, 2000 Index of Economic Freedom, Washington: Heritage Foundation and The Wall Street Journal, pp. 51-54.
Eiras, A.I. and B.D. Schaefer: (2001) "Argentina's Economic Crisis: An Abscence of
Capitalism", Bakckgrounder No. 1432, The Heritage Foundation, www.heritage.org
Vergés. J.C.: (2000) "The Political Economy of the Just Price: What the School of
Salamanca Has to Say in the Age of Corruption," Journal des Economistes et
des Études Humaines, July-September, pp. 253-283

Alberdi, J.B.: (1998 (1854)) Sistema económico y rentístico, Buenos Aires: Ciudad
Argentina.
Ghersi, E.: (2000) "La corrupción es efecto, no causa," Mercado libre, Fundación
Atlas, www.atlas.org.ar
Guido, P.: (2001) "Sin margen de errores," "Perspectiva sobre la crisis argentina,"
Informe económico, Buenos Aires: Fundación Atlas, www.atlas.org.ar
Guissani, A.C.: (2000) "Seguridad jurídica y crecimiento con restricciones
institucionales," Foro para la Administración de Justicia, El impacto del desempeño de la justicia en la economía argentina, Buenos Aires: Fores.
: (2001) "El problema de las instituciones en la Argentina,""Notas para una propuesta para un partido democrático, republicano, representativo y federal," Instituto Argentino de Ejecutivos de Finanzas, Argentina: Bases para un crecimiento sostenido,, Buenos Aires: IAEF.
Merbilhaa, J.P.: (2000) "El Estado: un problema de los argentinos," Novedades,
CARPAB, December.
: (2001) "La peor de todas," La Nación, 10th October.
Ortíz, R.M.: (1964) Historia económica de la Argentina, Buenos Aires: Ediciones
Pampa y Cielo, 2 vols.
Rodríguez Braun, C.: (2001) "Por qué España, por qué Argentina," Expansión, 13th and
20th July.
Salvia, G. C.: (2000) "La reforma del Estado," "Burocratómetro," Mercado libre,
Fundación Atlas, www.atlas.org.ar

My two books on corruption:
Vergés, J.C.: (1999) Corruptors i corruptes, Barcelona: Quaderns Crema.
: (2000) Tots els homes de Duran, la corrupció política de Catalunya, Barcelona: Llibres de l'Índex.


	© Fundacion Atlas para una Sociedad Libre \| Av. Roque Sáenz Peña 628 Piso 8º Oficina T 1 1035 - Buenos Aires - República Argentina Tel/Fax: (54-11) 4343-3886 E-Mail: atlas@atlas.org.ar