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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

We free marketeers have a problem here

Written by Tim Worstall | Friday 31 January 2014

This is something of a facepalm moment:

When he vented his frustration about holiday prices shooting up during the school half-term break, Paul Cookson struck a chord with other parents. His rant to 250 Facebook friends quickly went viral as outraged parents shared his post about rip-off prices 143,000 times. Now the issue may even be debated in Parliament after more than 100,000 signed an online petition calling for the Government to curb prices.

Err, yes, access to the fixed supply of something may well be more expensive when more people want to gain access. It's that supply and demand thing in action. There are alternatives of course: it could be that the favoured children of party apparatchiki gain access. There have certainly been times and places where that was the allocation method. There could be queueing, there have been times and places where that has been used too. But of all the different methods that have been tried rationaing of something like this by price has ended up being the best one.

That isn't to say that rationing by price is always the best method: I'd not be happy with justice being so allocated for one. But the chance to sit in the chlorinated water someone else's baby has just passed through? Sure, ration by price.

But as we can see there appear to be at least 100,000 of our fellow citizens who don't agree. I am reminded of Bertoldt Brecht's point about the first East German elections: perhaps we should try to elect another people who do get this market economy idea.

It also reminds me of something I saw the first year after food price rationing ended in Russia. Eggs are painted for Easter, there as here, and one old grandmother couldn't understand why they became more expensive just before Easter. "Why are they more expensive just when everyone wants them?" If you don't get the basic answer to that one then the operations of a market economy are always going to mystify you. She had an excuse: she'd lived her entire life under a system that was not a market economy. Quite what the excuse of those 100,00 Brits is I'm not sure. They'd all understand instincitively why pay goes up on Christmas Day. Because that's the day that absolutely everyone wants to have off. That they can't make the leap to why holidays might be more expensive in holiday time mystifies me.

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Yes, really, Women's Lib caused inequality

Written by Tim Worstall | Thursday 30 January 2014

Now here's a thing: the liberation of half the country from their economic and social shackles I regard as an unalloyed good thing. That this liberation of women largely came from technological causes, the "washing machine" or domestic household technology as Ha Joon Chang calls it, plus the decline in the economic importance of male musculature, doesn't matter at all. That it happened was great.

However, as recent research is showing, it has also led to an increase in the inequality of household incomes.

The argument is very simple indeed. We have moved from a society in which women tended not to work into one in which they tend to do so. And obviously, women tend to do the sort of work they are educated to achieve. Add in that people tend to meet their partners through university or work these days and it's quite clear that professionals will tend to marry professionals, blue collar blue collar and so on. We thus end up with a world in which there is a strata of society enjoying two professional incomes per household and others enjoying two white collar incomes, two two blue collar and so on. Although it does rather break down at that last: stay at home housewives are more likely to be in the working classes.

Whatever the earlier level of household income inequality we had before it's obviously going to be larger now. That a polemicist for the trade union movement is married to a GP, or that the Harman/Dromey household enjoys two, not just the one, MP salaries and allowances, makes the gap between those professional classes and the average working joe greater.

Short of the State telling people who they may shack up with there's no real way out of this either.

But what's really interesting is that that linked paper is claiming that all of the rise in US household income inequality can be put down to this one factor. And if that's so then I cannot for the life of me see that that rise in inequality is a problem. People are now much freer in their love and working lives than they used to be. That's good, in fact that's great. The side effects be damned.

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There's nothing neoliberal about work for the dole

Written by Tim Worstall | Wednesday 29 January 2014

OK, so this story comes from Australia where they might be far enough away not to be quite up to speed with things. But the idea that people should work for the dole is not in fact some appalling apparition leaping from the fevered imaginations of neoloberals. It's not, in fact, even a liberal idea. It's an entirely social democratic one: you know, soft left sorta thing?

A favourite policy of talkback callers everywhere, work for the dole is also an idolised measure for the right side of politics where old-fashioned conservative selfishness dovetails nicely with the extremist economic demands of economic neoliberalism. The idea is that to receive the sub-poverty-level subsistence Centrelink payment of $250 week, dole recipients will be mandated into forced labour or deprived of subsistence completely. Currently mooted are plans for the unemployed to be mandated to pick up rubbish in the not-for-profit sector or work in aged care homes as maintenance workers.

Ah, no. Here is the impeccably social democratic and soft left M'Lord Layard on the subject from 15 years ago or so:

This long-term unemployment is a huge economic waste. For people who have been out of work for a long time become very unattractive to employers and easily get excluded from the world of work. So it often happens that employers feel a shortage of labour even when there are many people long-term unemployed, with the result that inflation rises even in the presence of mass unemployment. Thus a major objective must be to reduce or eliminate the long-term unemployment caused by welfare dependency. There are two possible approaches – “stick” and “carrot”. The evidence suggests that much the best approach is a combination of the two. This combined approach is now being used increasingly in Britain, Denmark, the Netherlands and of course in the U.S. for single mothers on welfare. In consequence in these countries there have been dramatic falls in unemployment consistent with a given level of vacancies – which in most other countries continues to rise.

The argument is extremely simple. People who are long term unemployed drop out of the labour force entirely. This is both a waste of their lives and also of the things that they could be producing for the rest of us. We therefore want policies which keep the long term unemployed in that labour force: even up to and including make work programs while they collect their unemployment pay. For this does indeed keep them connected with the world of work and aids in preventing that dual waste of their lives and out money.

This is absolutely nothing at all to do with being right wing, conservative, neoliberal or even liberal. It's an entirely social democratic analysis of the problem and an entirely social democratic solution.

It may also be a good one, might also be a bad one but that's an entirely different matter. The blame or the plaudits, whichever way around it should be, should indeed go to those who proposed it. Similarly, if it's a good idea than praise its introduction whoever does it and if a bad one condemn it.

Peronally I'm convinced by the argument and the evidence and in the absence of my preferred solution (a return of capitalism red in tooth and claw that would raise the growth level and thus reduce unemployment) support the idea that work for welfare is a good idea. Even if it did come from my old economics professor....

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Technology, Privacy and Innovation in 2014

Written by Charlotte Bowyer | Tuesday 28 January 2014

Prediction lists for the coming year are always revealing, though perhaps more of the current public mood than the future. A write-up of the tech trends for 2014 by Fast Company's design blog is hardly controversial, but what is interesting is how the areas they’ve chosen highlight the existence of two wider and seemingly divergent technological trends. This apparent conflict in the way technology is heading is far from problematic. On the contrary, it shows our success in adapting and experimenting with new ideas and in response to shifts in the social and political context, without the need for any central guidance.

One thing clear from Fast Company's list is that 2014 will bring a continued increase in the volume and depth of the personal data we create. Things like Google Glass, the ‘quantified self’, hyperpersonalised online experiences and the interconnectivity of theInternet of Things all create new reasons and mechanisms for data capture. This in turn increases the value of our data to ourselves, the companies with access to it and, in some situations, the state.

However, the article also predicts that 2014 will see increasing concerns over cyber-privacy and a movement towards greater digital anonymity. Users will increasingly chose to control their own data and how this is profited from, whilst we will begin to discover the joy of ‘disconnecting’ from the digital world and see the creation of intentional blackspots.

The fact that we seem to be embracing deeper technological integration yet simultaneously finding ways to mitigate and avoid its consequences is certainly interesting. Does this show that we’ve raced forward too fast and are trying to claw back a space we’re realising we’ve lost? It’s perhaps possible that this is the case, but far from giving us cause for concern the two-track path we’re seeing shows the ability of consumers and the tech sector to adapt over time, and in turn gives some hints on the optimal tech policy.

Continue Reading...

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An alternative ‘Agenda for Hope’

Written by Sam Bowman | Tuesday 28 January 2014

Owen Jones has written a nine-point ‘Agenda for Hope’ that he argues would create a fairer society. Well, maybe. I’m not convinced by many of them. Then again, it would be quite surprising if I was.

But it got me thinking about what my nine-point agenda would be — not quite my 'perfect world' policies, but some fairly bold steps that I could just about imagine happening in the next couple of decades. Unlike Owen’s policies, few of these are likely to win much public support. On the other hand, most of the political elite would think these are just as wacky as Owen's too. 

Nine policies to make people richer and freer (and hopefully happier):

1) The removal of political barriers to who can work and reside in the UK. Removing all barriers to trade would increase global GDP by between 0.3% and 4.1%. Completely removing barriers to migration, though, could increase global GDP by between 67% and 147.3%. Those GDP benefits would mostly accrue to the poorest people in the world. We can’t remove these barriers everywhere but we can show the rest of the world how it’s done. Any step towards this would be good – I suggest we start by dropping the net migration cap and allowing any accredited educational institution to award an unlimited number of student visas.

2) A strict rule for the Bank of England to target nominal GDP instead of inflation, replacing the discretion of the Monetary Policy Committee. Even more harmful than the primary bust in recessions is what Hayek called the ‘secondary deflation’ that comes about as people, fearing a drop in their future nominal earnings, hold on to more of their money. That reduces the total level of nominal spending in the economy which, since prices and wages are sticky in the short run, leads to unemployment and a fall in economic output. NGDP targeting prevents those ‘secondary deflations’ and would make economic busts much less common and harmful. In the long run, we should scrap the central bank altogether and replace it with competition in currencies (see point 9, below).

3) Significant planning reform that abolished the Town and Country Planning Act (which includes the legislation ‘protecting’ the Green Belt from most development) and decentralised planning decisions to individuals through tradable development rights (TDRs). This would give locals an incentive to allow new developments because they would be compensated by the developers directly, allowing for a reasonably efficient price system to emerge and making new development much, much easier. The extra economic activity from the new home building alone would probably add a couple of points to GDP growth. 

4) Legalisation of most recreational drugs and the medicalisation of the most harmful ones. I think Transform’s outline is pretty good: let cannabis be sold like alcohol and tobacco to adults by licensed commercial retailers; MDMA, cocaine and amphetamines sold by pharmacies in limited quantities; and extremely dangerous drugs like heroin sold with prescriptions for use in supervised consumption areas. The sooner this happens, the sooner producers will be answerable to the law and deaths from ‘bad batches’ of drugs like ecstasy will be a thing of the past. Better yet, this would bring an end to drug wars like Mexico's, which has killed around 100,000 people in the past ten years.

5) Reform of the welfare system along the lines of a Negative Income Tax or Basic Income Guarantee. As it is, the welfare system disincentivises work and creates dependency without doing much for the working poor. A Negative Income Tax would only look at people’s incomes (not whether they were in work or not in work), reducing perverse incentives and topping up the wages of the poorest earners. This would strengthen the bargaining position of low-skilled workers and would remove much of the risks to workers associated with employment deregulation. Of course, the first thing we should do is raise the personal allowance and National Insurance threshold to the minimum wage rate to give poor workers a de facto 'Living Wage'.

6) A Singaporean-style healthcare system to replace the NHS. In Singapore, people have both a health savings account and optional catastrophic health insurance. They pay a portion of their earnings into the savings account (poor people receive money from the state for this), which pays for day-to-day trips to the doctor, prescriptions, and so on. The government co-pays for many expenses but the personal cost disincentivises frivolous visits to the doctor. For very expensive treatments, optional catastrophic health insurance kicks in. This is far from being a pure free market system but it is miles better (cheaper and with better health outcomes) than the NHS. (By the way, if you really like the NHS we could still call this an ‘NHS’ and still get the superior system.)

7) A school voucher system and significant reform of the state education and free schools sectors. This would include the abolition of catchement areas and proximity-based admission, simplification of the free schools application process, and expansion of the free schools programme to allow profit making firms to operate free schools. These reforms, outlined in more detail in two ASI reports, would increase the number of places available to children and increase competition among schools to drive up standards.

8) Intellectual property reform. As both Alex Tabarrok and Matt Ridley have pointed out, our IP (patent and copyright) law is too restrictive and seems to be stifling new innovation. Firms use patents as barriers to entry, suing new rivals whose products are too similar to their own. In industries where development costs are high but imitation costs are low, like pharmaceuticals, patents may be necessary to incentivise innovation, but in industries like software development where development can be cheaper than imitation, patents can be a terrible drag on progress. Tabarrok recommends that we try to tailor patent length in accordance with these differences; as a sceptic about our ability to know, well, anything, I’d prefer to leave it to private contracts and common law courts to discover.

9) Last but not least, the removal of the thicket of financial regulation and the promise of bailouts for insolvent banks. Known as ‘free banking’, this system of laissez-faire finance has an extremely strong record of stability – though bank panics still occurred in free banking systems, they were much less severe and rarely systemic. Only once the government started to intervene in the financial system to provide complete stability did things really begin to go wrong: deposit insurance, branch-banking restrictions, and other prudent-seeming regulations led to extremely bad unforeseen consequences. The financial crisis of 2008 probably owes more to asset requirements like the Basel accords, which heavily incentivised banks to hold ‘safe’ mortgage debt over ‘risky’ business debt, than anything else. Incidentally, the idea that having a large number of local banks is somehow better than having a few large banks is totally wrong: during the Great Depression, 9,000 of America's small, local banks failed; at the same time not one of Canada’s large banks failed. The small banks were more vulnerable because, unlike the big banks, they were undiversified.

Now, if only there was a think tank to try and make these dreams a reality.

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Bill Easterly on Bill Gates and aid and development

Written by Tim Worstall | Tuesday 28 January 2014

Bill and Melinda Gates have released their annual letter on what's going on with their Foundation, global poverty and aid. And they quite rightly point out that things are indeed getting better.

However, this is not the same thing as stating that it is aid that is making things better. As Bill Easterly points out:

The obsession with international aid is a rich-world vanity that exaggerates the importance of western elites. It is comforting to imagine that benevolent leaders advised by wise experts could make the poor world rich. But this is a condescending fantasy. The progress that Mr Gates celebrates is the work of entrepreneurs, inventors, traders, investors, activists – not to mention ordinary people of commitment and ingenuity striving for a better life. Davos Man may not be ready to acknowledge that he does not hold the fate of humanity in his gilded hands. But that need not stop the rest of us.

There are undoubted successes stemming from aid budgets: vaccination programs or the spread of oral rehydration therapy for example. These have certainly been funded by aid: but we should also note that our own societies managed very much the same things without aid from abroad to pay for them. So while aid may indeed have paid for them that's not the same as stating that aid is necessary for them to have happened.

But Easterly's larger point is that aid flows are of such tiny amounts in comparison with the global economy that they cannot in fact explain that marvellous reduction in poverty. Over the decades there's been very little aid to places such as China, Taiwan, S. Korea, the places where the battle against poverty is being so conclusively won for example. What has actually worked is that these places have become part of the global economy rather than languishing in purist localism.

Or, as we like to say here at the ASI, I contribute to making poor people richer by buying things made by poor people in poor countries.

Aid's all very well but trade is the name of the game.

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Equality: as cheap as 50p?

Written by Ben Southwood | Monday 27 January 2014

Peter Oborne argues that Ed Balls' pledge to raise the 45p top tax rate back up to 50p is a good idea. While the extremely high marginal rates (top main rate 83%, plus a 15% surcharge for "unearned income") of the 1960s and '70s might have been driven by "socialist envy", George Osborne's dropping the rate from 50p to 45p in was "profoundly shaming and offensive", Oborne contends. This is because, echoing Stanley Baldwin and his brand of Toryism, the conservatives should represent the whole country, not the rich or any other factional interest.

Apparently the Coalition has "devoted a great deal of effort to lowering the living standards of the poor", and this move to "make the rich richer" is inappropriate when the poor are getting poorer. I contend this by arguing that inequality is down to 90s levels under chancellor Osborne, while the worst-off in society are the only group to actually see their living standards improve the since the recession hit. And the (ugly, unpleasant, and regrettable) attitudes that have emerged towards benefits claimants are probably driving government rhetoric in that area, rather than vice versa.

In general, it annoys me when a columnist writes something apparently trading on what everyone just knows. Sometimes the common view is incorrect. Funnily enough, politics is the area where people err most profoundly and with the most regularity. And I would argue that Oborne is trading on falsehoods in his piece; would it still be a coherent argument if it started with the factual premise that inequality in the UK fell back below its 1997-8 low in 2011-12, 0.34 measured by the GINI coefficient? That the top 10% of earners endured the biggest blow to their incomes since the onset of the recession? And that the bottom 10% by income were the only one to see a rise in living standards taking inflation into account? I don't think so.

The IFS reports I link above predict that by 2015-16 inequality will rise back to roughly its pre-recession level, so perhaps Oborne could refocus his attack on the future inequality Osborne possibly has a hand in. But in all likelihood there is probably little the government can do about inequality over the long-term, caused as it is by very fundamental trends and robust as it is to institutions even such as the USSR's. Most of the extra inequality since the 60s and 70s has come from couples engaging in much more assortative mating. And very long-term trends are mainly dominated by heritability of social class—those with Norman surnames are 28% more likely than a random sample of similar others to get an Oxford place.

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Just how far we've come in two decades

Written by Tim Worstall | Monday 27 January 2014

OK, so this is largely a result of Moore's Law allied with some clever technologists but still, it's interesting to see quite how far it is that we've come.

The back page of the front section on Saturday, February 16, 1991 was 4/5ths covered with a Radio Shack ad. There are 15 electronic gimzo type items on this page, being sold from America’s Technology Store. 13 of the 15 you now always have in your pocket.

...

You’d have spent $3054.82 in 1991 to buy all the stuff in this ad that you can now do with your phone. That amount is roughly equivalent to about $5100 in 2012 dollars.

I've bought myself an off contract smartphone recently for around £100, or $150. Which shows how far we've come over these couple of decades really.

Which in and of itself is just an interesting observation (as is the one that the run of the mill smartphone these days packs more pure computing power than a Cray 2 from the early 1990s). However, this sort of technological change is something that our economic statistics deal very badly with. For several unfortunate reasons.

The first being that we do indeed try to adjust for the improving quality of things, through what are known as "hedonic" adjustments. But there's no one who really thinks that we've got this right as yet. Secondly, the advances in such things as our phones allow us to do things that were simply impossible before. And there's no real way os squeezing those into the GDP statistics. For the third reason: and awful lot of what we can do with these new technologies is actually free at the point of use. So therefore, not being charged for, it dsoesn't turn up in the GDP figures. And fourthly, those things that we used to be able to do but now can do them more conveniently have actually fallen in price. And given that it is the market prices that GDP tracks the contribution here is actually negative.

And this is indeed a problem with our economic statistics. I think a case could be made (I'd argue it, but not want to have to prove it) that the coming of smartphones has been recorded in GDP as a reduction in GDP. Which, given that we can now all do things we couldn't before, do things we could more cheaply, and do other things simply better seems like a remarkable indictment of the basic statistic.

But then we all know that GDP isn't the be all and end all of everything: it's maximising utility that is. GDP is just an indication that there might be more utils out there to enjoy: but not, sadly, a terribly accurate one.

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A capitalist crime which should be heavily punished

Written by Tim Worstall | Sunday 26 January 2014

Much of my time is spent in explaining how this capitalist/free market mix leads to the best of all possible outcomes. Except when I'm explaining that in this or that instance it needs a little nudge or limitation. However, there are times when it's necessary to condemn, in no uncertain terms, the purported actions of certain capitalists or capitalist firms. And this alleged price fixing (and do please note that "alleged" there) in the wages of engineers in Silicon Valley is one such instance. The claim is that the big companies agreed not to try and poach staff from each other thereby reducing the wages spiral that might have ensued:

In early 2005, as demand for Silicon Valley engineers began booming, Apple’s Steve Jobs sealed a secret and illegal pact with Google’s Eric Schmidt to artificially push their workers wages lower by agreeing not to recruit each other’s employees, sharing wage scale information, and punishing violators. On February 27, 2005, Bill Campbell, a member of Apple’s board of directors and senior advisor to Google, emailed Jobs to confirm that Eric Schmidt “got directly involved and firmly stopped all efforts to recruit anyone from Apple.”

 

It is said (note, alleged) that this practice them spread across the major firms in the area. And there's two major problems with this sort of cartel behaviour. Obviously, one is that the wages of said engineers were not bid up and they did not gain the full value of their scarcity. Sure, companies reported higher profits as a result, shareholders made more money. But we're not in fact capitalists, trying to make sure that this is what happens. We're actually free marketeers and this is one of those times when the two creeds conflict.

The second is perhaps even more important for us market types. One way of looking at said market is that it is the Great Calculating Engine of our society. Indeed, the only one we have that can have any possibility of correctly allocating resources. And if, through coordinated action such as this, people then damp those prices then our market allocation is going to be wrong. For example, depressing the wages of engineers in California would have led to some (maybe only a few, but this all happens at the margins of course) quants deciding to go off to Wall Street instead. And yet free market pricing would have told them that their skills were more highly valued in the computing rather than finance sectors.

At root of course this is again that conflict between markets and capitalism. We marketeers are very sure indeed that while capitalism is all very well it is competition in markets that harnesses and controls it. And if the capitalists do ever collude, whether it be in the prices for vitamins or the pay of the workers, then we're going to end up with a very much sub-optimal outcome. Which is why if we do find such collusion that we want to punish it very severely indeed.

If this sort of thing had happaned in Europe then the EU could levy fines of up to 10% of global turnover of each company that participated. I don't know what the potential US penalties are but I wouldn't think those numbers would be out of line with a just outcome.

We simply cannot allow such cartels to operate and should punish those who try severely.

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An Indonesian answer to George Monbiot's question

Written by Tim Worstall | Saturday 25 January 2014

George Monbiot got very hot under the collar recently about a provision in hte various trade treaties that are under negotiation at present. Arguing that the ability of an investor to take a matter to arbitration was a vile undermining of democracy:

They have good reason to ask. The commission insists that its Transatlantic Trade and Investment Partnership should include a toxic mechanism called investor-state dispute settlement. Where this has been forced into other trade agreements, it has allowed big corporations to sue governments before secretive arbitration panels composed of corporate lawyers, which bypass domestic courts and override the will of parliaments. This mechanism could threaten almost any means by which governments might seek to defend their citizens or protect the natural world. Already it is being used by mining companies to sue governments trying to keep them out of protected areas; by banks fighting financial regulation; by a nuclear company contesting Germany's decision to switch off atomic power.

And here's an example of what it is actually all about:

Freeport-McMoRan Copper & Gold Inc. (FCX) and Newmont Mining Corp. (NEM), the largest U.S. miners, said new Indonesian rules on metal export duties infringe on contracts they have with the government. Indonesia issued regulations on metal exports this month that curbed the shipping of unprocessed ore and placed duties on exports of copper concentrate, a semi-processed ore that’s shipped from mines to smelters. The rules have resulted in delays to obtain export permits, and Freeport plans to defer some production, according to the Phoenix-based company, the world’s biggest publicly traded copper producer. The duties on copper, which begin at 25 percent and will rise to 60 percent by mid-2016, took Freeport by surprise, Chief Executive Officer Richard Adkerson said yesterday on a conference call with analysts. Indonesia, where the company operates its biggest mine, the Grasberg copper and gold operation, accounted for 19 percent of its third-quarter revenue, according to data compiled by Bloomberg. Newmont’s Batu Hijau mine in the country contributed 6.8 percent of the miner’s total sales, the data show.

Indonesia has banned, in hte case of nickel, and heavily taxed, in the case of copper, the export of ores and or concentrates. They want the minerals to be processed within the country. Well, OK, I don't think that's sensible, you may or may not, but what is obvious is that this seriously changes the positions of those companies who have already invested billions into mines in the country. And that's what the right to go to arbitration is about.

If a government says, right, here's the terms upon which you can invest in our country then that's just fine. And it's also just fine if the government decides that it wants to change the law. However, if it does change the law it also has to compensate those who the law change affects. For example, Indonesia is entirely at liberty to nationalise those mines if it should wish to. But it does also have to pay market value when doing so. Similarly, the country is entirely within its rights to ban the export of concentrates. But it must compensate those who have invested on the understanding that concentrate exports would be allowed.

And the only purpose of arbitration is to make sure that the people deciding upon what the compensation should be are not controlled by the government that will have to be doing the compensating.

That's why these clauses exist in these treaties. Essentially, to make sure that governments keep their word.

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