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War Torn Iraq and Free Market Capitalism

Economics / Economic Theory Apr 07, 2012 - 01:26 PM GMT

By: MISES

Economics

Best Financial Markets Analysis ArticleIn the course of my deployments to Iraq I learned a great deal about economics, though I didn't realize it at the time. I hadn't yet been introduced to the Austrian School or a Rothbardian view of laissez-faire capitalism. Looking back, however, I can see quite clearly that in several important areas voluntary systems not only existed in that country but thrived.


My first deployment was to Baghdad, that ancient Mesopotamian city positioned on the Tigris and Euphrates rivers. It was there I discovered how, even during the most violent and unstable times, markets can adapt to the needs of consumers and peacefully provide essential services to humanity.

The focus of this article will be on economic provision, rather than the war itself. However, it's important to note that the following free-market solutions have blossomed in spite of being in the heart of a country ravaged by economic sanctions and all but total war. Not only was the US-led war destructive of the physical means to provide such services; it also destroyed the institutions that delivered them, adding to the difficulty in restoring them.

Utility Services

In the United States virtually all utilities are a service provided by government. Whether they are directly controlled by municipal governments or simply regulated to the point of being creatures of those organizations, relatively few cases exist where the market provides utilities unhindered. Baghdad, however, was not so tightly regulated.

Being the capital city, it is home to all of the major government offices and thus has a priority for electrical power; this was true before and after the invasion. However, after a decade of brutal sanctions, followed by a relentless bombing campaign of "shock and awe," the socialized infrastructure was entirely unfit to meet demand. The solution arrived at by the Iraqi people was brilliant.

Taking advantage of economies of scale, residents would pool their resources and either buy a large generator or contract with someone who already owned one. Then a mechanic would be hired to maintain the generator, guarding it against thieves and ensuring it was properly fueled. The more clients a neighborhood had, the lower the consumer cost and higher the profits for the owners.

The one flaw in this system was that fuel was supplied by a centrally planned government agency. As might have been expected, shortages were frequent, leading to power outages. Had fuel been freed from the highly politicized and bureaucratic web of government, there's no doubt an equally innovative and peaceful solution would have arisen to address this need.

Money

Another pocket of freedom that many Iraqis enjoy is in market-based currency, or something similar. After the collapse of Iraq's government, the central bank no longer issued notes for the Iraqi dinar. At this time the Coalition Provisional Authority (CPA), which was the US-lead interim government, began a large-scale influx of the US dollar. Between large shipments of currency from the CPA, and the widespread use of the dollar by hundreds of thousands of troops, its supply quickly increased. And while many thought the result would be large-scale abandonment of the dinar, quite the opposite in fact occurred.

B.K. Marcus describes the result here, wherein the dinar actually increased in value and was in many cases the preferred currency by many in the country. One primary reason seems to be that the value of the dinar remained fairly constant, due to its supply being more stable. But other currencies existed, some fiat-based, others springing from the market.

In another account of the market in Iraq, Edward Gonzales described how in the western region of the country, sheep and bottled water acted as money. Their value floated based on the season and relative quantities of one or the other. While I never witnessed trades made with livestock or other commodities, I did see that not just dinars and dollars were used for exchange.

My second deployment was to the Babel province, south of Baghdad, and the Iranian rial was fairly common there. This was particularly true in the Shia towns and neighborhoods, as might have been expected. I was not familiar with the exchange ratios among the currencies, but all were used in trade. It was not uncommon for a man's wallet to contain two or more of a different states' moneys, even all three at times.

Defense Services

Perhaps the state's longest running and most institutionalized monopoly is that of defense. Advocates of limited government will quickly concede that most services ought to be provided in a free market. This provides incentives for firms to compete for market share, thus raising quality while driving down prices. One service that must be provided by the state, according to everyone from socialists to minarchists, is defense of persons and their property.

Even many who claim to believe steadfastly in free enterprise will concede that defense is the sole purview of government. By doing so they implicitly argue that the same economic laws that govern the provision of trash collection are rendered impotent when applied to defending property. This certainly does not hold water theoretically, nor is it true when applied to the market in Iraq.

In most of the country there were multiple layers of government police and military, and martial law had become the norm. Despite (or perhaps because of) the saturation of the market by government defense monopolists, private services were a valuable commodity. In Baghdad, circa 2005, there were 175,000 US troops engaging various guerilla forces. On top of that, the government's police never bothered with the pretense of scruples and corruption was standard fare. Private security quickly became a profitable enterprise.

It is often suggested by advocates of a free society that, theoretically, defense would be an individual endeavor. So long as individuals are free to own property, goes the argument, they'll be able to arm themselves for protection. This is largely how it played out in Iraq. Each adult male was permitted to own one AK-47 rifle, for personal defense, and gun ownership was nearly ubiquitous. (This allowance was expanded later to allow shotguns for hunting).

As an added layer of protection, many neighborhoods employed night watchmen. These were typically middle-aged men who were contracted by their neighbors to patrol the streets and defend against thieves. Their teenage sons would often assist, and we came to know the groups well. Some took employment in the markets, hired by the business owners to protect commercial interests. Others were posted near residential street corners, keeping a watchful eye on their clients' homes through the night.

These were trusted men in the community, who had found a way to earn a living in a ravaged economy by supplying a highly valued service to their fellow man. They did as good or better a job than we did at securing neighborhoods. Recognizing this, we equipped them with infrared lights, indicating they were friendlies, to help protect them from our helicopter gunships and other units passing through the area at night.

Conclusion

In each of these cases, where proponents of the state argue we must have active government involvement, individuals found voluntary, peaceful solutions to their problems. In spite of the failure by both the Iraqi and US governments to provide essential services, such as adequate electrical power and the defense of property, private solutions quickly sprang up among the violence and disorder. Money too was not something that required a government fiat to make trade possible. The market, unhindered by the state, provided a currency by which individuals could exchange with one another.

Comment on this article.

Joel Poindexter is a student working toward a degree in economics. His writing has been published by the Ludwig von Mises Institute, LewRockwell.com and the Tenth Amendment Center. He lives with his wife and daughter near Kansas City. See his blog. Send him mail. See Joel Poindexter's article archives.

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© 2012 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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