35. An Austrian in Pyongyang!
- Andrei Lankov – The Real North Korea (2013)
- Paul French – North Korea: State of Paranoia (2014)
- B.R. Myers – The Cleanest Race (2010)
- Robert L. Schuettinger & Eamonn Butler – Forty Centuries of Wage and Price Controls: How Not to Fight Inflation (1979)
In today’s seminar, we will host one of our own, Peter Young, who is a regular in the seminar, most of the time. And he has taken the Austrian economics classes on academy.saifedean.com which I highly recommend that everybody take and he is also a bitcoiner who’s studied bitcoin extensively over the last couple of years and has also been producing some excellent content around the web under his handle @TheAustrian3.
Peter has also travelled to North Korea extensively over the years and he has got some very interesting stories to share and I thought this would be an interesting topic for a conversation on this seminar to discuss North Korea from the perspective of someone who has studied Austrian Economics. Looking at the economics of the place, how it is run, because we don’t get a very accurate picture of what’s going on there, and we don’t much get a picture from someone who has studied Austrian Economics and can analyze the economics of the place through the lens of the work of Mises and Rothbard and the ideas of the Austrian school which I believe can be quite illuminating. Peter, thank you for joining us.
Great to be here Saif, thanks for that. Cheers.
Tell us, how many times have you been to North Korea and what have you done there?
I have been living over in China for about ten years. I moved there in 2010 and I have made my first visit to the DPRK as a tourist in 2014. Since then, I have been going on a reasonably regular basis. I have done 9 visits in total. I started out going as a tourist but then I managed to get some work leading towards going to the DPRK, so I have done 7 visits in capacity.
Nice, so what is it like there? General impressions first, before we get into the economics.
When people go to North Korea, they often think about the media coverage they receive and the media coverage tends to be really focused on the threat that North Korea poses, so the missile test and some of the darker side of the country like the network of prison camps that we know exist across the country. Because North Korea is kind of an oddity, there tends to be a big focus on some other sensational aspects of the society. When people arrive for the first time, they tend to feel a sense of relief, like it is a bit more of a light or fun place than they would originally have thought.
When you come out of the airport, typically you are coming in through Pyongyang international airport or the train. When you connect with your guide the first time, because the way in which they do things is a little bit more dated, a bit like you might expect a tour company to offer in the 1950’s. They have a very formulaic way of doing things, there is an aspect of intrigue and playfulness about it that people do not fully appreciate or expect when they are making a visit for the first time. When you travel around Pyongyang there is a big distinction between Pyongyang and the rest of the country, but you do not feel like this is a really poor country, you don’t feel like this is a place where people are struggling to survive. It is a reasonably nice place to look at, the urban environment in Pyongyang.
But of course, once you start to look under the surface of the country you kind of realize that things aren’t quite the same. Things are a lot harder for people. So, it’s kind of a mixed picture. There are some things that people are pleasantly surprised by but there is also a darker side that is there, as a tourist though, it isn’t immediately in your face. I’m happy to talk about both of those two different aspects if you’d like.
Yes, please do.
One of the things that I think has happened in the last 10 years, particularly under Kim Jong Un, as you’ve referred to in your introduction, has been liberalization of the country in certain economic ways. I think it’d be helpful to give a bit of context on North Korea. Just how its economy has functioned historically, how it came about and where it is now in terms of the economic systems we typically associate with communism 20th century. The Korean peninsula was occupied by the Japanese from about 1910. It was a colonial offshoot of the Japanese empire up until the end of WWII. So that’s a very large part of its identity.
After the war, it was split between spheres of influence on the north and south. The north was under the Soviet Union and the south was under US. And as we know there was a very big war that took place between the north and the south between 1950 and 1953. Following that, DPRK started its period of modern history. The state was established in 1948 but a truce between both sides was formed from 1953 onwards. North Korea and SK today are still technically at war. There was never any formal end to that war. Just a truce between both sides.
After the Korean war, North Korea became a soviet supported state. It had its degree of autonomy, but it was very much in the Soviet Union’s sphere of influence. It was receiving a lot of technical assistance from the Soviet Union. It was receiving subsidized commodities, in particular oil, which is very crucial to NK’s economy which we can bring up later in the conversation. Also, spare parts, because the DPRK had a legacy infrastructure for heavy industry, for manufacturing – left over from the Japanese colonial period. Though, they were in a really weak situation, as was the south. Between the 1950’s and the early 1990’s, the DPRK was functioning like the purest form of a Stalinist state that has ever existed.
Some Soviet commentators said that what North Korea had managed to achieve in terms of the centralization of the economy and the amount of control exerted over the citizens was even greater than what Stalin had achieved in the Soviet Union. It was a purer form of VATIN, in a certain way. Things really started to change in the 1990’s when the Soviet Union collapsed and all of that subsidized help it was getting from the Soviet Union dried up. It wasn’t able to get subsidized oil, spare parts into the economy and it experienced a really horrific famine in the 1990’s which lasted from about 1993-1994 through to 1997-1998.
During that period, about 600-900 thousand Koreans died from starvation and malnutrition but one of the things that is very relevant to the economic story today is, the Korean regime was forced to abandon the Stalin model because it wasn’t being subsidized by the Soviet Union and people were starving. This is the period when markets started to emerge from the country. They started unofficially where people would go to the market and trade with each other. It was tolerated because they were in such a dire situation.
Then, going forward, it was allowed to continue after the famine period had passed. Been through some hiccups in it’s development but roughly speaking, it’s continued. Since Kim Jong Il died in 2011 and Kim Jong Un came to power shortly afterwards, they have further increased the marketisation and the reforms in the economy. Including some important agricultural reforms as well.
To give a quick summary, where North Korea is today is somewhere between a Stalinist state and a market economy. I don’t think that in 2021, there exist anywhere in the world, states that are controlled in the way that the Soviet Union, the Soviet Eastern Bloc and North Korea was previously. They’re all hybrids at the moment and North Korea is the most Stalinist of any country. People compare it to Cuba as being another possible exception. I think it’s probably still the most but, it does now have very significant market elements built into the system.
Yea, I think people will usually say that free market anarchism has never been tried. It’s worth noting that communism has never really been tried. The most centralized attempt of communism has never been able to eliminate markets and prices. It just never happened. If you look at any of the examples we’ve had. They may have banned private ownership for individuals but what really happened was, property wasn’t banned. There was still property but it was run by the central bureau, by the central planners.
The central planners still existed in the market because they have to buy and sell things on the international market and they have to run their industries based on these signals. Mises has mentioned this early on in his work, the reason that communism has been able to survive for so long is simply because it wasn’t real communism.
They managed to rely on world prices. When you rely on world prices and when the government is able to trade, sell and buy on the international market you can think of the entire country as the private property of the central bureau. You can think of the people as being their private property. In a sense, markets continue to work, just not well for the property. If you’re part of the stock of property of the owners of the country, things are not working out for you. It works for its real goal of giving those people money, allowing them complete control. They continue to operate in this market economy, but they can’t suspend economic reality forever.
As you said, by the 1990’s it became impossible to deny people market economy because people were just dying. At some point, the regime has to be a little bit responsive to its people. What kind of reforms did they implement in the 1990’s? What was changing then?
In the 1990’s they started turning a blind eye to the practices that started to emerge. As I mentioned, the markets were a big liberalization that was seen, in the 1990’s. Before that, more of the economy was run by the rationing system. The state-run distribution of things like rice and food and basic necessities to people. People look back at the Kim Il Sung era, and part of the reason Kim Il Sung was incredibly revered in North Korea is, relative to where they were ten years ago, Kim Il Sung’s time in charge was quite an affluent period.
That was made possible because of the huge subsidies from the Soviet Union. As you mentioned, there’s never been a fully communist state. They’ve always been elements of markets in every single communist state that has existed. The Soviet Union, after the twentieth party congress and Khrushchev’s rise to power in 1956. They started pursuing a slightly more liberal and market-oriented approach to economic governance.
That meant they were better able to provide international support. The DPRK was one of their big client states. The interesting reforms recently under Kim Jong Un include the way he’s attempted to reform the agricultural center. In 2012 when he came to power, the farming was essentially collectivized. It was run in a traditional Soviet way; people would go to work into the fields and literally everything that they had was supposed to go to the state.
One of the things that Kim Jong Un did is, he allowed formations of work units. It wasn’t acknowledged but these were families working plots. Individual families were able to declare they were a work unit. These work units were able to individually farm small plots and keep thirty percent of what they farm for themselves. You found that in the following after it was introduced, North Korea had its biggest ever harvest.
We saw this stuff happen in China and the Soviet Union as well when they introduce agricultural reforms. It happens everywhere, where you give people autonomy to control the land and to keep some of what they produce. That’s something that has been under Kim Jong Un that’s been quite significant.
As I said, my first visit to North Korea was in 2014, so I haven’t got a long time horizon to compare it to from my personal experience. Even in that period I’ve noticed that life has started to get quite a bit better for people. There are signs on the streets of people with more mobile phones, better clothing, there’s a lot more construction going on. There’s also, under Kim Jong Un, more flexibility about setting up restaurants, businesses and buying property, even though, this is all officially done as state business, if you want to set up a restaurant for example, you’d go to your local bureau and you would put in a request to set up a state owned enterprise, which would be this restaurant and they would say yes, this is what you would need to do’ and you register everything. All your employees are state owned employees.
You effectively pay a fixed rent to the local government based on an estimate of what they think you’re going to make, if you make more, you get to keep it, if you make less, it’s ‘tough luck’ as I understand it. They started to introduce more and more private economic activity. The Korea specialist Andrei Lankov has estimated that of all the economic activity in Korea, somewhere between twenty five and fifty percent of it is now in the private sector. These things are notoriously difficult to put figures on because North Korea doesn’t publish economic data, so it’s ‘finger in the air’ stuff.
If that’s correct though, fifty percent is similar to some European countries. France has sixty percent government involvement. The GDP share taken up by the government in France is 60%. It’s interesting to look at those figures and make a comparison. I do think that that, in recent years, has led to rising prosperity in the DPRK.
When you put it that way, it’s pretty shocking when you think about it. Ultimately, no matter how much the state pretends, the vast majority of the economic production is going to be done by the private sector anyway. All the business services are going to be produced by people, not necessarily in the private sector nominally, but people who have market incentives and have to deal with market prices and their day to day business. Maybe it’s not that different from France or other western economies in that there’s a dead weight of a state weighing on production but there’s still production being made in the real world. Now, in all of their dark communist days, North Korea has always had a currency, they never got rid of their currency, right?
They always have had a currency, but they were probably the state that relied on their currency the least. That was one of the things that, in the early days of the DPRK when you had soviet advisors travelling to the DPRK, surprised them. ‘This is something we didn’t achieve in the Soviet Union!’ they thought, because the currency was always very dominant in the Soviet Union but in the period of 50’s to late 80’s, currency was there but it didn’t play a dominant role. There were state rationing systems – state distribution systems. That was mainly the way people fed themselves.
As they say, there’s this phrase that’s been used, called the ‘Hikikomori state’. Hikikomori is the word that they use in Japan to refer to teenagers that will stay at home and shut themselves in their room and play computer games and they just wait for their mom to drop them some food outside the door anytime they need to eat. They live like that – there’s this phenomenon in Japan.
There’s a writer called B. R. Myers that described North Korea as the Hikikomori state, that’s how it persisted prior to the 1990’s. It did its own thing and it was receiving food at the door from the Soviet Union periodically. When the Soviet Union collapsed, that meant they were forced to come to terms with economic reality and forced to make currency play a much greater role in the economy. There’s never been a soviet state that has completely eliminated currency. It’s always been there in some form or another but North Korea is the one that has come the closest historically even though it proved to be unsustainable.
I don’t know the details very well but I think Cambodia abolished money for a while. They were the ones who went the furthest. Pol Pot, I believe, even blew up the central bank when he took over. He shut down cities and told everyone to move to the countryside. He was an agricultural revolutionary. There are different strands or strains of communism that can afflict countries and a lot of them are industrialized.
We need to make cars and airplanes and refrigerators and catch up with the US and build all the evil capitalist goods that the US builds through evil market competition. We’re going to make them available for the poor people and have the poor people work on them. Then there’s the agricultural aspect, which is more of a Maoist, Khmer Rouge and Cambodia blend which viewed the land as being very important and viewed the communist struggle as being the struggle of the farmer.
The idea was to become independent in terms of food production and for that, who needs cities? Who needs money? They just moved people to the countryside en mass and told them to take up economic production without any property rights. Of course, the consequence of that was, as we expect, mass starvation. I think North Korea came close in that, while the money existed, so much of the economy was essentially things being given to you. These things don’t really have a market. There wasn’t much room for money to collapse or for there to be hyperinflation because everything was being assigned. I’m not sure about their inflationary history but, their currency has not hyperinflations, right?
It did actually, there was a period in the late 2009 early 2010…
Not in the seventies and eighties during the real Stalinist period right?
There’ve been a couple of incidents that have been referred to as hyperinflations, but as you say, the currency wasn’t such a big thing then. These weren’t society-wide massive issues in the way that the 2009 currency reform was. Prior to that, money was more peripheral in the economy, still there but not playing that full-on role.
I think there’s an interesting parallel when you think about the emerging modern permanent crisis economy in the west where we’re always afraid of things and we can’t do anything because everyone has to stay home for whatever reason. You look at how this is going and you can see that you can implement UBI and handouts and free food in a North Korean model. Doesn’t necessarily need to lead to hyperinflation.
If you have an enormous amount of industrial food available, you can assign it to people and ration it to the people. You can control prices and I think we might be seeing, to some extent, this is what’s happening with large chunks of the economies of the west or large chunks of the population that are effectively in this economic situation where they get their food and expenses handed to them by the government under the pretext of a crisis for whatever reason.
It seems like it’s a politically sustainable formula and in a lot of places in the west (Europe, Canada and US), this seems like a sustainable formula. Voters continue to vote for politicians that give them free stuff and that incentivizes politicians to promise more free stuff. In the case of north Koreans, the way that was sustained was through a much bigger foreign benefactor. In the case of the US, it seems like the free part of the economy is going to act as the benefactor in a sense. That tax is taken from people, or inflation from people that are actually producing and saving, is what is going to end up financing this stuff. Interesting how sustainable this is.
Ultimately, you can’t fool the market for so long, people need price signals in order to be working and productive. That’s why North Korea eventually had to liberalize, and they’ve introduced some form of property rights. If we look at the heritage foundation index for property rights, we see North Korea is one of the lowest. In terms of free markets, on the heritage index of economic freedom, it ranks dead last.
It’s still dead last, still has the lowest level of economic freedom of all the countries in the world, ranked 180, Venezuela is at 179, Cuba at 178 and Eritrea at 177. They still have a very long way to go before they are liberalized in any meaningful sense. And yet, they’re still rock bottom, at 4.2 as their ranking which is by far the lowest. The second lowest, Venezuela is still at 25.2 in terms of their index, and Venezuela at 26.9. They are still way behind Cuba and Venezuela. Tells you a lot.
Yea, I’d be interested to look into how they’ve calculated it because as they say, the way that Korean property rights work is very different to what we’d expect in the west. In reality, apartments in Pyongyang, you get a certificate from the government saying you have a right to reside in this property. People pay 100 thousand USD for a nice apartment in Pyongyang, and you basically pay the person that has the permit and you switch the permit around, the transaction is made in cash and people clearly believe enough in the way that their property is going to be protected by the state in order to undertake those transactions.
At the same time, when they’re opening restaurants and small businesses, they clearly believe enough that the state’s going to protect their property rights for them to invest their foreign currency in procuring equipment and other things. Just to mention as we’re talking about currencies, there’s a two tier system in Korea. The one is paid to workers by the state that are working on stay-on enterprises but, the salaries that people get from state owned enterprises are generally miniscule compared to what they can make in the private sector.
A lot of this stuff is done in foreign currency because people don’t really trust the Korean won as a store of value. They also want to procure stuff from overseas. Generally, the USD is used as their store of value and the Chinese RMB is the most frequently used, especially in the border areas in the north where people can trade more easily with China – unofficially. There tends to be this tiered system where people will use USD, RMB and a bit of Euro and Yen in addition to their Korean Won. There’s a seditional complication with the currency system which is worth noting and passing as we’re talking about it.
There are probably some parallels in how you would imagine the growth of bitcoin continuing if you think about the FIAT economy, as it continues to head more and more towards centralization and continues to thrive on all of these crises. Incidentally, Daniel just shared with us, on the Telegram group yesterday, this wonderful tweet from the ECB on valentine’s day, some poem by the ECB twitter account ‘roses are red, violets are blue, we will continue easy lending facilities until we see this crisis through’ or something like that. Its’ very telling because the central bank loves a crisis.
The people that central bankers work with benefit when there’s a crisis. When all you have is a hammer, everything looks like a nail. When all you have is a money printer, every problem in the world looks like it can be fixed by printing money. We’ve been in a world of permanent crisis for God knows how long. First it was September 11th, then it was the global financial crisis, then we moved to the virus crisis, and throughout there’s always the climate crisis, also requiring all kinds of money printing to finance.
This is becoming more and more permanent and if you look around, you see the measures to fight these crises don’t look as if they are emergency measures or temporary measures. They look like they are fundamental structural shifts in how business is going to be conducted in the west in the future. The reality of permanent inflation and permanent monetary easing is becoming normalized. There are always crises and your tv always has you on edge.
There’s a lot of money to be made from crises. you can expect any kind of crisis to be overplayed because there’s a lot of benefit in overplaying it for bureaucrats and for financial entities that benefit from financial easing.
Bringing this back to North Korea. If you think about a few models in which this kind of permanent crisis combines with a UBI model, then you end up with something similar to the North Korea economy where officially everything runs on the national currency, as long as you’re buying in the white market. Everything in the black market is regulated and has fixed prices, but the quality is horrific. If you want things that actually work, if you want to be in a free market, then your best bet is to get into the black market and use black market money -the USD, Yen, Won or any other foreign currencies that are hard money because the local kleptocracy can’t just print more of them. The local government can’t make more of any of these currencies. This is the only way to get out of their arcade economy.
Think of it as an arcade game, they have their tokens and if you want to get anything better than the arcade games that the government gives you, you need the harder money. This might be similar to how we see bitcoin rise, maybe we just continue with this sclerotic welfare states turning into more and more of a North Korean model, with more and more uniformity in everything. Everybody eats the same industrial sludge, and everyone wears the same industrial clothes and eventually everyone marches in the same marches, in lockstep, in order to demand more government handouts. Meanwhile, all the real production takes place with the harder money.
It’s interesting to think about the comparisons between the ECB and other central banks. I think North Korea’s central bank makes the ECB look rather favorable in comparison. Perhaps this is a good time to mention what happened in 2009 with their hyperinflation episode. This was something that was led by Kim Jong Il who was the 2nd generation KIM that was in charge at that time. One of the things that he did was, he was going through this anti-market phase.
As I mentioned, during the 90’s the markets sprang up and they were allowed to continue through till 2009. At this point, Kim Jong Il felt that there was too much profiteering going on in the markets sector. The people were able to make too much money by involving themselves in private activity. The way that he sought to bring them down a peg or two was by revaluing the currency by a factor of 100.
In October 2009, the economic ministry announced in a kind of chaotic and unofficial way, by papers on the fronts of banks, posts on the banks, that there was going to be a reform whereby within a week, they were going to reevaluate the Korean Won. If you wanted to get your hands on the new Won, because the old Won was going to become completely invalid, you had to exchange your old Won for new Won at an exchange rate of 100:1. On top of that, they said the maximum amount you can exchange is the equivalent of 40 USD worth of Won.
Basically, this led to a widespread panic in Korea. There was a lot of protest and within a couple of days, they raised the threshold to 200 USD. Most Koreans didn’t have 200 USD because that’s quite a lot of money for them.
200 USD would be what you hand in or what you take out? To take out 200, you’d need 20,000, right?
100,000 won was the original limit, which was equivalent to roughly about 30-40 USD, which they then increased to 450,000 won and said that this was the total amount that you could exchange, which was worth around 200 USD.
New ones or old ones?
You could exchange up to 450,000 old Won, and you’d get 4,500 new Won. They undertook this and it killed the markets for a few months. There’s very little that’s been done in terms of research on this episode but there’s a YouTube video that shows someone who managed to take a little camera into a market, and they show before and after the episode. The market’s thriving in October 2009 and then it’s completely dead in March of the next year.
They killed the markets there and then they also did the standard things that we read about in “Forty Centuries of Wage and Price Control”, where they introduce fixed prices for things to try to limit the inflation, but these got completely ignored.
They also kept the state salaries at the same rate in the new currency as they were supposed to in the old currency. It effectively amounted to a hundred-fold pay rise for the workers. That’s their thinking. But of course, we all know from economics 101, this activity leads to massive inflation and that’s what they saw. There was a massive reevaluation of the Won. The effect was, prices went back to roughly where they were before but all of the people that held won, had their savings wiped out.
This episode was one of the nearest episodes North Korea has had to having a mass disturbance that might threaten the security of the nation in recent decades. It made people very distrustful of the won and it contributed to people wanting to hold hard currency as an alternative to the won quite significantly.
It’s amazing, these stories. You see so many of them throughout history and they just never learn. That book you mentioned, ‘Forty Centuries of Wage and Price Control’ is a wonderful book. From the times of the Sumerians, Babylonians and the ancient Egyptians, they’ve been doing the same trick. They print money, prices go up and then they figure: “well, if we just mandate the prices have to stay low and throw in jail the people who charge these prices, we can fix it.”. It’s absolutely as brain dead as thinking: “we’re going to make the temperature cooler by outlawing thermometers that read anything above 35 Celsius. If your thermometer shows up at more than 35, you go to jail.”. That’s not going to make the Earth cooler.
It’s incredible how people fail to understand this point. It’s something that we discuss extensively in Economics 11. In terms of the basics of a market economy, you don’t have private property and you don’t really have entrepreneurship, at least officially, but markets find a way. Ultimately, you end up assigning the property in the hands of the bureaucrats that get to tell you what to do. Your local commissar is a partner in every business venture.
There’s no private property but you still run your own business and if you make any money, he gets a share. To the extent that any production takes place, it takes place because somebody is taking a risk with their own property and they’re getting market signals. That’s ultimately what Mises talks about and it’s why that topic which we covered in the first couple of chapters in Economics 12 is really powerful as a tool for analyzing economics.
Ultimately, this is the only way economic production can take place. When you have individuals who own property and can make calculations on it. All that communism does is, it destroys this process and forces that process to emerge in a disfigured way. Emerge it must, otherwise people just starve. Either people starve or they change, in which case, we’re always going to end up with markets emerging everywhere in the world. This is universal, we’ve always had markets, people trading with one another, this is going to continue and we’re always going to have capital accumulation, people who accumulate capital and trade with one another. There’s simply no way of stopping that.
The interesting thing about looking at places in North Korea is that you see this pull towards the center where communistic economies like North Korea have to end up reforming and becoming more market oriented whereas market-oriented economies somehow continue to fall more and more into centralized control and central planning and end up becoming more and more similar to that. There’s private property nominally, but then there’s the local commissar that gets to tell you what to do.
The enormous transformation in the way that modern economies work after the coronavirus crisis is truly, in my mind, historical because it has introduced the local commissar as a business partner, as a normal part of life everywhere. You can’t just have a restaurant, you can’t just open a clothes shop, you can’t just open a shoe shop, you can’t just have a pub. You have to talk to the local health führers and get their permission on how many tables and seats you can have. It’s bundled under safety’s, caring for the elderly and not wanting people to die.
All of these nice feel-good stories also present in North Korea which also fueled workers. The reality of it is whatever the good feels you get from the story, on the ground there’s a power hungry bureaucrat who’s almost certainly never worked a real job in their life, never produced anything worthwhile. As a result of these measures, they get to be a partner in every business. They end up having the ability to command and boss people around and tell them what to do with their business.
The kind of people that are drawn to these jobs, they are drawn to them because they like that thrill. The reason that, if you think about journalists, when you have a topic like football, football journalists are the ones that like football, just because part of their job is going to be watching football. If you’re a good writer and you don’t enjoy football, then all of that time you spent watching football is horrible work whereas if you enjoy football, that part is non-monetary compensation for your job. You’re getting to watch all the football you want and then you do work.
Naturally people are going to end up doing jobs that they like. If your job involves bossing people around, you’re going to be attracting people who enjoy bossing other people around. These people don’t like to give up that feeling. They don’t like to give up that prerogative. We’re likely going to see more and more power continue to accrue to those people under the banner of safety-ism and whatever future crises we’re going to be getting and I’m sure we’re going to be getting many. Everything’s going to be treated as a crisis when there are people who can benefit from it.
We’ve discussed the coronavirus crisis, the most effective measures would be things that you would do individually but nobody talks about those things because they don’t involve more power to the bureaucrats that benefit from them. You see it more and more with all these crises. The only solution is to just have somebody control more and more aspects of your life. More surveillance, more centralized control. Maybe those heritage rankings are beginning to shrink and the distribution in the freedom ranking.
It’s becoming less and less diverse. The world is moving more and more to the center of, not North Korea but maybe 1980’s Yugoslavia as an economic system, not entirely communist but more and more centrally managed.
I think there is something interesting psychologically about the tendency to want to control other people and the kind of self-validation that that gives a lot of people. You do see examples of that in Korea, particularly when you’re visiting certain sites that are state-sites and have an important association with the leadership attached to them.
I’ve seen people that are attending these sites that don’t have a lot going on but their only responsibility is to make sure order is maintained around this site, and they seem to take quite a lot of pleasure in telling people off for not behaving in the right way. Walking with their hands behind their back when they should be by their sides.
There’ve been incidents where Korean guys have been fired because of the misbehavior of tourists on their tours. This is really minor stuff, for example doing a handstand in the square where there are portraits of the great leaders. You do wonder how much of that is associated with people liking having the power and not having a lot going on, wanting to feel like they’re important and doing a job protecting the integrity of the leadership.
You see a lot of positive attributes in North Korea from the North Korean people and that’s something I want to emphasize as well. There are fantastic talented people in Korea that are unfortunately under a bad system. You also do see some of the less appealing aspects of human psychology come through.
I think you’re spot on. These kinds of totalitarian regimes thrive on tattletales, on this part of psychology in people that are not achieving that are given a sense of achievement and purpose by brainwashing them in the predominant story cult. You’ve been a loser who’s done nothing all of your life but now this is your calling. You’re going to be the guardian of the revolution by protecting the revolution from people walking with their hands behind their backs instead of next to them because it’s disrespectful to the leaders.
Most people in the world wouldn’t think that walking by a statute in a certain way is disrespectful and threatening to the revolution. If you’re one of those people who have this kind of personality, then you’re going to see it as a huge deal. Every time somebody does it, it gives you a chance to be dominant over somebody and to use threats of force against them and act morally superior.
It’s really disastrous when you start seeing societies tend to this notion of glorifying people who go around harassing and haranguing others. In the US they call them Karens. People who want to stop others minding their own business, saying: “Excuse me Sir, you should be doing this and that.”. It’s shocking how popular this has become. It’s marketed with a sense of you’re a good person for doing this, and they’re bad for not doing it. It’s a dangerous slippery slope because these people end up thinking of themselves as better.
The most tragic thing about it is not just the power trip, it’s that once you’re on the power trip, there’s no way to rewire your brain and get you to go out there and have a productive way. You can’t just be productive for other people. If you look at the people who do this and the people who are productive, the Venn diagram is two circles that do not overlap.
If you have to be productive and need to do a job, it’s a very different mentality. You wake up in the morning and have somebody to please, whether it’s your customer or your boss. You need to report and deliver to somebody and you know that not delivering means no food on the table, maybe today or a few years down the line. You need to turn up, wake up and be there on time. You need to essentially be a servant. No matter how rich you are and how much you get paid. If you’re productive you’re serving others.
The richest people out there are putting products for people that will like them or hate them. That has to come from a mentality of humility. What do those people want and how can I make their life better? How can I make work easier for them? Can I give them more productivity?
That mentality is in complete conflict with the mentality of the DPRK guards, the DPRK Karens that walk around haranguing people all day. It’s extremely dangerous, the long-term cultural effects. Once you start glorifying it, you think about children growing up in a world where going to your work is a selfish thing. Living in your home is selfish.
On the other hand, haranguing people for leaving their home or for not wearing a mask, that’s heroic. You think about the long run cultural implications of a generation brought up with this mentality, it’s pretty scary.
I don’t think it’s a positive thing to encourage in people, definitely. I am worried about the way in which the recent coronavirus developments have empowered people to start becoming more confident about telling other people what to do regarding what they wear, where they go and what they do in the privacy of their own homes. It’s a really worrying development. Very different in kind to what’s going on in North Korea.
It’s a much more bureaucratic style of control in the DPRK. You need to get permission for everything and there are specific rules. In the UK, we now have certain rules regarding what you can do with the coronavirus which change all the time, are very detailed about who can be in your bubble and how long you can stay in someone’s house for, if you’re bubbling with them, how long you’re allowed outside, what a distance is between you and another person. They’re coming at this from two very distinct and historically different cultural perspectives.
At the end of the day, the laws of economics are the same. The wiring of the human brain is also the same, the sorts of things we want. We want to have status, feel like we’re adding value to society, like we’re respected in regards to who we are. The more you give power to the state, whether it’s for planning and industrial economy or for managing a health crisis, the more you encourage some of the more negative aspects of the human personality.
Very true. Camino is asking in the chat Does private property actually exist outside of the bitcoin network? The system for opening businesses in North Korea sounds quite similar in its essence, to legal systems of more free economies. If you pay the local commissar thirty percent and he gets to tell you a few things, how different is it from paying thirty to forty percent of your businesses income as tax? Having to shut down every time the World Health Organization has a hissy-fit. Doesn’t seem all that different.
Yes, to be honest, that interests me. In China as well, for example, you don’t own property outright, you rent it from the state. You get a seventy-year lease on a new property when you buy one and you trade the property title. The land is technically owned by the state, but it’s a matter of trust. Even in the UK where we have a tradition and association with private property, there’s nothing you can do if the local council says we’re doubling council tax , or we’re going to create double stamp duty, which is the fear we pay a tax to sell our house. They could just double it, there’s nothing you can do.
Ultimately, when you own land, you are renting it from the state even though you think you own it. You don’t have freedom to use it exactly how you want, you have to pay a tribute to the state. One thing I read from Andrei Lankov in The Real North Korea book he wrote in 2014, there’s an idea in the DPRK that you pay a fixed fee. They don’t monitor your revenue very closely to see how much you’ve made. They’ll tend to work out what it roughly is. If you make loads, you can keep it. If you don’t make the money, you still have to pay. There’s a slight difference there. The way it practically works-
Seems like it might even be more incentives compatible with the way it works in the west. In the west you pay income tax, so the more you earn the more taxes you pay. If it was a flat fee, you have an incentive to work harder.
Exactly, yes, that’s an interesting thing. It’s more like a rent than an income tax.
I think it was Milton Freedman who said: “Land value tax: the least-bad tax.”. I can sympathize with that because if everybody has to pay a tax on a piece of land, then you’re not really distorting the economics much. The land will still go to the person who uses it the most. It’s a small level of distortion of the market, but of course it is a distortion in the sense that it makes investment in land less rewarding than investment in other avenues. It can lead to underinvestment in land as a form of capital.
If you think about government as the actual land owner, It’s a more formal way of thinking about property. Ultimately, the police can come and take your property away. Maybe we should just recognize the fact that it is government property and just pay them rent every year so you can use it. Maybe that has a less distortionary effect on tax than taxing income, sales, imports and exports.
Now they’re taxing carbon dioxide as well. Hong Kong had a tax on land only, that was how their system worked before they transferred to China, that financed the fire station and a few basic services. There wasn’t any income tax if I record correctly, right?
Yes. Under Sir. John Cowperthwaite, there was no income tax initially. They introduced a small income tax on people that had over a certain income threshold, which was very high. The vast majority was coming from land tax in the beginning. Even then, the tax in Hongkong was really low. Something like ten percent of the GDP. Hongkong is a phenomenal story. They went from being completely destroyed during WWII to surpassing their colonial masters in GDP per capita around the 1990’s. That’s quite phenomenal, what they achieved. They’ve done that with much less regulation.
The tax code in Hongkong is 1,5 percent the length of the British tax code. It has around 275 pages, whereas the British tax code reads and reads, nobody understands it. In Hongkong they kept things simple, had a simple land tax, and did phenomenally as a result of it. When you think about government really is, we can talk about Rothbardian anarcho-capitalism arguments, but what most would say is that the government is at the very least a monopolist on violence or the use of force within a certain area.
What it essentially does is protect the land. Even though land can have vastly different values because the value is not proportional to the area necessarily. In a way, you’re paying protection for your land by paying taxes on it to the government. I prefer a more voluntary way of doing it. If we’re talking about the least bad taxes in the Milton Freedman sense, it works in the example of Hong Kong. It’s something that we should look into more.
Yes, very much so. It’s astonishing how much Hong Kong advanced over the years when they had such a regime. It’s even more astonishing how few places in the world want to copy them. If you study development, and I have in graduate school, looking at the textbooks they teach, they all want to learn from the examples of industrial planning and governments that spent a lot of money developing industries that worked out and what we can learn from them. In the examples of these industries, one out of a hundred ended up succeeding in the long run.
Very few people want to learn from the Hong Kong example, the lesson that taking your hands off and letting people do what they want will give you something like the Hong Kong miracle. The examples of Hong Kong and Switzerland are brushed under the carpet as unique cases. There’s nothing there to learn for your average Latin American trying to get rich. Your conditions are different from them, you can’t learn anything. Listen to the world bank, borrow and spend a lot of money on giant white elephant projects. That’ll eventually work out.
One country that is copying Hong Kong is Dubai. A lot of people think of Dubai as being just another oil state. Today, Dubai is very different than an oil state. In fact, Dubai itself doesn’t really have any oil income, or very little of it. Other Emirates of the United Arab Emirates still have significant oil income. Dubai’s income is predominantly coming from the city being a global business hub, similar to Hong Kong.
The really smart thing they did was copy the British Hong Kong law into Dubai. A lot of businesses from all over the world are leaving and moving to Dubai because of the tax code, business regulations, rules, laws and the way that the banking systems operate. They’ve copied the best things out of the Hong Kong experience. It’s working out fine. Looking at the Emirates today, it’s doing very well, particularly Dubai. Daniel, you have a question you wanted to ask?
Hey guys, really great conversation, thanks. Peter, one conception we have about North Korea, maybe a misconception, about the civilians and people who live there. Are they allowed to travel or leave the country in any capacity? Is it a myth that they’re all like prisoners there? Just wanted to get some color on that especially as we’re all locked in at the moment and are unable to travel. It would be a nice comparison. Great chat guys, really appreciate it, thank you!
Thanks Daniel. Within the DPRK, one difference between the DPRK and the Soviet Union is that within the Soviet Union you were able to travel around. A lot of people think you weren’t but you actually were able to travel between different parts with relative ease, as long as you could afford to do it. In the DPRK you need a permit to go between towns. You often need a specific reason to do it.
Travel between the DPRK and China has been historically more porous. You have a couple of rivers that run all the way along the DPRK-China border. It freezes over in winter so you can often walk across and do some trade with China or emigrate if you want to.
Under Kim Jong Un, that’s tightened up a bit. Kim Jong Un shouldn’t be seen as an unambiguous liberalizer. He has introduced a lot of economic liberalization. But actually, he’s probably clamped down on people going to China and communications, watching South Korean dramas within North Korean homes. It’s a mixed picture.
There are North Koreans that go overseas, they have their network of embassies overseas. They also have 125 state-owned restaurants in different countries around the world. This is one of their main sources of hard currency. I went to one that was in Yanji – a border town with the DPRK. They put on a Korean show and you can have Korean dinner. They have these networks of people.
The other thing they have is, you may have seen on the news, often portrayed as labor camps in Russia and China where you have DPRK citizens sent overseas to undertake manual work. The narrative you get about these is ‘This is an example of North Korean slave labor, look at how Russia is violating human rights of the North Koreans’. This is quite a big thing, but the interesting thing about it is, these people can keep some of their salary when they go overseas and work.
They actually bribe officials to be allowed to do these. Someone living in the DPRK will typically pay something around 500 USD to get a posting in Russia to go and work there. Russia is a bit more desirable than China because they get more freedom in Russia. Partly because there’s not an established track for defectors like there is in China. There’s a smaller risk of defection if you go to Russia. 200-300 USD to get an overseas job in China is the going rate as I understand it.
What you have with the North Korean population is tightly controlled. If you want to go overseas, its not just: “you’ve been a good citizen and you have cash” , you need to have a spotless family background, going back to your grandfather. If your grandfather was a landowner, or viewed as a part of the hostile class – they called them within the Korean Songbun system, then it would be much harder for you to get any overseas posting.
They do have minor ways that Koreans can go overseas. With China as well, there is a more general movement of people, but it’s mostly people that are high up – people with cash that have a good family background that support it.
Camino has a question about bitcoin in North Korea, you have any idea what’s going on there? Is it being used? We don’t want to get anyone in trouble with too much information but if there’s anything you can share please do let us know.
Bitcoin in the DPRK came up in the news. In part because it’s something that the regime is interested in. The most prominent example of it being in the news was the WannaCry episode that happened a few years ago. A malware was sent to different computers and the DPRK is thought to be the origin of that virus as it would be a way of gaining funds. That’s one negative aspect.
There’s also been speculation in the media about mining of bitcoin in the DPRK. I hear mixed things about it. I’m personally quite skeptical that any of it is done on a mass scale in the DPRK. That’s partly because the DPRK has such a severe energy shortage. It’s not a place where you go if you want cheap energy. What you do have, however, is people that they train to do whatever they want in a way that is often incredible to behold.
If you go to one of the schools, in Sinuiju or Pyongyang, they will showcase the ability of children to play the violin or the piano. The skill that they’re able to develop because of their dedication, resources being thrown at them for doing it, is really phenomenal. The same is the case with computer hacking.
There’s a unit within the Korean military which is suspected of being responsible for a lot of big hacks that have taken place. The Sony hack back in 2014 around the film that was made about Kim Jong Il called The interview . They were supposedly responsible for that. There’ve been some hacks that have taken place. A big hack that was on a South Korean cryptocurrency exchange a couple of years ago. The DPRK are thought to have been associated with that. They also tried to run some conferences.
There was a conference hosted there a couple of years ago, can’t remember its exact name but it was a cryptocurrency conference. Some people got into some trouble as a result of attending that. There was a guy that was involved with Ethereum called Virgil Griffith, who ended up getting arrested in the US after he went back due to his involvement in this conference.
The DPRK is quite interested in cryptocurrency and bitcoin in general. Do they own bitcoin? It’s possible that they do, but I reckon it’s not gained through mining. It’s probably gained through hacks that they’ve done. Although the WannaCry episode is only thought to have generated about a hundred thousand USD in actual people paying, whereas the crypto exchange in South Korea was quite a big sum, in the billions I believe. It was quite a big hack.
There is this interest in the DPRK and they want to try to get around the US sanctions anyway they can. Like most things, it’s very hard to know what they’ve done and exactly what’s happening behind the curtain. A lot of the activity is probably for good reasons shrouded in secrecy.
A lot of people say that the problem with bitcoin is it’s going to end up financing and subsidizing all these totalitarian regimes that will get into it. I can see the point. A lot of enemies of the US are not pleasant people and they’ll resort to bitcoin out of necessity and will hold it, use it, mine it maybe.
I try to console myself with the fact that these people are the highest time preference people in the world. Being in these positions of power, no matter how much bitcoin they’ll have, they’ll always have a short-term outlook on it. They will always be spending it very quickly. They might benefit from it in terms of being able to get around censorship of the US, in terms of evading sanctions, but I can’t see them benefiting significantly from bitcoins unique and proprietary number go up technology because that requires a low time preference for which you need to have money you can spend and just sit on it.
I’m optimistic we won’t end up in a world in which despotic leaders have the biggest stashes of bitcoin. No matter how much bitcoin passes under their hands, they’ll always be selling it and moving on, at least I hope so.
I think bitcoin is just a really powerful tool and wherever you have powerful tools, people are going to try to use them for good and bad. The DPRK regime would love to have bitcoin and it would love to have means that it can get around US sanctions. That’s just part of the reality you have.
Ultimately, it just comes down to the ethics of the people involved. If you knew you were supporting something nefarious in the DPRK, would you be involved with it? I think that’s a question individuals have to answer for themselves. You can also argue that in general, the sanctions regime in North Korea doesn’t really help things. Revolutions throughout history don’t happen when the population is really poor. People are at that point fighting for survival. If they don’t get their government rations, they’re going to die.
It’s not quite that desperate in North Korea at the moment. As I mentioned, things are liberalizing but sanctions tend to hit the people really hard in a way that is not helpful to seeing Korea reform. It also gives the pretext for the North Koreans to say: “The reason you’re poor is because of the imperialist US who have placed sanctions on us, not because we mismanaged the economy”.
This is a bit controversial to say but I do think that if the US stopped the sanctions and took its military personnel out of the south, that would undermine a lot of the narrative in the north. At the moment they can say: “Look at these southern lackeys protected by the US, we need to have all this military funding in order to counter that’. The other thing they say is ‘The only reason the south isn’t liberated by the north is because they’re coerced by the US into not joining the north”.
If the US leaves, then that excuse goes away and they have to acknowledge that the reason the south isn’t unifying is because they don’t want to be ruled by the Kim leadership.
It’s a tricky one, I can’t remember quite what it was but there was a passage in Man, Economy and State by Rothbard where he writes about the different areas of praxeology and catallactics is the area involving free exchange. There’s another area he called the praxeology of violence and how it works.
That sort of area is an interesting thing to explore, theoretically. When you’re talking about the dynamics of violent military powers and who should do what, it is quite a tricky thing to analyze. I’m just sharing my personal feeling on what I think would be a good thing for the Korean people and also to delegitimize the harmful narratives in the north.
I think the experience of Iraq and other places in the middle east suggests there’s a lot of truth in what you’re saying. It sounds like the sanctions were going to put pressure on the government which is going to give the government a hard time. It’ll have a loss of legitimacy. In fact, it seems like it has the opposite effect. It legitimizes the fact that they’re up against the US as if they’re out there resisting the US. It also excuses all of their behavior.
Whatever it is that the North Korean regime can do, if you oppose it you’re obviously just an American lackey. The sad thing about it is, the sanctions mean that everything coming in and out of the country becomes heavily regulated and supervised. That ends up benefiting the people in the government – the people who can bring things in and out, the ones that can control it. It ends up concentrating money, power and resources in the hands of those who want much more, unfortunately. You would take that away if you removed the sanctions, probably.
That’s an interesting point, it becomes a more bureaucratic thing to engage in international trade and the centralizing tendencies of it. Haven’t really thought about that.
Anybody else have any more questions? Anything you want to discuss? Alright well, thank you very much for joining and thank you Peter for this, it was enormously interesting and beneficial. Thank you for joining us again!
Great to be on as a guest Seif, really enjoyed this.
Cheers, we’ll see you on our next seminar on Thursday.