Giovanni Birindelli (Institut Hayek)
Settignano, 7 April 2006
The idea that progress can be achieved mainly through trial and error, and not through planning or design, has one particular advantage: bad things can be viewed as an opportunity.
Among the many structural problems that afflict Italy, one of the most notorious ones is mafia. Here I would like to argue that even the mafia can be seen as an opportunity.
A few days ago I was reading an article about the results of a survey which reported that 70% of the businesses based in Reggio Calabria (a city of the south of Italy) is victim of "racket" and that the remaining 30% is not for the simple reason that these businesses belong already to the mafia. The most appalling fact reported by the article was, however, that, in the whole year 2005, the number of victims who called the special telephone number set-up by the police to report mafia crimes, and in particular "racket" crimes, was zero (zero) (La Repubblica, 16/01/2006).
Before reading this article, I thought that the "racket" consisted only in mafia threatening its victims to make them pay a regular fee. Apparently not only mafia victims have to pay a fee, but they also have to employ the people that mafia orders them to employ, and buy the goods that mafia orders them to buy (a form of economic planning which today's socialists may envy).
In fact, the south of Italy (which accounts roughly for one third of the Italian population and one fourth of Italy's GDP) lives in a political situation which is even worse than communism in one particular aspect: it is subject not to one, but to two different and conflicting states and to the relative two different and conflicting systems of law.
Not only Italy's south (as well as the north) enjoys the oppression of one of the least free countries of the industrialized world (Italy was rated 42 in the 2006 Index of Economic Freedom), but, on top of that, it suffers from the brutal oppression of a second state, in some respects more powerful and respected than the first one (how could one explain otherwise the fact that 100% of the businesses which do not belong to the mafia are mafia victims and that no one of them called the special number set-up by the police?).
This second state has many of the elements of a regular state: it has its rule of law, its army, its taxes, its GDP, its monopolies, its language, its leaders, its political procedures, apparently its cabinet, it is supported by public opinion, it is respected/feared by its subjects.
However, it has no flag.
This situation is one example of Italy's two layer system: the formal layer saying what things are supposed to be (i.e. the territory controlled by the official Italian government), and the unofficial layer, that is what things in fact are.
It is, however, a very particular form of duality. In fact, on the one hand, as far as the official government is concerned, there is what Bruno Leoni called the "prevalence of non-legislative right on legislative-right, as a form of common-law, not formally acknowledged, but in force" (Bruno Leoni, "la Libertà e la Legge", 1961, p. 199; my translation from the Italian text, apologies). On the other hand, as far as the mafia is concerned, in some areas there is the prevalence of the second state on the first one, of criminal authority on official one.
Therefore Italy is afflicted by a "double duality": the first one within the official state and relative to the contrast between "legislative right" and "non-legislative right", and the second within the nation and relative to the (absence of the) contrast between official state and mafia state.
The magnitude of the first duality (the contrast between "legislative right" and "non-legislative right"), and its damaging power are somehow directly proportional to the degree in which the rules that govern a country are the direct expression of the "design" of the majority of the day, rather than the result of a process of discovery of a spontaneous order of abstract principles based on centuries of trial and error procedure.
The main damage produced by this first duality is the killing of the human spirit, that is of the individual energy and intelligence which often has, as only viable options, either to hide or to be chained, that is, in both cases, to die.
The magnitude of the second duality (the one of the contemporary presence of two states, two authorities) is directly proportional to the magnitude of the first one. Since they are imposed, or made, by the majority of the day at their convenience, and not "discovered", formal rules usually are not felt as laws but rather as commands, often absurd, and therefore often bypassed. Since these commands derive from the majority's desire to protect particular interests, it is impossible to determine the abstract principle they derive from: there is none. Being independent from abstract principles, these commands usually have no limit in number and therefore are unknown to the average person, who therefore considers the state as something between a powerful enemy and a stranger. All this creates the most fertile ground for the criminal state to impose its own authority since there is no principle, no law (intended as the opposite of command), no shared values to oppose it.
Therefore mafia's existence depends, at least in part, on our system of law. I am convinced that, if Italy had a common-law system, the mafia would be much less powerful than it is and probably would not rule the "second state", or the "state within the state", as it does now. The mafia is feeding on the official state's commands. And so is economic stagnation, the lack of individual entrepreneurship and so on.
Probably the two words that, in my opinion, may help to describe the general characteristics of the approach to follow in order to invert this vicious cycle, not only in respect of mafia but in the broadest sense, are "withdrawal" and "abstract": A) withdrawal of legislation from all the areas where it is not proved that it is needed (as Bruno Leoni says, "shifting of the judicial systems' gravitation-point from legislation to other type of production of right", "The fact that the legislation process is, or was, mainly a private matter ... passes almost unnoticed also within the cultivated elite" Bruno Leoni, "La Libertà e la legge", 1961, p. 100, p. 197); B) actual separation between government assembly and legislative assembly as proposed by Hayek, so as to deprive those who have the power to spend money of the power of making laws (that is the rules based on abstract principles whose necessity was proved) and, vice-versa, so as to deprive the latter of the power of spending money. In other words, re-tracing of rules so as to link them to abstract principles.
Of course, changing the system of law of a country is not something that can be done, or should be done, overnight. It took centuries for the English common-law to develop and there are no reasons to believe, in spite of our technological progress (or probably because of it), that it would take less today. Spontaneous orders cannot be "made".
But, in a long-term perspective, I see no reason why we should not try to make a small first step in that direction.
Italy's south may offer an opportunity for such a small, almost insignificant, first step in the same way as a part of the body suffering from a hopeless disease may offer an opportunity to test a new drug which has been proved effective in laboratory and has been tested with success on other patients.
This drug is called flat-tax. An extremely low flat tax (a "super-flat-tax"). That is a non-progressive tax on personal and corporate revenue fixed at an extremely low level with no possibility to deduct any expense whatsoever. The application of this tax would replace all special public subsidies, programmes, agencies etcetera which have been established to "help" the south, that is to pour money into it in a purely charitable way and in the least transparent forms (to use an euphemism).
Of course it could not be emphasised enough that this drug would not be a remedy, but just a first and probably useless step if the body does not want to recover and unless other measures were taken to avoid that public money financed the mafia (such as outsourcing all decisions involving public money expenditure in that area to foreign agencies for example). However, if proved effective, at a later stage it could be extended to the whole body to make it stronger.
On the rationale of a flat-tax system in general, on its results on the east European countries, and partially on its non-regressive aspects, it is definitely useful to read The Economist 3/3/2005 and especially 14/4/2005.
The flat-tax proposed here is, however, at least at the initial stage and until mafia will have been contrasted significantly, much lower than that currently applied with success in the east European countries. The reasons for this are both ethical and economic.
From an ethical point of view, if the mafia controls so extensively and so deeply the territory and the economy of Italy's south, this is mainly the official state's responsibility, therefore the least this can do is to withdraw, that is to avoid adding insult to injury to the individuals and businesses living there. At al later stage, the super-flat-tax could be gradually increased towards the east-European levels (around 19%) as the state would re-gain control of the territory and of the economy.
From an economic point of view, one first reason is that this tax would reflect, as a market price, the situation as it is: that is would take into account the risk and the cost for businesses posed by the mafia (and, among other things, by the lack of infrastructure).
One second economic reason consists in the incentive that this initial super-low rate (with the promise not to increase it beyond a fixed amount, say 20%), would give to international businesses to move to the south of Italy. It can be assumed that these would be mainly large businesses, which may find it easier to relocate and protect themselves against mafia threats.
As opportunity to work in some of these large businesses would increase, young Italians living in these areas would find it less convenient to work for mafia. The establishment of large businesses may start a process of development of a small business service sector, university programmes etc.: more in general, it would start a spontaneous process of economic development. In the long run mafia could loose its main source of appeal: the fact that it provides those jobs that the state doesn't (as if the state's duty was providing jobs and not instead creating the best possible conditions for an economy to prosper).
Of course, the Italian constitution as it is today would probably not allow this: a different tax-system would create "inequality" among Italians. Would it? Is the current situation equal?
I have to admit that I have not investigated this idea from a public finance perspective (that is why I gave no figures for the flat-tax rate), but intuitively I would find it very hard to believe that all the money poured into the south for the most absurd subsidies, the most useless agencies, that all the special and ordinary deductions, all the privileges, all the bureaucracy-related work and costs, all the costs deriving from this under-developed state of the economy, all the missed business opportunities, all the costs related to mafia, all the costs in terms of image would be less, in the long run, than the tax revenue missed on the difference between the current extremely high tax rate on a devastated economy and the extremely low flat-tax rate proposed for a possibly more vital one.
This of course without taking into account the non-financial benefits that could be gained from an economic, legal, and therefore cultural, renaissance whose necessary conditions this small measure may contribute to create.
However small, and, precisely for this, unlikely to give a significant contribution to that renaissance, this measure would be based on conditions as they are, and not as they should be: therefore it is still too revolutionary to be even conceived in a country which would resist any attempt to fight his deadly duality.
This flat-tax system may help to introduce in the mind of Italians a bit of common-sense, which is one of the necessary conditions of common-law.
© Institut Hayek, 2006