International Conflict and the Democratic Economy

When two nations engage in war, their economies ultimately determine the outcome, but what shapes their economy? While obvious answers include geography, natural resources, population, and technology, a critical but often forgotten factor is their economic philosophy. For example, a conflict between an authoritarian regime running a command economy and a democratic nation running some kind of free market economy, as is the case with Russia and Ukraine.

Since I'm going to be talking about The Democratic Economy, Democratic Supply Chains, and Democratic Companies, I strongly recommend reading previous article, Software Never Needed to Eat The World. Nonetheless, here's a quick refresher:

Democratic Companies have a constitution stating that:

• All employees are issued voting shares across their first 12 months.
• All votes must use the mathematically sound quadratic voting system.
• All current employees are issued non-voting shares (profit shares) each quarter
• A departing employee's voting shares are converted to non-voting profit shares.
• Profits are shared amongst current and former employees based on total shares.
• Salaries are capped at 4x an employee's country's median wage.
• Dividend payouts are capped at an average of 1x the salary cap over 5 years.
• The company "war chest" is capped at 5x annual expenses.
• If the company's profits exceed its caps, it must take action to reduce profit.
• The company cannot sell more than 20% of its shares to raise capital.
• The company can only invest in other Democratic Companies.
• The company must not hold or use any unsanctioned financial instruments.
• Employees cannot work more then 40 hours per week.
• Only humans can be employees of the company.

Due to these financial limitations, Democratic Companies can reach Financial Saturation, meaning they have reached these financial limitations and have taken action to reduce profits.

A Democratic Supply Chain is simply a supply chain consisting entirely of Democratic Companies. A Democratic Supply Chain has the following properties:

• It reaches Financial Saturation when its constituent companies are financially saturated.
• Once saturated,
  • salaries have increased alongside deflation
  • companies in related industries are more likely to achieve saturation

And of course, a Democratic Economy is an economy consisting of democratic companies and democratic supply chains, having the following properties:

• Wage increases correlate with deflation
• Manufacturing artificial scarcity is infeasible
• Monopolies are unlikely to exist for long, if at all
• Improved economic resilience due to reduced consolidation
• Negative externalities are reduced (e.g. pollution, mental health crises, preventable shortages, etc)
• Broad goal alignment between enterprise, government, and people (e.g. quality of life)

With these factors in mind, we must consider how a democratic economy would reorganize systems we take for granted today.

Democratic Re-Globalization

Let's consider the contemporary supply chain of a common household item, the iPhone. Over 600 suppliers across more than 20 countries work directly with Apple to manufacture each and every iPhone. Each of those suppliers have their own suppliers of components and raw materials, most of which come from Africa and South America. And much of the energy and oil byproducts required to create each iPhone comes from oil extracted throughout the world, including from Russia and Venezuela, refined in refineries in China, and then shipped again throughout the supply chain.

The question is, why? Why do we mine raw materials in Africa, ship them to various countries throughout Asia to manufacture components, ship those components to various countries throughout Asia, Middle East, Europe, and North America, then ship those back to China and India for final assembly, and then ship those iPhones back to the rest of the world, all using oil extracted throughout the world and refined almost exclusively in China?

This is vastly different from a company like Coca-Cola which often manufactures its beverages close to the consumer using locally sourced raw ingredients. Put simply, every component in an iPhone is a lot more complex to manufacture and therefore requires a larger workforce. Whether that means deep expertise to design an automated fabrication system, or manual labor performing jobs not suitable for automation.

This means a complicated product like an iPhone requires each supplier to be in some optimal balance between expertise, cost of labor, and cost of shipping. Following the invention of the shipping container, the cost of shipping became negligible compared to the cost of labor. Of course, the result is that each component is manufactured in the location where sufficient talent is available at the cheapest possible price.

Okay, but why? Why can't we afford to manufacture each component closer to the end consumer, like we do with a can of Coke? Essentially, it comes down to exchange rates and relative cost of living. To cut brutally through a lot of bullshit: keeping the majority of the world poorer lets us outsource labor and import deflation.

If wages and currencies were equal, the financial incentives would lead Apple to create a distributed supply chain where iPhones are manufactured in every country they are sold to reduce shipping costs and redundant transportation. Instead, the current system's financial incentives lead companies to consolidate the manufacturing of each component to a very limited number of key suppliers, and in many cases, a single supplier.

It's crucially important that we recognize that consolidation begets fragility. We saw this during the pandemic, and now governments are seemingly obsessed with autarky (economic self-sufficiency).

If the supply chain of the iPhone is simultaneously this complex with so many companies, and yet so fragile with so many single points of failure, what do we think this means for something as complex as a fighter jet, missile system, or drone fleet?

And the problem hidden from view of many people, is that the further down the supply chain we go, the greater the consolidation. In fact, many of the world's rare earth materials are refined almost exclusively in China, as is the case with crude oil refineries.

Our current economic system will always produce this result. Refining, manufacturing, and assembly, will always go primarily to a country capable of supplying large amounts of cheap labor, which then leads to consolidation, which eventually gives that country a lot of power over the countries that exploited them for decades.

The fact is that no country could win a war with China now. They can essentially turn off supply of materials and components required to continue replenishing equipment and ammunition. They can outlast any opposing country. It's an incredibly precarious situation for the world, and about the only disincentive is an economic one, the risk of losing customers for their export economy.

The idea that economic disincentives prevent armed conflict has a sad and alarming precedent of being profoundly false. Most notably, in "The Great Illusion" by Norman Angell in 1909 he argues that, owing to industrialization, war grew so costly to a nation's economy that conquest had been rendered unprofitable and therefore, there would be permanent peace among nations. He even argued that war between Britain and Germany was impossible because German ships were insured by British companies. Of course, just 5 years later the first World War began.

So why did we allow ourselves to walk into this situation? Why would we allow all of our manufacturing to be beholden to a single country? Well, before our current economic system produced this scenario of upstream consolidation in a single country, it produced a different scenario. A scenario wherein one country dominated international trade, and therefore their currency had hegemony, it was the dominant currency used by all countries for international trade. This made their currency far more valuable than others, letting them buy military equipment much cheaper than other countries. This is called purchasing power parity, and it's how the United States maintained its military and economic dominance for decades following WW2. Outsourcing labour to import deflation works just as well with fighter jet components as it does with iPhones, until it doesn't.

Government can't fix this problem by itself. This problem is created by the economic paradigm we've operated under since industrialization – the feudal economy. Just like a feudal state begets conflict, so too does a feudal economy. So why would a democratic economy be any different?

Remember that a democratic economy creates deflation alongside wage growth. Given sufficient time, wage disparities between nations will trend towards a more balanced level, a kind! of homeostasis. This will change the calculus of cost of labor vs cost of shipping – it will start to make a lot more financial sense for raw materials to be refined closer to where they are going to be used. It will start to make more financial sense for components to be manufactured closer to assembly plants. It will start to make more financial sense for assembly plants to be closer to customers.

All of this will mean that our economies will become more distributed and less consolidated. It will reduce the ability for any single country to dominate others. The only legitimate way to reduce conflict is by reducing the disparity between countries and people. The democratic economy does that in every way that matters.