Apple, Ireland, and the EU: First Steps Towards Self-Regulated Competition in Corporate Tax Rates Among Nations (Part 1)

“Liberty is not the power of doing what we like, but the right of being able to do what we ought.”

––Lord Acton

FACTS
  • apple-ireland-euThe EU has requested that Apple Inc. pay €13.5 billion to the Irish Treasury, citing back taxes unpaid during the past 10 years as the reason behind it.
  • Understandably, Apple is going to appeal the EU’s request, arguing not having broken any law and regulation in Ireland. Apple opened its first Irish office in Cork, Ireland in 1992, based on the very attractive incentives for new investments, including lower corporate tax rates than the rest of the developed world. It didn’t take much time for Apple to headquarter all of its European operations in Ireland. If Apple does not appeal the multi-mentioned ruling, it would mean a gigantic setback for the company and the destruction of a 25 year-old business structure.
  • Naturally, the Irish government does not have the slightest interest in accepting any back-dated corporate tax for the reasons argued by the EU. The 12.5% Irish corporate tax rate, one of the lowest in the world, has attracted a myriad of global corporations during the past 25 years. If Ireland were to proceed in accordance to the ruling, a fundamental pillar of the uber-successful Irish economic model would collapse, on top of the severe reputational damage infringed in that instance.
  • Ireland joined the EU on January 1st, 1973. By the end of the 80s Ireland had launched an economic liberalism program inspired in Singapore, aimed at pulling-out the country from the dire economic situation it had (one of the poorest nations on Europe, at that time). One of the major features of the economic program launched was the very low corporate tax rate, looking to entice foreign investors. This liberal economic program has been so successful that, according to figures from The World Factbook, in 2015, Ireland’s per capita purchasing power ($55,500) almost equaled that of the US’s ($55,800).

The following table presents per capita income of 15 select nations, in order to have a better basis for comparison. It is important to consider that by the end of the 1980s, Ireland’s per capita income was lower than Portugal’s, then and now one of the poorest nations within the EU, along with Greece.

select-countries-gdp-per-capita-2015

Understandably, the Irish government has no intention, whatsoever, to accept any payment from Apple, nor from any other large global corporation established in its soil in order to take advantage of the very attractive Irish business atmosphere which, among other incentives, has a 12.5% corporate tax rate, one of the lowest in the world. Otherwise, one of the most fundamental pillars of the Irish uber successful would collapse, with a huge reputational damage inflicted.

Evidently, the Irish government’s strategy to fast-track its population out of its laggardness and poverty was very successful, to such an extent that nowadays, Ireland is not only one of the richest countries in Europe, but also one of the richest in the world. This is truly important. There is no way to overestimate this factor.

IS PANDORA’S BOX ABOUT TO BE OPENED?

Although the aforementioned facts are very concrete, the possible number of interpretations isn’t. Beyond legal considerations (how the internal agreements and the assumed commitments are written, in order to see if Ireland didn’t comply with the EU’s laws and regulations) the essence of this matter is of a more economic, moral and governance nature than a tax matter.

The tax aspect of this matter is just an excuse, a smoke curtain, which focalizes and uncovers something much bigger and momentous: the current limitations of free markets.

As previously exposed, in essence Ireland has followed Singapore’s steps. A couple of originally very poor nations that constructed spectacular competitive advantages for themselves with a very wise strategy:

  • Profound deregulation of the economy,
  • Fully enforced and respected property rights,
  • Very clear and consistent laws and regulations,
  • Corruption repudiation,
  • Very low corporate tax rates,
  • True openness towards foreign investments,
  • Great ease to open/close a company,
  • In summary, all the attributes that the Heritage Foundation Index of Economic Freedom, and/or the Global Competitiveness Index of the World Economic Forum emphasize as the fundamental aspects of an efficient and virtuous government administration.

The EU as well as the rest of nations on Earth fear the possibility of an authentic war of lowering taxes among nations, since once in progress, it would mean the end of the liberty of congresses to manage government budgets. In particular it would mean something not far from the end of congresses’ discretionality in assigning who gets what, as we know it today; instead, congresses would be hand-tied in this foremost aspect of governance of nations. Ironically, from a purely external phenomenon, a most critical and coveted aspect of internal politics would be severely (and most virtuously) affected.

A global competition where many nations were both actively and aggressively fighting to lower their taxes, thereby attracting more foreign investments, notwithstanding the great net benefits for global society. In the short term it would create a sizeable disequilibrium in the public finances of many nations, which would force them to begin a profound re-engineering of costs and processes.

Moreover, even countries not actively seeking to lower their tax bases would be forced to do it since, otherwise, the loss of companies headquartered in those nations fleeing to more hospitable tax environments would do it.

As it can be seen, the implications of a strict adherence to the policy and practice of free competition among nations seeking to outdo the rest with low taxes are impressively large, with humongously favorable benefits.

The great virtue behind mankind moving towards a truly free tax competition among nations is that, thanks to double-entry (the fundamental principle behind accounting, as a professional discipline), the lower the tax base, the lower the capacity to finance public expenditures, which would force nations under strain to be austere, efficient, and effective in the use of public budgets, thereby withdrawing congress’s huge discretionality in deciding where and how much to spend.

Free markets would achieve the authentic discipline and fiscal austerity that citizens all over the world have been looking for during centuries. More on this topic in next week’s Part 2.

Brexit: What’s Next?

Brexit

Very few international events throughout both, mankind’s history and the history of financial markets have achieved a cause/effect reaction so unmistakably clear as the one produced by the Brexit vote on June 23rd, and the effect it had over the next couple of days, after 43 years of having been a most prominent member of the EU.

Friday 24th and Monday 27th’s reaction throughout global financial markets was unequivocal: stark disapproval of the result (record fall in Sterling –to a 30-year low–, a strong fall in most currencies –except the US dollar, and the Japanese yen–, a sizeable fall in the world’s equity markets –particularly acute in the UK and the EU–, flight to safety –a strong rise in the US bond markets, and less so, but still noticeable in the Japanese–, strong rise in gold, etc.), coupled with nervousness and uncertainty because of the new era that, in all probability, such an event can end up signifying, not only for the UK itself and the EU, but for the world as a whole. Near paralyzation of new business ventures and of new hiring, and many business decisions in general are almost guaranteed to occur and will last while confusion and uncertainty prevail for a few months, in the best case scenario.

Almost at once, the rating agencies, S&P and Fitch, degraded the credit quality of the UK’s debt, losing the highly coveted AAA rating; furthermore, the outlook of it’s debt changed from stable to negative. The price of British banking stocks (in USD) with heavy exposure to the British economy (Lloyds, Barclays, and RBS) lost slightly over 35% of their market capitalization in just two work days; the stock price of HSBC only lost 12.9%, given that it is a truly global bank.  All of the previous reactions are not only very logical, but also extremely painful, costly, and regrettable.

There are multiple reasons that make the British’s vote outcome an egregious mistake. Without going into detail, the regrettable outcome can be summarized in one concept: there is strength in unity, weakness in division. The loss of such an important and momentous membership, as that of being an outstanding member of the EU, will inevitably bring very costly and onerous consequences for the UK.

Most of the time, the coordination of multinational efforts towards a common goal typically generates great benefits among the participant nations. The formation and launching of the EU has been the economic, social, and political project of nations of utmost importance and reach in human history, up to date. The separation of one of the most prominent and influential members cannot, in any conceivable manner, bring about health and well-being among the member nations, and more so for the UK, the nation that unilaterally has decided to withdraw from such a far-reaching and meaningful economic, political, and social endeavor.

In addition to the immediate uncertainty and nervousness brought about to the whole world by the multi-mentioned decision, the most likely outcome in the near future is a substantial decrease in investment (local and foreign), employment, and competitiveness in the UK (all three caused by the paralyzation and postponement of key business decisions), along with many other costly and painful economic and social implications associated to this process.

The economic integration of the UK with continental Europe is truly substantial, since 50% of the UK’s total exports are forwarded to the EU. Up to now, thanks to the common market, those exports are tax-free.

The exit agreements can take a few years to be arranged and fully implemented, hence, the big (mostly legal) changes to the rules of the game will not go into effect immediately. Nonetheless, companies within the EU that purchase products and services  from the UK are not going to wait until the new rules are clear and enacted. In no time the EU companies will start to replace their British suppliers with companies from other nations, even among themselves. This will imply, for a great portion of British companies, a substantial drop in sales, employment losses and a very likely recession, just the opposite to what the Brexit voters are expecting and looking for.

Contemporary national economies are complex and delicate mechanisms, yet with relatively clear and logic rules of the game, at least in their essential processes and interrelations. No one in their right mind would dare modify them without an appropriate causation knowledge. Quite regrettably, a dysfunctional interpretation of the current democratic system makes it so, that a decision as momentous as the one being analyzed can be in the hands of the general population; a population that is essentially void of the minimum foundations required to make a well-informed, mature decision. Indeed, it doesn’t make any sense to expect people to give reasonable answers to binary questions in very complex subjects which they don’t really comprehend.

The UK has been an advanced nation, a leading country, one of the nations that in more than one way has been a role model for the rest of the world, a pillar of the new world order after WWII. The UK managed to transit with great dignity and integrity from being a hegemonic economy, the largest on Earth during the 18th and 19th centuries, to become a large second-class economy, basically circumscribed to the English island, yet with great world influence because of its history, pride, traditions and globalizing spirit. Previously, the UK showed the world how to move from an absolutist monarchic regime, to a parliamentary democracy, with no wars during the process. The UK is the cradle of Adam Smith, the father of economics.

Two former Prime Ministers, John Major (1990–1995), and Tony Blair (1997–2007), both from rival parties, campaigned together in favor of the Remain camp. Likewise, so did all business people (officers and major shareholders) of the companies engaged in exports to the EU. In an analog manner, all governments of developed nations, with no exception, the IMF, the Bank of England, and many other institutions, unequivocally expressed their desire for the UK to remain within the EU. Hence, the referendum result can be interpreted as a popular revolt against expert knowledge, and institutions.

Brexit is a perfect example of what professor Robert N. Proctor from Stanford University describes as “Culturally constructed ignorance”. Proctor has coined a term for this social phenomena: agnotology, describing it as “culturally constructed ignorance, created by special interest groups to create confusion and suppress the truth in a socially important issue.”

Who, in their right judgement, deliberately and unilaterally breaks up with one’s main trade partner? This is the equivalent of shooting oneself in the foot!

Granted, the events under analysis will take many weeks and months to sufficiently permeate throughout the British economy and society before being able to emit a more definitive judgement, one supported by additional real, statistically proven facts. Nevertheless, the cascade of mostly negative effects for the UK will inevitably be materializing almost by the day. The negative impact of Brexit can go beyond the UK and the EU, with clear implications and greater risks in national and international security issues, and anti-terrorism endeavors.

“The more things change, the more they stay the same.”                                                            –Jean-Baptiste Alphonse Karr

The global political system is in a crisis. The way nations are governed has been essentially the same over the past 240 years, since the formation of the USA. The world’s political system is exhausted, highly dysfunctional, and in dire need of profound changes to be a better match for current challenges, needs and opportunities. Among many other pieces evidence (political gridlock and procrastination all over the world, etc.) the multi-mentioned British experience is a classical example of this.

The previously mentioned global political crisis has naturally generated a great deal of disenchantment and ill-feelings in significant portions of the world’s population, including those of developed nations. Hence, this background has been a very fertile field for the coming-to-being of demagogues, populists, and irresponsible politicians that have greatly contributed to a marked social polarization during recent years. This is the primary reason of the proliferation of unpropitious and threatening characters like Donald Trump in the US and Marine Le Pen in France, among many others.

A quick breakdown of June 23rd’s results says a lot about the ideological, geographical, and generational divisions of the British population:

  • In the city of London, close to 75% of the vote was for Remain. It is evident that the financial and service sectors in general, mostly based in London, with a majority of educated population (many young professionals), is highly oriented towards an integrated Europe, as well as towards a global economy.
  • In Scotland, the Remain vote was a solid 62%. Notwithstanding the Scottish separatist movement, there is a clear preference towards integration, against isolationism.
  • By segmenting the vote by age, citizens below 35 years old decidedly (close to 75%)  voted to remain within the EU. Senior citizens were the ones also decidedly (close to 75%) in favor of Brexit.
  • In Gibraltar, with a minuscule population, the preference to remain within the EU was impressively above 90%.
  • Small, rural and postindustrial populations were also clearly in favor of Brexit. This seems to be a reflection of the great fear felt by having been left out of the big globalizing wave engulfing the planet.

In summary, small town inhabitants, and senior citizens were the ones that, on the average, tilted the balance in favor of Brexit.

Brexit-1The referendum decision made on June 23rd, possibly opened a huge front; one that, if appropriately managed, can generate big benefits for the world as a whole, at the expense of the UK’s citizens. Hopefully, other countries around the world have learned from the UK’s experience. It requires a better understanding from global society of how not to do things and why. Alternatively, a new era of great socio-economic and political convulsion and divisionism will come to being –a true global nightmare. Naturally, there is plenty of room for all sorts of intermediate outcomes. Let’s hope that the first possibility prevails, for the progress and wellbeing of all nations on Earth.

It seems highly unlikely that most of the British electorate had an objective idea, reasonably complete and balanced, about the momentous implications and effects of both alternatives under the ballot, and particularly about Brexit. If this statement is true, then we have a case of momentous decisions in the hands of populations insufficiently prepared to make them, causing  huge and irreparable damage. Undoubtedly, this is one of the great tragedies (and areas of opportunity) of the current global political system.

Is there any possibility of Regrexit, that is, to reconsider the catastrophic outcome of June 23rd’s vote? Nobody knows. However, there are some beams of light in that direction:

  1. An initiative was made public several weeks before the vote, requesting two conditions for the referendum to be valid; understandably, this initiative is now asking the result to be annulled:

• A minimum of registered voters turnout of 75%.

• A minimum of 60% of votes for the winning side.

According to British rules, in order for Parliament to consider and analyze a proposal, a minimum of 100 thousand citizens must be behind any petition. By the evening of Tuesday, June 28th, over 3.5 million registered British voters were already behind the annulment initiative.

In both accounts, the vote of June 23rd fell short. The total number of citizens voting was slightly over 70% of registered voters, and Brexit won with only 52% of votes. Total number of votes for Brexit was slightly over 17 million.

2. On June 26th, Angela Merkel’s chief of staff stated that the British government should reconsider Brexit.

3. In an open letter published in the Daily Telegraph on June 27th, Jeremy Hunt, the UK’s Health Secretary, proposed that before the new Prime Minister presents the formal withdrawal of the UK from the EU, the UK should seek a special agreement on immigration with the EU and, if reached, a new referendum on the permanence of the UK within the EU should be made.

The number of possibilities on the UK’s exit from the EU is very limited. Nonetheless, there is still a paradoxical and interesting possibility: that the UK negotiates with the EU a similar deal to the one existent between Norway and the EU (or even Switzerland’s). In essence, Norway’s arrangement with the EU implies a virtual belonging to the union, with most of the benefits of membership, with similar economic contributions, yet without vote and voice in the EU’s decisions.

Naturally, if the UK ends up in an arrangement of this nature with the EU, it would be a big hoax, a most regrettable consequence of June 23rd’s vote. Ironically, Brexit itself is so costly that, even a Norway-like arrangement would still be far superior than Brexit.

It is very difficult to find a positive outcome from June 23rd’s voted decision in the UK. Interestingly, there is an extremely valuable one: To learn from others. If enough rationality surfaces around the world in the days, weeks, and months after June 23rd, radical anti-globalization movements should be highly discredited, once the costly and onerous effects of that vote are fully acknowledged by the rest of the world. Hopefully, the Brexit experience will provide effective armouring against ignorance, demagoguery, and populism.

Unfortunately, there is also a very worrisome possibility: if the vote results are not appropriately assimilated, it could generate an era of nightmares in the world, where separation, divisionism, and instability, would be the prevailing sign of the times.

In essence, on June 23rd, the UK’s voters chose between unity, fraternity, and solidarity, versus division, isolationism, and confrontation (the anti-institution, anti-expert knowledge vote).

There is no doubt about the great deficiencies and imperfections in all human institutions. Understandably, the EU is a work in progress, imperfect, unfinished, yet essentially functional. The EU has been providing huge benefits for each and every one of its 27 members, but also has an enormous potential for improvement.

David Cameron’s government took a great risk and lost. To have called a referendum in such a complex and polarized subject as the UK’s relation with the EU proved to be a catastrophic error. As a result, regardless of possible arrangements that avoid an altogether Brexit implementation, the UK has incurred a huge reputational damage and has lost something that had cost it many decades and two world wars to achieve: an enviable level of stability and predictability. Most regrettably, these very valuable and virtuous attributes have been lost in a most damaging and foolish toss-of-a-coin.

History shows that, most of time, the best way to progress is by improving established social, political, and economical institutions, and the way of doing this is by constructively working from the inside. Radical divisionism that pretend to undo the long distance already walked without providing functional solutions in exchange should be vanished forever.

Brexit has brought to light a crossroads that the world is on. Countries must choose between opening up, looking for associations, and solidarity with other nations Vs. closing up, constantly looking for separation, and isolationism. Indeed, this is the current version of the classical debate between the Enlightenment ideals and many of the most deplorable practices of obscurantism of the Middle Ages. These ideological confrontations should have already been overcome by mankind. Sadly, this is not yet the case.

Not surprisingly, the UK’s divorce from the EU goes against the most fundamental spiritual and religious principle: Love thy neighbor. Undoubtedly, love, reconciliation, and solidarity will always be a far superior alternative to hatred, resentment, and fragmentation.

The EU, Greece, and the Perfection Syndrome

Color-Greece-debt-EUDuring the past few months, and particularly during the past few days, an avalanche of articles have been published about the most likely future for Greece and especially of the European Union, if Greece gets out of the EU and of the Euro Zone.

The Greek crisis has resurfaced this week as a result of the abandonment of negotiations between the Greek government, the EU, the IMF, and the ECB, and the call for a referendum on the EU membership by the Tsipras administration. The most likely wording of the question to vote on will not be as clear as previously stated. However, at the end of the day, the fundamental question that Greek citizens will reply to is a ‘Yes’ or a ‘No’ to the continuation of its membership to both the EU and the Euro Zone, with all the benefits and responsibilities it implies.

There are many angles in this hot topic. However, scarce attention (if any at all) has been paid to a fundamental element: the EU, like all human creations, has never been close to perfection; understandably, it never will. This simple, axiomatic principle seems to be lost in most arguments that have already kissed the EU project goodbye.

Granted, if Greece leaves the EU and the Euro Zone, in most likelihood it will be viewed as a major setback for the EU, and rightly so. Nonetheless, not necessarily a fatal and insurmountable one. Reiterating the obvious, the EU was not designed and constructed under the perfection premise.

There are plenty of instances in history where major recoveries have been achieved from apparently dead-lock situations. If Greece abandons (or is forced to abandon) the EU and the Euro Zone, there are good chances that the European integration project will continue and eventually gain strength, by learning very valuable lessons from the misfortunate Greek experience.

Let’s hope that reason and common sense ends up prevailing among most of the Greek citizens this coming July 5 so the Greeks will cast their ballots in favor of remaining a part of the EU.

FIFA’s Scandal: Death by Corruption?

corruption-schoolFIFA, the international football federation (soccer), has been shaken to the core by the recent indictment of the US Department of Justice, where 9 high-ranking officers of FIFA (the chairman isn’t one of them) and 7 of them were arrested with charges of racketeering, wire fraud and paying bribes worth more than $150m. On a parallel note, it was also disclosed that the government of Switzerland is also investigating the procedure whereby Qatar was awarded the World Cup in 2022.

Granted, the aforementioned indictments are just a preliminary stage of a most probably long judicial process. No sentence has been issued. Nonetheless, the US Department of Justice, despite its human limitations, carries a great deal of global credibility, whereas FIFA’s handling of business affairs doesn’t; quite the opposite.

FIFA has been a prime suspect of systemic global corruption on a grand scale for decades.

Any organization where:

  • Transparency and accountability are not fundamental,
  • Coupled with the generation of sizeable cash surpluses,
  • With no owners

As is FIFA’s case, prone to excesses. In other words, governance at FIFA is very poor. Moreover, it seems to have been a deliberate issue, to facilitate the opaque way in which it is handled.

A point in case is the weights implied in the voting system. FIFA is composed of several regional confederations, encompassing the whole planet: UEFA (Europe, 53 votes), CAF (Africa, 54), CONCACAF (North, Central America & The Caribbean, 35), COMMEBOL (South America, 10), AFC (Asia & Middle East, 46), and OFC (Oceania, 11).

There is no question where the largest market for soccer is: Europe. That’s where most of the best players are, where the most valuable clubs operate: Real Madrid, $3.4 billion;  Barcelona, $3.2 bn;  Manchester United, $2.8 bn; Bayern Munich, $1.9 bn; Arsenal, $1.3 bn; Chelsea $ 868 million; Manchester City, $863 m; AC Milan, $856 m; Juventus, $850 m; and, Liverpool, $691 million. Despite it, UEFA, the European confederation of soccer, has a grotesque subrepresentation since Africa, for instance, has one vote more than the UEFA. South America, the cradle of many of the best players in the world (Messi from Argentina and so many luminaries from Brazil) likewise is outrageously underrepresented, as can be seen in the previous paragraph.

Another very worrisome signal is the permanency of the chairman of the board in that position. Through 3 re-elections, Sepp Blatter already has been at the helm for 17 years (he was first elected in 1998), notwithstanding his most recent re-election, the fourth one, whereby he is programmed to maintain his post until 2019. Never mind that he already is a 79 years old, not exactly the ideal age for that kind of responsibility.

The amount of money managed in world soccer is several tens of billions of dollars a year, in sponsorships, advertising, television rights, memorabilia, among the most important subjects. To put things into a proper perspective in this point, in the four years concluded in the 2014 World Cup in Brazil, FIFA’s revenues were $5.7 bn.

A highly unregulated, opaque and essentially unaccountable non-profit organization, like FIFA,  at the center of a uniquely profitable ecosystem is an easy prey of corruption in many ways and forms. Soccer is a global phenomena. In the absence of effective global governance, the US DoJ initiative must be applauded.

The non-profit denomination of any organization frequently is a source of confusion regarding the internal management of funds of that type of entity (see Globalization and The Olympics). For practical purposes, the non-profit status simply means that these organizations are not subject to income tax. However, that fact in no way means that they can’t be extremely profitable organizations, able to amass vast amounts of wealth in their day-to-day engagements. Of course, this capability only  refers to the relatively few non-profit organizations that are financially self-sustainable, like hospitals, universities, and yes FIFA.

In order to avoid confusion, it is very helpful to visualize the financially self-sustainable non-profit organizations like entrepreneurial non-profit entities.

From another angle, the non-profit legal status simply means that surpluses are not classified as profits, from the legal and accounting standpoint. Since non-profit entities have no shareholders, the surpluses generated cannot be distributed as cash dividends.

FIFA has an extremely profitable and powerful business model, mostly based on being a monopoly of the world’s most popular sport.

fifa-corruption-cartoon-beelerIn FIFA’s case, vast surpluses are generated and surely, a significant proportion of them, are distributed among the inner circle in the form of (very high) salaries, fees, perks and all sort of fringe benefits. Moreover, the temptation to bite those surpluses by the mostly unaccountable FIFA officers before those funds officially get into FIFA’s accounting system is ever-present, and a very powerful human force. If poor accountability and a very opaque system is in place, all elements for rampant corruption of all sorts is very evident.

Due the extremely poor checks-and-balances mechanism at work, FIFA’s been abducted by its management, from the board downwards throughout a great deal of the whole organization. For practical purposes, the board acts like if they were owners.

Recent statements made by Sepp Blatter, FIFA’s chairman, regarding the corruption scandal and warning big corporations sponsors of soccers games about how much they would lose by abandoning FIFA’s soccer games, are a most evident manifestation of arrogance and a feeling that he can walk on water attitude. He knows that, as things stand today, for practical purposes he is accountable to no one.

Though Sepp Blatter announced his resignation from the FIFA yesterday, it will go into effect sometime between December 2015 and March 2016. Given this condition, we will have to wait and see how things really pan out.

The Economist’s (May 30th issue) recommendation for UEFA to quit FIFA and operate independently (possibly forming a competing world organization) seems to me an excellent idea. Most of the time, market and business pressures can achieve more comprehensive and quicker  positive results than the legal approach, complementing the later on a very effective manner.

The Frankenstein FIFA has evolved into should not go on as it is now. Fundamental governance restructuring has to be done. Feudal organizations like FIFA should not be permitted to operate with impunity, unaccountable to no one.

 

Uber, The Old Taxi System, and The New Business World

File illustration picture showing the logo of car-sharing service app Uber on a smartphone next to the picture of an official German taxi sign in Frankfurt, September 15, 2014. A Frankfurt court earlier this month instituted a temporary injunction against Uber from offering car-sharing services across Germany. San Francisco-based Uber, which allows users to summon taxi-like services on their smartphones, offers two main services, Uber, its classic low-cost, limousine pick-up service, and Uberpop, a newer ride-sharing service, which connects private drivers to passengers - an established practice in Germany that nonetheless operates in a legal grey area of rules governing commercial transportation.    REUTERS/Kai Pfaffenbach/Files  (GERMANY - Tags: BUSINESS EMPLOYMENT CRIME LAW TRANSPORT)

REUTERS/Kai Pfaffenbach/Files (GERMANY – Tags: BUSINESS EMPLOYMENT CRIME LAW TRANSPORT)

In recent months there has been an increasing hostility in many cities and countries around the world against Uber, the ridesharing app group, the Silicon Valley offspring that is revolutionizing for-hire private transportation’s way of doing business.

The traditional taxi system around the world hasn’t had any significant improvements for decades, since its inception, almost a century ago. This system has essentially been resting in their laurels and hence, ripe for the taking.

Present technology lends itself beautifully for ordering a ride by mobile phone, and tracking the type of car, license number, driver’s name, and the waiting time, among other amenities —for instance, to be located where to be picked-up through GPS technology.

As we all know, Uber’s system only gives service to registered clients, who already have designated a credit card for the ride charge to take place —Uber does not accept cash as payment. On top of that, Uber’s system relies on private cars, instead of owning an automobile fleet, gaining invaluable capital deployment and cost-saving advantages. Furthermore, once the ride ends, in addition to an email confirmation about the service provided —including the corresponding credit card charge— both the driver as well as the passenger are rated, thus providing very useful information for all parties involved.

In short, the reach and level of service that Uber provides is miles ahead of the traditional taxi system.

Unsurprisingly, most of the taxi establishment has reacted with great hostility towards the innovating company with such a powerful and disruptive business model, trying to block Uber’s development wherever and whenever the taxi system can. This outright hostility has taken place all around the world, some recent cases are Germany and Mexico. Instead of accepting with lucidity and humility Uber’s overwhelming superiority over the outdated taxi system —which truly requires a profound revamping—, the establishment mostly has reacted by resorting to legal procedures trying to stop the inevitable. In some extreme cases, even physical violence has been at play.

What should be the appropriate reaction from the established system and why?

The answer is humiliatingly simple and painfully obvious: the collective acceptance of new business models brought about by —relatively— new technologies and creative thinking. Granted, this ideal behavior could only occur in Utopia, since we human beings are rather complex creatures; a spontaneous fair sport spirit has not ever been a collective common trait among us. The desire to protect one’s turf, even at the expense of everybody else is very common, yet an extremely unfair and harmful human characteristic.

On one hand, it is quite understandable that the status quo feels threatened by the new way of doing business and, up to a certain moderate degree, a hostile reaction makes some sense.

However, if history and logic are any valid guides, experience shows that all these types of episodes end up with the new technology (and/or way of doing business) prevailing over the old status quo. This is not an accidental result but a mere reflection of causation.

In an ideal world, whenever a new technology and/or a new way of doing business with a significant value added (in terms of Cost/Benefit) is implemented, society will rather rapidly adopt the new model. That’s the essential way through which mankind has been progressing throughout time. Regrettably, the adoption time of new, significantly improved ways of doing business until now has rarely been short nor trauma-free; hence, there is significant room for improvement in both scores.

The process of substitution and displacement of old technologies and business models for new and significantly better ways of doing things has been very appropriately named by economists as creative destruction.

If creative destruction were not constantly at work, among many other things, nowadays we still will be relying in the vacuum tube system instead of transistors and microprocessors.

However painful the adjustment turns out to be—for a relatively small minority, in this instance the world’s current taxi system—, it better be quick and well done. Nothing else will suffice.

The sooner the adjustment to the new and irreversible reality, the better. At the end of the day society is truly better-off with the new systems. That’s what really counts.

A similar rejection by the status quo has been experienced by Tesla Motors and the current automotive distribution system. Tesla Motors, the innovative company which has only relied in electric-car technology for its automobiles, also decided to sell its cars directly—bypassing the traditional automobile dealers network—, additionally setting up an also self-owned independent recharging center system along the way.

In the US there are a handful of states where Tesla cars cannot be sold, under the allegation of the violation of some local laws and regulations. Beyond technicalities and some outdated commercial regulations, the plain truth, however, is that the establishment has been reacting to what it (correctly) perceives to be a major threat to the customary way of doing business.

Both cases, Uber and Tesla, are very similar manifestations of a common root: focalized resistance to change for the better. In all these type of cases, relatively minor interests are —albeit temporarily— placed ahead of the interests of society as a whole.

Labor unions are a perfect example of the challenges and astounding opportunities technology is presenting mankind. The labor unions came to existence in a very different world to our present realities. In those days —also roughly over a century ago— communications were not instantaneous nor almost cost-free, as nowadays. In addition, transportation costs were substantially higher at that time. In short, strict and rigid laws and regulations were required to avoid excesses and exploitation from employers. In that socioeconomic environment labor unions made a lot of sense.

At present, and already for several decades and counting, the socioeconomic environment

has been increasingly flexible and favorable to the workers aspirations, working conditions and remuneration structures, not to mention mostly well thought labor laws.

Thus, in today’s world, from the workers’ standpoint, most of the time labor unions are an anachronism, often at the losing end of things, instead of a social and legal structure that adds value.

That’s the major reason behind the evident decline in significance and power labor unions have been increasingly experiencing during recent decades.

A great deal of the persistent stagnation and high unemployment the EU has been going through after the Euro crisis has to do with the marked rigidities in the labor front; an inflexibility championed by most —if not all— labor unions in the European continent.

Hence, the cost of maintaining the status quo in the labor front is costing the EU high levels of unemployment and a very painful economic stagnation.

The quicker we collectively advance in adjusting our typical labor mindset, including a flexible and open mind to new technologies and ways of doing business, the better.

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