Trends

MINERVA UPDATE

The government of Tonga has belatedly attempted to lay claim to the isolated Minerva Reefs, site of the emergent libertarian Republic of Minerva. King Taufa-Ahau Tupou IV, accompanied by a brass band, raised the Tongan flag over the reefs and claimed a 12-mile territorial boundary around the reefs. The reefs lie several hundred miles from Tonga, across open sea, and have been clearly excluded from all past Tongan sovereignty claims.

Mike Oliver, spokesman for the Ocean Life Research Foundation, said the Tongan action would have no effect on the group's plans to begin construction of a permanent settlement on the reefs, under the independent self-government of the Republic of Minerva. At last report, the Foundation had purchased and completed outfitting of a ship for use in the initial construction and settlement of Minerva.

M.C. Davis, representative of the Minerva project, met with representatives of the Tongan government in June to discuss the matter. Mr. Davis was treated very rudely and was informed that the Tongan government would attempt to use force to remove Minervan representatives from the reefs, and was prepared to go "to any extent short of war" to protect "its" territory. The government of Figi has since sided with Tonga, and has closed the port of Suva to the Minerva group.

Meantime, Mr. Robert Marks, another project official, was busy in New Zealand making arrangements for the initial construction expedition. A 200-ton cargo vessel, the "Ranganui," has been purchased and prepared for service, and other supplies and equipment are being obtained. Other plans are not being made known at this time, for security reasons.

The Ocean Life Research Foundation, sponsor of the Minerva venture, has issued the following reaction to the Tongan action:

1. Prior to January 1972 the Minerva Reefs were unowned, uninhabited, and had never been in the territory or protectorate of any power.
2. We have complied with every conceivable requisite of national sovereignty in establishing our claim to the reefs. WE have conformed explicitly to international law as it is manifested in the treaties, traditions, and conventions of the modern world.
3. We have never posed a threat to the peace and security of any nation. In fact, the success of our program would be of great benefit to all peoples of the South Pacific.
4. The King of Tonga has violated our territorial sovereignty by claiming the reefs six months after the Republic of Minerva became a sovereign state, and has threatened the peace and tranquility of the South Pacific.
5. The King of Tonga has refused to discuss the matter with the representatives of the Republic of Minerva, and has threatened to arrest anyone found on the reefs.
6. Tonga has no plans to develop the reefs. The Minerva Reefs are two desolate atolls that vanish below the tide twice each day. They are volcanic in origin and it is inconceivable that they could contain deposits of oil, gold, or any other economically advantageous mineral.
7. We want to continue our program to develop the Minerva Reefs to benefit not only ourselves, but the rest of the South Pacific as well. We have the technology and resources necessary to succeed. Yet we have been unjustly infringed upon by another government. We hope to peacefully persuade them to relinquish their claim. Our rights as individuals and citizens of a sovereign state have been violated; we intend to defend those rights.

SOURCES:
• "Tonga Claims Minerva Reefs," Reuters, LOS ANGELES TIMES, 28 June 1972.
• Personal communication from Mike Oliver.

PUBLIC SCHOOLS IN MORE TROUBLE

Public school systems in two major cities—Portland (OR) and Detroit—ended the 1971-72 school year on the brink of financial collapse. Portland's 124 public schools closed in May, a full month early, because funds had run out. The school board found itself with a $6 million gap between expenses and revenue, and the only solution left was the early school closing. Three times during the 1971-72 school year Portland voters were called to special elections to vote on a special tax levy to eliminate the deficit, and three times they said no, once by 3-2 and twice by 2-1 margins.

The early-closing action was primarily a school board tactic to pressure the voters into approving—at a fourth special election—an increased tax base for the 1972-73 school year that would permit retaining the existing level of service for a full school year. But on 23 May, just 11 days after the schools closed, the voters soundly defeated the $12.9 million increase. The school superintendent has since announced plans to eliminate the kindergarten, fire 762 employees (including 438 teachers), and increase class size.

In Detroit the public school system ended the school year with a $38 million deficit, and a projected deficit for next year of $101 million. In a "survival" plan, the Detroit school board has delayed this fall's school opening two weeks, decreed a six-week Christmas vacation, and cut two months off the spring term, resulting in only 117 school days (instead of the state-required 180). Detroit's schools have been in the red since 1966. Although a tax hike was approved in 1969, that was the last time the voters were so disposed. Tax increase proposals went down to defeat this year in both May and August.

Detroit school board member Darneau Stewart summed the situation up accurately: "We have just discovered the death of the public school system, and we don't want to recognize it." It won't be long before entrepreneurs begin picking up the pieces and begin to get down to the business of education.

SOURCES:
• "Portland Closes Schools One Month Early—No Cash," LOS ANGELES TIMES, 25 May 1972.
• "Struggle to Survive," TIME, 19 June 1972, p.42.

ADMINISTERED PRICES—FACT OR FANCY?

The theory of "administered prices" has long been a favorite of non-free-market economists, and has recently been embraced by the Joint Economic Committee of Congress. In May this learned body announced to the world that "the market power enjoyed by large monopolistic or oligopolistic firms enables them to set prices which are higher than competitive conditions would dictate." This same theory lay behind the January action of the Federal Trade Commission in charging that four large breakfast cereal manufacturers constitute a "shared monopoly" which illegally retain dominance of their market. A spokesman for Kellogg Company, the largest of the four (with 45% of the market) charged that the FTC was citing it for illegal practices "based on theories which have never been tried or tested."

Until recently, that was indeed the case. In the last few years, however, these theories have come under empirical study, and the results are quite remarkable. In a major article in FORTUNE, author Gilbert Burck reports that "the…fact is that the theory of administered prices is totally unproven, and is growing less and less plausible as more evidence comes in." The article describes the work being done in the Research Program in Competition and Business Policy at the UCLA Graduate School of Management, under the direction of Prof. J. Fred Weston, as well as the findings of economists such as George Stigler and Yale Brozen at the University of Chicago.

Some of the first important evidence questioning administered price theory came in 1970 in a book called THE BEHAVIOR OF INDUSTRIAL PRICES, by Stigler and James Kindahl. By studying the actual prices charged by companies (including discounts and concessions), the economists found no significant differences in pricing between "concentrated" and "nonconcentrated" industries. Weston and his colleagues have carried on similar work, challenging the unproved assertions (1) that large corporations set target markups or target rates of return, (2) that their prices tend to be inflexible and unresponsive to changes in demand, and (3) that they do not maximize profits, but seek only to maintain target profit levels. Weston's empirical studies seriously discredit the first two notions, and cast doubt on the third.

Another recent book lends further support to the view that companies in concentrated industries do indeed compete and respond to consumer demand. IN DEFENSE OF INDUSTRIAL CONCENTRATION by Prof. John S. McGee of the University of Washington argues for a broader, more evolutionary definition of competition than that set forth in standard economics textbooks. The growing evidence indicates that competitive efficiency is an important characteristic of concentrated industries. As Brozen points out, "concentrated industries are concentrated because that, apparently, is the efficient way to organize those industries."

Included in Weston's research program are noted economist Harold Demsetz, on leave from the University of Chicago, and UCLA professor Sam Peltzman, subject of a recent REASON interview ("Working Within the System," REASON, June/July 1972).

SOURCES:
• "The FTC Declares War on Oligopoly," BUSINESS WEEK, 29 January 1972.
• "The Myths and Realities of Corporate Pricing," Gilbert Burck, FORTUNE, April 1972, pp.85-89ff.

MINOR SKIRMISH VICTORIES

The past several months have seen a number of minor victories for free-market libertarian ideas, at the expense of the federal government:

• A proposed step towards 1984-type surveillance of households has been killed on orders of the White House. The plan, billed as a "disaster warning system," would have required all new television sets to be equipped with a device allowing the government to remotely turn on the sets at full volume, day or night, so as to warn citizens of an impending disaster. Enough citizens considered the plan an impending disaster that the government decided to back down.

• In another communications development, the Federal Communications Commission voted 4 to 3 to allow all qualified applicants to provide communications satellite service for television, telegraph, and digital data transmission. The ruling follows the pro-competition recommendations made two years ago by Clay T. Whitehead of the White House Office of Telecommunications Policy. Interestingly, the decision was opposed by Nixon's three FCC appointees (Burch, Reid, and Willey). The decision does not mean there will be totally free entry to the communications satellite market; applicants must demonstrate financial and technical competence, and existing monopoly carriers AT&T and Comsat must meet special conditions in exchange for their public utility status. New entrants into the satellite business will probably include Western Union Tele-Communications, RCA Global Communications, RCA Alaska Communications, MCI-Lockheed Satellite Corp., and Fairchild Industries, all of which have filed applications with the FCC.

• In an important change in policy, the federal Bureau of Indian Affairs has apparently gotten serious about Indian self-determination. In a 17 July announcement, the BIA said it plans to turn over complete control of its $110 million a year operation on the Navajo reservation (the Bureau's largest) to the Navajo tribe—"lock, stock, and barrel." Tribal Chairman Peter MacDonald said he thought it was about time that the BIA responded to the tribe's request. The move reportedly has the support of the Navajo Tribal Council, the Commissioner of Indian Affairs, the Secretary of the Interior, and the President.

• For once, apparently, the federal government will compensate businessmen who suffer from arbitrary government regulations which harm or destroy their businesses. The House has narrowly passed legislation designed to compensate businesses for losses suffered due to the FDA's sudden ban on cyclamates in 1969. When massive overdoses of cyclamate caused bladder cancer in rats, the FDA, as required by the "Delaney clause," banned cyclamates in foods, causing millions of dollars in losses to diet-food producers. The compensation bill was passed despite the complaints of Ralph Nader, who made unsupported assertions about human bladder cancer and harm to unborn generations, and called the bill a reward for "bad business judgment and wanton disregard of consumer health."

SOURCES:
• "Hurricane Warning Plan Is Dropped," UPI (Washington), 26 June 1972.
• "All Qualified Firms Get Chance to Offer Satellite Services," UPI (Washington), 17 June 1972.
• "Navajo Tribe Offered Control of Reservation," Associated Press (Window Rock, AZ), 18 July 1972.
• "Repayment for Cyclamate OK'd," Associated Press (Washington), 25 July 1972.

NEW ATTACKS ON FARM POLICIES

Although no changes are likely in this election year, public sentiment against farm subsidies and other government favors to farmers seems to be growing. Jack Anderson recently exposed a plan cooked up by Florida tomato growers and the Agriculture Department to restrict consumer choice. The plan calls for holding down tomato imports from Mexico so as to eliminate the Florida growers' competition. Apparently, the vine-ripened Mexican tomatoes are much better sellers than the green Florida tomatoes, which are gassed with ethylene to improve their color. Despite Anderson's exposé, the Agriculture Department has reached a "recommended decision" to restrict the Mexican imports.

Meanwhile, a palace revolt of sorts has been suppressed within the Agriculture Department, but not before the subject of the revolt became known. A group of Department employees called the Young Executives' Committee produced a report urging that the government slash net farm subsidies by about $6 billion, by ending many programs, resulting in lower food prices for consumers. The report pointed out that big farmers now get the lion's share of nearly $4 billion in direct subsidies, and noted that if rural poverty is of concern, it would be better dealt with by other programs.

The Agriculture Department officially released the report before its explosive impact was realized, and then hastily backtracked. Under heavy pressure from farm lobbyists, Asst. Agriculture Secretary Richard E. Lyng said the report "has no official status" and its opinions "are not representative of the policy of the Department." The Young Executives' Group was set up by former Agriculture Secretary Clifford Hardin "to get new-generation thinking on farm problems." It certainly accomplished that purpose.

SOURCES:
• "Growers Push 'Gassed Green'", Jack Anderson syndicated column, 7 July 1972.
• "U.S. Disavows Plan to Abolish Farm Subsidies," UPI (Washington), 18 June 1972.