Tag Archives: economy

How Ideas Drive Societies

08 Monday Dec 2014

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Recently I attended a wonderful seminar on “Capitalism and the Future of Democracy” with the Tikvah Fund. One of the main themes of the class was about how societies and economic systems could not simply exist on their own, but needed justification. Back in premodern times, all over the world, the pursuit of wealth was seen as morally corrosive, commerce was viewed with skepticism if not outright contempt, and governments saw it as their duty to guide economic behavior with a heavy hand. Then came John Locke, who argued that ownership of property was a God-given right, an individual accumulating wealth actually facilitated the welfare of the whole society, and the best thing that governments could do is to uphold property rights and otherwise get out of the way. Thanks in part to that claim, a revolution in thinking about commerce swept across Europe.

Now, many are agitating about growing inequality. Whether or not inequality is a problem (I think it is, though not always for the same reasons as others) and whether it should be solved by government intervention (I think most proposed remedies are worse than the disease), it is surely the case that ideas about economic justice are creating social currents that work against the “natural” direction of our current economic systems. Wealth will have to be justified if it is to be perpetuated.

I came away from that seminar with ideas for another long-term project, now that my dissertation is done. (More on that when I actually decide to launch into the thing…) But a larger point, which is useful for fiction writers as well as those seeking to change the political world, is that legitimacy is a powerful force. New ideas can change notions of what behavior is legitimate, or which institutions are legitimate, or how that legitimacy is to be established and maintained. Before you can overthrow the king and replace him with the glorious people’s assembly, you need to believe that kings are not divine and that people have the right to govern themselves. This is not an obvious belief, and how such beliefs get spread in a society could be a powerful story in itself.

When Do Societies Face Unrest?

02 Thursday May 2013

Posted by in Better Fantasy, Economics, History, Politics, Revolution, Self-Promotion, War, Writing

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I have just read a recent journal article by the brilliant scholar Peter Turchin, in which he elaborates on his theory of the dynamics of social instability over time and tests it on the United States from 1780 to 2010. Put briefly, his theory holds that one can expect a society to suffer greater social violence (such as riots or lynchings, as opposed to routine crime) in a relatively predictable cycle. The larger “secular” cycle occurs every 150 years; a smaller cycle of violence occurs roughly every 50 years, superimposed on the secular cycle. Thus in the United States, we had peaks of societal violence near the years 1870, 1920, and 1970, with the Civil War being the peak of the secular cycle. Turchin forecasts that the next secular peak should hit sometime around the year 2020. Turchin’s previous work has detected the same sorts of cycles in societies from ancient China to revolutionary France.

Of course, detecting a pattern does not tell you what has caused it. Turchin’s theory for when violence intensifies depends on two major factors. Both of these factors might derive from excessive population growth; in the early version of Turchin’s work, he was focusing on agrarian societies in which population growth leads directly to food shortages. But now that he is considering Industrial societies, Turchin is focusing more on the immediate causes laid out below.

First, whether from excessive population growth or technological disruption or whatever, there emerges a labor glut. The average wage drops in response, leading to diminished standards of living. Thus you see larger segments of the populace who are in a precarious situation, with the potential for violent outbreaks such as labor struggles, or ethnic competition with minorities, or political upheaval.

Second, there emerges “an oversupply of elites.” This can happen for a few reasons, and Turchin focuses on the economic one. The low cost of labor means that it is easier for those on the top to become far wealthier than they might have done in a more normal setting, leading to the accumulation of vast fortunes and a polarization of society. A consequence of this is that there is much more competition for the leadership positions in society, such as control of government offices. Politics becomes more nasty and partisan, leading in extreme cases to violent rivalries between elite factions struggling to secure their hold on power. Such violence is made easier by the larger number of poor, desperate people in society who can serve as a demagogue’s muscle.

In Turchin’s research, he finds that oversupply of elites has the strongest association with societal violence. This is easy to understand when one looks at places like the Philippines, in which politicians routinely employ armed militias to attack competitors (a horrifying example was the Maguindanao Massacre of 2009), or the Congo, which has been wracked with coup after coup. But even in the United States, a surplus of would-be leaders will tend to produce extreme ideologies, such as militant unionism in the 1920s, or the present upsurge in eco-terrorism.

I think many people, writers among them, mistake the relationship between cheap labor and exploitative rich. Often, a super-wealthy class emerges as a result of lots of poor people, who make it easier to be rich—that is, to benefit from the production of lots of other people. This is not to say that an exploitative class won’t try to keep everyone else poor, once it emerges. But the dynamics are complex here, and societal violence is one of the things keeping them in check.

(How might such violence be averted? Full discussion will have to wait for another post, but I find it rather interesting that the Biblical institution of Jubilee, in which land was returned to its ancestral owners and debts forgiven, follows a 50-year cycle.)

(Have I mentioned lately that my new book is available on Amazon Kindle? It’s called The Best Congress Money Can Buy: Stories of Political Possibility. You can read the first story for free here, and then buy it if you like. Enjoy!)

Concerning Cooperatives

25 Sunday Nov 2012

Posted by in Economics, Politics

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Thinking about how to make an economic system that is more humane, and less riven by class struggles, many social reformers have advocated for workers’ cooperatives (the Distributists being one example). Cooperatives differ from the traditional capitalist firm in that workers share ownership and management of the company, as opposed to being salaried employees with no participation in the profits besides what management feels like giving them. They differ from a socialist commune in that there is still private property, and individuals can benefit directly from the success of the firm, which tends to mitigate the typical Socialist tendency of “They pretend to pay us, and we pretend to work” and lead to more creativity and enterprise.

With these advantages, why hasn’t the cooperative become more popular in the United States? In part, because cooperatives come with some drawbacks. First, if workers share ownership in the company, what happens when you hire new people? Does that mean that you’ve just diluted the ownership of the existing employees? If so, then there will be a tendency of the owner-employees to delay hiring more people, even if it means sacrificing business opportunities. Or do different classes of employees have different shares of ownership? If so, then the cooperative differs from a typical capitalist firm only by degrees.

How much of the ownership of the firm accrues to the investors, as opposed to the employees? After all, without the initial investment, there would likely be no business in the first place. And asking employees themselves to buy in, as some cooperatives do, places a high bar in front of poor job-seekers.

Additionally, there will always be a place in a large-sized firm for experts of some kind, who will be paid more for their expertise. Should such experts, be they management or whoever, also get a disproportionate share of the company?

All of these questions have answers, and the answers will vary depending on the particular needs of each cooperative. But even if you could come up with an ideal structure for your own situation, it is far from clear that existing law could support the ownership structure you want. To my knowledge, in the United States the most common means for employee ownership of their company is the ESOP, or Employer Stock Option Plan, and these are typically structured so that employees have partial ownership without true control. While American law has well-understood prototypes for traditional capitalist firms, like the C-Corporation or the S-Corp, there are few prototypes for worker-owned cooperatives.

If such prototypes existed, then new insights could be gained as people experimented with them and figured out what works and what does not in different contexts. And cooperatives could become more accepted in modern industrial economies—which is not to say that they would displace the typical capitalist firm entirely, or even mostly. Each firm structure solves different problems. The best structure depends on your own situation, and the imperatives of your industry. Still, more options are good.

One handicap of your typical utopian social reformers is that they tend to focus on parapolitics, action outside the system, rather than trying to work within the system. True, such parapolitics often has an effect, but you only get mass adoption of your ideas in the face of total collapse of the system you are opposing. In this case, those who seek to have the cooperative form catch on in society ought to be lobbying for its inclusion in the tax code, the same way that a C-Corp or S-Corp is. With an off-the-shelf model to work with, with well-understood procedures for sharing ownership and profits, more entrepreneurs may elect the cooperative model without any political or social goal at all—which is how you win.

On Sovereignty, Trust, and Protectorates

04 Sunday Nov 2012

Posted by in Better Fantasy, Economics, History, Politics, State Formation, Writing

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I recently read a journal article by Peter Haldén titled A Non-Sovereign Modernity: Attempts to Engineer Stability in the Balkans 1820-90. He writes to correct the conventional view that international relations in modernity is all about sovereign, independent states, and that the earlier era of protectorates, vassal states, or other such semi-autonomous regions ended with the arrival of nationalism. Indeed, the rationalist, modern Concert of Europe deliberately used non-sovereign zones several times in the Balkans area in order to control the outbreak of political crises.

The topic remains important for us readers today for a few reasons. First, understanding history is always good (particularly for budding fiction writers, who have a tendency to assume that all stories must be set in modern states or in absolutist monarchies, and thus impoverish their stories.) Second, non-sovereign states never really went away; they were just sleeping. Understanding the dynamics of non-sovereign states gives us a fresh lens to understand places like Kosovo, Chechenya, or even international organizations such as the European Union or the United Nations.

The power politics of the 19th century were marked by several themes, but two of the most important were the decline of the Ottoman Empire as a great power, and the rise of Russia which aspired to take its place. The fundamental problem facing the European powers was how to manage the fragmentation of Ottoman authority, which expressed itself in events like the Greek revolution, without causing a full-blown war between the Great Powers over the spoils.

Briefly, the favored solution was to take outlying provinces of the Empire and turn them into non-sovereign states, under the aegis of the Concert of Europe. These provinces would still nominally be subject to the Turkish Caliph and would pay tribute, and they would be prohibited from having free diplomatic relations with other states as an independent state would, or from having a military. But they would have civil militias and police forces for defense, they would be self-governing, and they could have diplomatic relations with the Concert of Europe as a body. Importantly, the Ottoman Empire would be forbidden to maintain troops in these non-sovereign states.

How does this help? In modern International Relations, states often try to set up buffer zones between them and some potentially hostile neighbor. These zones typically take the form of other, smaller, states. For example, China uses the totalitarian hell state of North Korea as a buffer between it and South Korea, or Japan. The “Low Countries” of Belgium, Netherlands, and Luxembourg were used as a buffer between France and Germany, to their periodic detriment.

The idea is that if you don’t share a border with a potential foe, then there are fewer opportunities for friction that might escalate into a full-blown war. After all, it is hard to distinguish between positioning troops to defend your borders, and positioning troops to attack your neighbor. So the buffer state helps to cool down the temperature. The only problem is that when a buffer state is independent, it can rely only on its own force of arms to maintain itself. The history of the Low Countries graphically demonstrates how easily this can fail; moreover, the potential for a buffer state to become a full-blown military ally of one side or the other ensures that the situation remains tenuous.

A demilitarized nonsovereign territory, on the other hand, is not guaranteed by force of arms, but by the cooperation of the potential rivals under color of an international agreement. There is less likelihood of miscalculation or escalating tensions, and more opportunity for creative institutional design (read the article for some great examples); not all peoples are ready for statehood, after all, even aside from the objections of their current rulers. And there would be less competition between rivals such as Britain and Russia as there would be (and were) over who would dominate the policy of newly independent states, if the territories could only have relations with the international body as a unit and not with other states bilaterally.

For a modern parallel, we can look to the European Union, which began as the European Coal and Steel Community—a project to strip West Germany’s ability to produce war armaments without the cooperation of France, and vice versa. By effectively tying their own hands, the member states hoped to foreclose on the possibility of war between them, so they could focus on the vital task of withstanding the Soviet Bloc. Henceforth, relations between member countries would be based on partnership and negotiation, not power politics.

However, in the case of the Balkans, the stability of the protectorate arrangements for Greece and elsewhere depended crucially on the degree to which the Great Powers trusted each other. In the three cases that Haldén considers, the initial attempts to institute a nonsovereign territory broke down once Russia violated the terms of the agreement, and Britain could no longer trust the Russians to play nice. (I am oversimplifying grossly.) Indeed, the creation of new independent states from the former provinces of the Ottoman Empire was, in Haldén’s telling, a suboptimal outcome, forced on the Great Powers by the breakdown of cooperation and the increasing worry over Russia’s growing power. The independent states would have to fend for themselves, without the aegis of a Concert of Europe which was growing ever-less-concerted over time. No surprise that World War I kicked off in the Balkans; Serbia was one of these formerly nonsovereign states.

Similarly, arrangements such as the EU or the UN are hampered by the lack of trust between member states. Many predict that the current economic crisis may spell the end of the Euro currency, or of the EU altogether, because Germany will grow tired of footing the bill for its more spendthrift neighbors forever. Early aspirations for the UN to become a true world government, meanwhile, have run aground on the cold reality that Americans do not trust a body made up mostly of dictatorships to act with the public interest in mind.

Haldén also draws a fascinating parallel with the old free-markets/interventionism debate in economics. He writes that creating new independent states who would rely on their own armies for defense, and hoping that they can contribute to international stability, is comparable to the intent of the free market. Conversely, a managed protectorate under the oversight of an international body is similar to government control of the economy, under the theory that such control will lead to more manageable outcomes. Whether or not you believe that government control can lead to better outcomes in the abstract, it is clear that you will not desire actual government control unless you trust the government to play nice. If you do not trust the government, you will accept even the putatively suboptimal outcomes of the free market in exchange for keeping a measure of control over your own destiny.

Haldén apparently wrote a book exploring some of these themes, which I may want to read. For our purposes, we should remember that what we are familiar with is not everything that is possible. As well, if we want to build a new world, it is crucial that we trust the main players; otherwise, the world may turn out to be not what we expected.

The Talents of Others

27 Saturday Oct 2012

Posted by in Economics, Politics

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I just began reading John Tomasi’s recent book Free Market Fairness, which is an attempt to synthesize Libertarianism’s concerns for property rights and the importance of spontaneous order (rather than top-down government control) with High Liberalism’s concerns for social justice and care for the poor. I don’t know whether Tomasi’s project will be successful, but something like it is certainly welcome. And for me, the book has already been worth the purchase for the sake of a single sentence.

Tomasi here is paraphrasing the arguments of John Rawls, and particularly that institutions should be arranged so that poorer citizens are supported from the wealth of the richer—as Rawls put it, so citizens “share one another’s fate.” Tomasi adds: “Institutions must be arranged so people can look upon the special skills and talents of their fellow citizens not as weapons to be feared but as in some sense a common bounty” (Introduction, pg. xiv).

That phrase—”weapons to be feared”—is something that struck me. And yet it is obvious that in a system of competition, one man’s advantage is another’s loss. It would seem rational, from a narrow point of view, for economic competitors to try and minimize each others’ skill and ability. But if we all did that, society would collapse and there would be little wealth left to compete over. We need other people to trade with, and they must have talents worth trading for, or else no products of any complexity would ever be created.

So in a pure competitive system, you are left in an uneasy search for the optimal level of skill in other people—just enough to support your own activities without threatening your position. In theory, you can avoid the problem by designing institutions where other people’s success contributes to your own; this is the supposed aim of redistribution. (Still, redistribution is a blunt tool that discourages activity by the most productive, and also requires oppressive political structures that create their own problems.)

What annoys me is that the political faction most in favor of redistribution is not speaking of “shared bounty” and communal unity at all. Instead, they speak of how the rich don’t deserve the wealth they have, how they have exploited others, how they have a duty to give up their wealth, and so on. In fact, the reason that Tomasi’s turn of phrase was so striking to me is precisely that I had never encountered the idea put in quite that way before. The idea that—in the absence of proper institutions—a competitive society would lead to social discord and envy floats half-formed throughout much of our discourse, but more often is expressed in precisely those envious terms that Tomasi seeks to preempt.

So what sort of institutions can lead to a sense that one person’s success contributes to everyone else’s? The first thing that comes to my mind is anything having to do with inventing new things. Inventing new medicines, or a new and better solar panel, or writing clever software, can make many people’s lives much better. Software in particular is inherently scalable; it is nothing more than information, which can easily be transmitted to many people. So the success in inventing new things can certainly help many people. (I think this is why most people don’t resent the massive wealth of, say, Apple as they might do for an investment bank—because they can readily appreciate the way in which Apple’s wealth was generated by selling products that they, as individuals, benefited from.)

Still, this doesn’t precisely address the point. Not all industries act as such powerful force-multipliers for all of humanity as science or computing can. How can we create such an alignment of interests across society? I don’t know the answer off the top of my head, but probably institutions such as workers’ co-ops point in the right direction. Still, the most important part of finding answers is asking the right questions. Tomasi’s formulation is incredibly valuable for that purpose.

Coordinated versus Liberal Market Economies

11 Monday Jun 2012

Posted by in Credit, Economics, Finance

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[Welcome! If you enjoy short stories about politics, check out mine—published in a collection called The Best Congress Money Can Buy: Stories of Political Possibility. You can read the first story for free here, and then buy it if you like. Cheers!]

Capitalist economies (not the same thing as free-market economies, necessarily) depend on those with money providing capital to firms that need it. For most of human history, most actual investment was done by a small number of people, those with the skills and inclination to form relationships with businesses. Vast amounts of money was economically sterile, being hoarded as gold or silver treasures in the vault of some nobleman or other (just as today one might stuff hundred-dollar bills into a mattress). For the economy to grow and develop, somehow a mechanism needed to be set up to allow savings to be automatically channeled into investment.

This mechanism was the banks. When you deposit money in a bank account, the bank then turns around and lends it to someone who wishes to borrow. The bank serves as an intermediary between you, the saver who wants nothing more than a safe place to store your money (with maybe a little interest on top), and the borrower. Thus, savings that were previously useless to the economy are now being recirculated. (This can lead to systemic fragilities, of course, but those must wait for another post.)

Most bank-dominated systems work in a style called relationship banking. A company forms a long-term exclusive relationship with a bank, that will provide access to capital in exchange for a large degree of control over the company’s decisions—the bank wants to make sure that the company isn’t going to waste the money, after all. This sort of system relies on personal relationships and insider knowledge more than on things like a credit score, which only came into common use in the 1980s or so.

Some economies, such as those in much of Europe, take this logic even further and structure their entire economy around such long-term relationships between firms. Business contracts, decisions on who to hire and how to train them, and access to capital are all made through a close-knit network of powerful executives; insider knowledge and relationships are the key factors here. This is called a coordinated market economy, and you can read a fuller description of it in Hall and Soskice’s Varieties of Capitalism. (Amazon link here.)

Coordinated market economies have some advantages over the American/British system of comparatively liberal market economies. The system in general is more stable; you don’t get the day-to-day disruptions common in the US economy, for example, because everything is based on long-term relationships. In particular, new upstarts find it very difficult to break into such a system, because they can’t get access to capital and they can’t win contracts from existing businesses. While this may seem bad to the American ear, it has the advantage that firms in such an economy can specialize in extremely narrow niches of production, leading to incremental innovation. This is why German companies are known for their precision manufacturing, for example: because they have the luxury of intense specialization in their particular areas.

On the other hand, because it is so difficult for new firms to compete, a continuing hazard of such economies is that the whole system begins to stagnate. Disruptive innovations find it hard to survive in such systems, and instead gravitate to the more open liberal market economies like the United States.

In a liberal market economy, access to capital for big firms is usually gained via the public markets: the stock market and bond market. This means that the long-term relationships typical of Continental economies are less important here. Instead, decisions about who to invest in are driven by the release of public data, for example in annual reports or tax filings. Using such data, market participants decide who to channel their capital to.

There are drawbacks to this system. Particularly in the last thirty years, company executives can be driven to chase quarterly targets at the expense of long-term viability. The business environment is volatile and always changing, making it extremely difficult to plot long-term strategy and to pursue incremental improvement.

On the other hand, this system is much more hospitable to disruptive innovation, as we can see just in the last decade or two. While it can be gut-wrenching while you’re in the middle of it, overall it leads to a more dynamic and healthy economic system over time; stagnation is less of a threat here.

The main difference between these two systems is in the ability to get investment capital without sucking up to a bank. From that relatively minor difference, massive differences in total economic structure can develop. (More details in the Hall/Soskice link.)

Again, institutions matter. And seemingly small differences in institutions can lead to major differences in outcomes.