capitalism

Does the “Profit Motive” Inhibit Art?

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“Profit and profitability are…crucial–for society even more than for the individual business,” wrote the late Peter Drucker.

Yet profitability is not the purpose of, but a limiting factor on business enterprise and business activity. Profit is not the explanation, cause, or rationale of business behavior and business decisions, but rather the test of their validity. If archangels instead of businessmen sat in directors’ chairs, they would still have to be concerned with profitability, despite their total lack of personal interest in making profits. The root of the confusion is the mistaken belief that the motive of a person–the so-called profit motive of businessmen–is an explanation of his behavior or his guide to right action. Whether there is such a thing as a profit motive at all is highly doubtful…In fact, the concept is worse than irrelevant: it does harm. It is a major cause of the misunderstanding of the nature of profit in our society and of the deep-seated hostility to profit, which are among the most dangerous diseases of an industrial society…And it is in large part responsible for the prevailing belief that there is an inherent contradiction between profit and a company’s ability to make a social contribution. Actually, a company can make a social contribution only if it is highly profitable.[ref]The Essential Drucker, pgs. 18-20.[/ref]

Drucker goes a little too far (his dismissal of economic explanations is a bit, well, wrong), but I was nonetheless reminded of this with the passing of science fiction authior Ursula Le Guin. In her speech at the 2014 National Book Awards, she said, “Books aren’t just commodities; the profit motive is often in conflict with the aims of art.” This is because “we live in capitalism” and “its power seems inescapable.” I suppose that could be true of profit to an extent, but the best evidence we have suggests the opposite. Economist Federico Etro’s work has shown that profitability helped drive artistic innovation over the centuries. For example, in Renaissance Italy, Etro found

a slow decline in real prices up to the 1420s, when the real price of paintings starts a rapid increase that continued for all the rest of the century. This process is more spectacular for the expected profitability of painting (the index based on the baseline regression), which suggests that the artistic profession was becoming more profitable. The expected compensations of a young apprentice (unaware of his future talent) were increasing during the XV century. But a similar increase in profitability applies also conditioning on the talent of the painter: the index of the expected compensation of a given painter (the one based on the full regression with artists’ fixed effects) reaches levels in the 1480s that are about three times as those of the 1420s. This suggests that the quality of the active painters was increasing over time, but even the most talented artists during the mid 1400s could expect an increase in their compensations along their career. Finally, notice that in the first half of the XVI century the real price of paintings finally stabilized at a relatively high level, which, as I argued, was not differentiated between regions. 

This evolution suggests a Schumpeterian pattern. Part of the artistic creativity associated with Renaissance, and the artistic innovations of this period, such as the introduction of exact perspective (since the 1420s), oil colors (around the 1470s), the sfumato (with Leonardo), the colorito (with Titian) and an impressive differentiation of styles, may be due to increasing profitability of the profession made possible by the increasing demand for artistic goods. My data do not allow me to test directly for causality, but show for the first time that the expected profitability of the artistic profession was increasing rapidly during the XV century compared to the profitability of other professions (since we adjust prices for the purchasing power in terms of unskilled work). We should not underestimate the opinion of a privileged contemporary, Vasari, who repeatedly cited competition as a main driver of the achievements of the Florentine painters[.]

…An economic perspective suggests that it was the unprecedented increase in relative demand for artistic goods by wealthy patrons ready to compete for (and able to judge) quality in an interregional market that attracted large enough groups of painters in towns such as Florence, Venice and Rome. Competition incentivized these painters to differentiate styles and compete in quality, where higher quality was interpreted as the ability to solve a series of new technical problems in the realistic reproduction of the world in painted images. Under these rules of the game, positive externalities from the close interaction of painters in these towns strengthened their innovative ability (pgs. 25-28).

This was also true in Baroque era Italy:

We have studied the Italian market for oil paintings of historical subject during the Baroque era through econometric analysis of a unique data set containing the prices derived from the original contracts. Our main purpose was to show that looking at the market for paintings as a fully fledged market could shed light on the determination of the prices of some of the most valuable handmade objects of humankind. The market for oil paintings was extremely competitive and populated by players very similar to what we may now define as representatives of the homo economicus. 

…In a celebrated historical account of the demand for art in the Renaissance period, Richard A. Goldthwaite has pointed out that Italian cities have generated the first modern markets for durable luxury goods, which have been at the origins of modern capitalism based on consumerism. “Today the consumer instinct is taken for granted: the challenge to producers is to introduce new products, reduce prices, and change fashion… If, on the one hand, we decry what this consumerism has developed into in our own times, with its commodity culture of planned obsolescence, throwaway goods, and fashion-ridden boutiques, on the other hand, we have enshrined its very spirit in our great museums. These veritable temples to the consumption habits of the past, where we worship as art one of the dynamics that gives life to the economic system of the West, mark the supreme achievement of capitalism.” The market for paintings in the sixteenth-seventeenth century is not only one of the first markets for durable luxury goods of the modern capitalistic society. Its surviving documentary evidence and even its surviving products are witnesses that it was also one of the first markets to follow the main laws of economics and rational market behavior (pg. 437).

Etro has found similar patterns in the Venetian Republic between 1550 and 1750, Amsterdam during the Golden Age, and the Spanish Golden Age. Profitability and market forces don’t necessarily inhibit art. Most of the time, they allow art to flourish.

 

Do the American Alt-Right’s Ideas Have European Roots?

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That’s what a recent essay in Foreign Affairs suggests. Political scientist George Hawley writes,

Image result for alt-rightThe [alt-right] is disorganized and mostly anonymous, making it difficult to study systematically, and until recently its definition was up for grabs. Throughout 2016, the term “alt-right” was often applied to a much broader group than it is today; at times, it seemed to refer to the entirety of Trump’s right-wing populist base. Since the U.S. presidential election, however, the alt-right’s nature has become clearer: it is a white nationalist movement that focuses on white identity politics and downplays most other issues. As the alt-right’s views became better known, many people who had flirted with the movement broke ranks, leaving it smaller but more ideologically cohesive.

Some have argued that the alt-right is simply the latest iteration of an old, racist strain of U.S. politics. And indeed, as a white nationalist movement, the alt-right’s ultimate vision—a racially homogeneous white ethnostate—is similar to that of earlier groups such as the Ku Klux Klan, the Aryan Nations, and the National Alliance. Yet the alt-right considers itself new and distinct, in terms of both style and intellectual substance. Stylistically, it has attempted to distance itself from the ineffectual violence and pageantry of what it derisively calls “white nationalism 1.0,” instead preferring a modern aesthetic that targets cynical millennials on social media and online message boards. And ideologically, the movement represents a break from American racist movements of the past, looking not to U.S. history but to the European far right for ideas and strategies.

White nationalists like Richard Spencer draw on ideas from the European New Right:

The ENR first emerged in France in the late 1960s, at a time when the radical left was at its apogee and the country looked to be on the brink of revolution. In 1968, a group led by the young right-wing journalist Alain de Benoist founded the Research and Study Group for European Civilization (known by its French acronym, GRECE). This new think tank sought to provide a philosophical foundation for a new political order, one that rejected liberalism, communism, and the excesses of fascism.

The ENR was an unusual amalgamation of ideas from the beginning. Although it repudiated fascism and Nazism, the ENR drew inspiration from many of the same intellectual sources. Particularly important to the ENR were the so-called conservative revolutionary writers of Weimar-era Germany, including the legal theorist Carl Schmitt and the historian Arthur Moeller van den Bruck. Like these figures, the ENR envisioned a new path for Europe that rejected both Soviet communism and Anglo-American liberalism.

The ENR flirted with, but eventually rejected, a politics based on overt racism. Instead, the movement grounded its arguments in culture. ENR thinkers rejected the idea that all human beings are generally interchangeable and posited instead that every individual views the world from a particular cultural lens; inherited culture, that is, is a vital part of every person’s identity. They further argued that all cultures have a “right to difference,” or a right to maintain their sovereignty and cultural identity, free from the homogenizing influence of global capitalism and multiculturalism. The right of cultures to preserve their identity in turn implied their right to exclude or expel groups and ideas that threatened their cohesion and continuity.

…Yet the ENR also used left-wing theories and rhetoric. It adopted the New Left’s opposition to global financial capitalism and borrowed arguments about cultural particularity from anticolonial movements, concluding, for instance, that European colonial projects had been a mistake and that the United States was trying to Americanize every corner of the globe, destroying distinct cultures along the way. The ENR even supported anti-American populist uprisings in the Middle East, Asia, and Africa…The ENR was also strongly influenced by the Italian Marxist Antonio Gramsci, whose views on metapolitics and cultural hegemony contended that a political philosophy will attain lasting power only after it has won the battle of ideas, at least among elites. The ENR was pro–environmental conservation, as well.

Mainstream American conservatism paid no attention to the ENR, while even the “radical right in the United States…showed little awareness of the ENR until quite recently. This was also understandable, given the language barrier—the writings of de Benoist and others were mostly untranslated—and the ENR’s lack of interest in U.S. domestic politics. De Benoist’s careful avoidance of transparent racism also put him at odds with white nationalists in the United States, who wore their racism on their sleeves…Institutions affiliated with the alt-right are now working to translate books from ENR thinkers into English. The publishing company Arktos Media has put out a large catalog of these translations and is now part of the recently formed AltRight Corporation, which has become a significant hub of alt-right propaganda. Arktos has published works by de Benoist and Faye, the French-German ENR ideologue Pierre Krebs, and earlier right-wing radicals such as the Italian philosopher Julius Evola.”

Hawley notes that “it would be an exaggeration at this point to speak of a unified, global far-right movement. Yet members of the radical right on both sides of the Atlantic are increasingly adept at borrowing each other’s ideas and learning from each other’s successes and failures. Those who study these phenomena must maintain an international perspective. If a right-wing idea, tactic, or meme proves successful in one context, it will probably appear in others.”

The Need for Competition

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Jason Furman, the chair of the Council of Economic Advisors under President Obama and now a senior fellow at the Peterson Institute for International Economics, argues that “both microeconomic and macroeconomic evidence” point to declining competition:

On the micro level, most industries today have fewer players than before. Just think about hospitals or cellphone service providers or beer companies. Throughout our economy you see larger companies, older companies, and, in any given industry, fewer companies. Growth in international trade has been a counterweight — but only within the tradable sector. Most of our economy is not tradable, and so for most of our economy, international trade isn’t a factor.

On the macro level, companies’ rate of return on capital has stayed the same or risen, while the safe rate of return on bonds has fallen precipitously. If there were really vigorous competition, you wouldn’t see increases in return on invested capital. In addition, we see an increase in the share of national income going to capital — that is, to investors — rather than to wages. That income shift has been larger in industries that have seen bigger reductions in competition.

He believes that this lack of competition plays a role in the increasing income inequality within the United States:

Wages aren’t determined strictly by supply and demand; they also depend on institutional arrangements and bargaining power. And with greater industry concentration, the bargaining power of employers rises. If there are four hospitals in your town and you’re a nurse at one of them, you can threaten to leave and go work at another one as a way to get a raise. If there’s only one hospital, it’s a lot harder to advocate for a raise.

This insight complements Brooking’s Jonathan Rothwell’s analysis as well as a 2016 commentary from The Economist:

[O]ne problem with American capitalism has been overlooked: a corrosive lack of competition. The naughty secret of American firms is that life at home is much easier: their returns on equity are 40% higher in the United States than they are abroad. Aggregate domestic profits are at near-record levels relative to GDP. America is meant to be a temple of free enterprise. It isn’t.

…You might think that voters would be happy that their employers are thriving. But if they are not reinvested, or spent by shareholders, high profits can dampen demand. The excess cash generated domestically by American firms beyond their investment budgets is running at $800 billion a year, or 4% of GDP. The tax system encourages them to park foreign profits abroad. Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. Were America’s firms to cut prices so that their profits were at historically normal levels, consumers’ bills might be 2% lower. If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed be rigged.

…Unfortunately the signs are that incumbent firms are becoming more entrenched, not less…A $10 trillion wave of mergers since 2008 has raised levels of concentration further…Having limited working capital and fewer resources, small companies struggle with all the forms, lobbying and red tape. This is one reason why the rate of small-company creation in America has been running at its lowest levels since the 1970s. The ability of large firms to enter new markets and take on lazy incumbents has been muted by an orthodoxy among institutional investors that companies should focus on one activity and keep margins high. Warren Buffett, an investor, says he likes companies with “moats” that protect them from competition. America Inc has dug a giant defensive ditch around itself.

What can be done?:

The first step is to take aim at cosseted incumbents. Modernising the antitrust apparatus would help. Mergers that lead to high market share and too much pricing power still need to be policed. But firms can extract rents in many ways. Copyright and patent laws should be loosened to prevent incumbents milking old discoveries. Big tech platforms such as Google and Facebook need to be watched closely: they might not be rent-extracting monopolies yet, but investors value them as if they will be one day. The role of giant fund managers with crossholdings in rival firms needs careful examination, too.

The second step is to make life easier for startups and small firms. Concerns about the expansion of red tape and of the regulatory state must be recognised as a problem, not dismissed as the mad rambling of anti-government Tea Partiers. The burden placed on small firms by laws like Obamacare has been material. The rules shackling banks have led them to cut back on serving less profitable smaller customers. The pernicious spread of occupational licensing has stifled startups. Some 29% of professions, including hairstylists and most medical workers, require permits, up from 5% in the 1950s.

A blast of competition would mean more disruption for some: firms in the S&P 500 employ about one in ten Americans. But it would create new jobs, encourage more investment and help lower prices. Above all, it would bring about a fairer kind of capitalism. That would lift Americans’ spirits as well as their economy.

Making Business Ethics a Cumulative Science

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Such is the goal of Jonathan Haidt and Linda Trevino in a recent Nature article. “Imagine a world,” they write,

in which medical researchers did experiments on rats, but never on people. Furthermore, suppose that doctors ignored the rat literature entirely. Instead, they talked to each other and swapped tips, based on their own clinical experience. In such a world medicine would not be the cumulative science that we know today.

That fanciful clinical world is the world of business ethics research. University researchers do experiments, mostly on students who come into the lab for pay or course credit. Experiments are run carefully, social and cognitive processes are elucidated, and articles get published in academic journals. But business leaders do not read these journals, and rarely even read about the studies second-hand. Instead, when they think and talk about ethics, they rely on their own experience, and the experience of their friends. CEOs share their insights on ethical leadership. Ethics and compliance officers meet at conferences to swap ‘best practices’ that haven’t been research-tested. There are fads, but there is no clear progress.

The authors argue that societies “would be vastly better off if we could improve business ethics. Efficiency would improve (http://www.ethicalsystems.org/content/ethics-pays), enlarging the pie, and workers would be treated better, removing some of the animus directed toward capitalism and free trade in recent years.” However, three obstacles stand in the way:

  1. The hyper-complexity of business ethics: Proper business ethics requires understanding of “the individual, the group, and the legal and cultural ecosystem” as well as “the alignment (or misalignment) across levels, and within each level.”
  2. The risk aversion of firms: “Why take unnecessary risks by inviting strangers in to poke around and ask questions, knowing that these strangers will then publish their findings, even if they say they will hide the name of your company? Request denied.”
  3. The siloed data problem: “[W]hen it comes to sharing data, the walls are higher. Data is normally kept private and only shared with other researchers under limited conditions, particularly when it benefits the researchers in some way. When those data are (rarely) gathered from real companies, which are concerned about downside risk, the walls are even higher…Most companies collect little or no data about their ethical culture, and if they do, they most likely would not share it with anyone.”

Haidt and Trevino continue,

What can we do to get the business and research communities together, and to establish the sorts of long-standing trusting relationships that can lead to longitudinal studies in which data is gathered using the same instruments over the course of several years and many companies, while various interventions are tested? This is the holy grail of business ethics research.

In 2014, a group of ethics researchers from many subdisciplines came together to form a research collaborative called Ethical Systems (see EthicalSystems.org). We were formed to address the hyper-complexity problem. We began by summarizing the existing research on topics as varied as accounting, fairness, business law, human rights, conflicts of interest, ethical culture, and whistle-blowing. Our initial goal was to aggregate the vast and varied research literature and make it accessible — always for free — to business leaders and especially to ethics and compliance officers. (Because culture and regulatory frameworks differ by country, we have limited our work to the United States so far, but we plan to expand globally in the future.)

Our second goal was to bring researchers together from multiple subfields and link them to the many business leaders who have begun to realize that they can’t just focus on compliance with regulations; they must invest in improving their ethical cultures. We have found a great deal of interest in working together from all the relevant groups — including federal regulators.

This is an exciting development.

What is the Cost of Corporate Short-Termism?

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Some claim that corporate “short-termism“–or what Hillary Clinton called “quarterly capitalism“–has negative effects on the economy. But is there any evidence for the claim? A new McKinsey report answers in the affirmative:

  • From 2001 to 2014, the revenue of long-term firms cumulatively grew on average 47 percent more than the revenue of other firms, and with less volatility. Cumulatively the earnings of long-term firms grew 36 percent more on average over this period than those of other firms, and their economic profit grew 81 percent more on average.
  • Long-term firms invested more than other firms from 2001 to 2014. Although they started this period with slightly lower research-and-development spending, cumulatively by 2014, long-term companies on average spent almost 50 percent more on R&D than other companies. More important, they continued to increase their R&D spending during the financial crisis, while other companies cut R&D expenditure; from 2007 to 2014, R&D spending for long-term companies grew at an annualized rate of 8.5 percent versus 3.7 percent for other companies.
  • Long-term companies exhibit stronger financial performance over time. On average, their market capitalization grew $7 billion more than that of other firms between 2001 and 2014. Their total return to shareholders was also superior, with a 50 percent greater likelihood that they would be in the top decile or top quartile by 2014. Although long-term firms took bigger hits to their market capitalization during the financial crisis than other firms, their share prices recovered more quickly after the crisis.
  • Long-term firms added nearly 12,000 more jobs on average than other firms from 2001 to 2015. Had all firms created as many jobs as the long-term firms, the US economy would have added more than five million additional jobs over this period. On the basis of this potential job creation, this suggests, on a preliminary basis, that the potential value unlocked by companies taking a longer-term approach was worth more than $1 trillion in forgone US GDP over the last decade; if these trends continue, it could be worth nearly $3 trillion through 2025.

2001-2015 performance of long-term and short-term companies on earnings, revenue, and market cap

The report concludes that “the potential value that could have been unlocked had all US publicly listed companies taken a long-term orientation exceeded $1 trillion over the past ten years” (pg. 7).

How do the researchers determine that a company is “long-term”? Their Corporate Horizon Index consists of five financial indicators:

In a Harvard Business Review article, the researchers explain,

After running the numbers on these indicators, two broad groups emerged among those 615 large and midcap U.S. publicly listed companies: a “long-term” group of 164 companies (about 27% of the sample), which were either long-term relative to their industry peers over the entire sample or clearly became more long-term between the first half of the sample period and the second half, and a baseline group of the 451 remaining companies (about 73% of the sample). The performance gap that subsequently opened between these two groups of companies offers the most compelling evidence to date of the relative cost of short-termism — and the real payoff that arises from managing for the long term.

…While we can’t directly measure the cost of short-termism, our analysis gives an indication of just how large the value of what’s being left on the table might be. As noted earlier, if all public U.S. companies had created jobs at the scale of the long-term-focused organizations in our sample, the country would have generated at least five million more jobs from 2001 and 2015 — and an additional $1 trillion in GDP growth (equivalent to an average of 0.8 percentage points of GDP growth per year). Projecting forward, if nothing changes to close the gap between the long-term group and the others, then the U.S. economy could be giving up another $3 trillion in foregone GDP and job growth by 2025. Clearly, addressing persistent short-termism should be an urgent issue not just for investors and boards but also for policy makers.

How we manage matters.

Historians vs. Economists: The History of Slavery

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Image result for 12 years a slave
Chiwetel Ejiofor as Solomon Northup in 2013’s ’12 Years a Slave’

A new article over at The Chronicle of Higher Education provides an excellent review of a controversy that has been brewing over the last couple years that should be of interest to those who care about history and economics. The controversy surrounds the new history of slavery and capitalism, marked by books like Johnson’s River of Dark Dreams, Beckert’s Empire of Cotton, and especially Baptist’s The Half Has Never Been Told. The main claim among these historians is that slavery was essential to American capitalism and the emergence of the Industrial Revolution. Economists and other social scientists are not convinced. “Most economic historians,” the article states,

have argued that “cotton textiles were not essential to the Industrial Revolution,” and that cotton production did not necessarily depend on slavery, according to [Dartmouth economist] Douglas A. Irwin…Summarizing economists’ thinking…Irwin points out that cotton was grown elsewhere in the world without slaves. Cotton production continued to rise in the United States even after slavery was abolished. “In this view, the economic rise of the West was not dependent on slavery,” Irwin says, “but came about as a result of an economic process described by Adam Smith in his book The Wealth of Nations — a process that depended on free enterprise, exchange, and the division of labor.”

Economists see the problem with the new histories on slavery as

stem[ming] in part from how the discipline of history has developed. In the ’60s and ’70s, historians and economists battled over economic history. But as historians turned toward culture, and economists became more quantitative, economic history increasingly became just a subfield of economics. For a variety of reasons, including the 2008 crisis, historians are turning their attention back to financial matters. But they “did not build up their tools in order to understand the material world,” says Rhode. “And they carry along certain ideological positions which they hold fervently and are not willing to test.” Historians, he says, “can’t be making stuff up.”

Historians, however, see economic history as too reductive:

“The problem is the economists left history for statistical model building,” says Eric Foner, a historian of 19th-century America at Columbia University. “History for them is just a source of numbers, a source of data to throw into their equations.” Foner considers counterfactuals absurd. A historian’s job is not to speculate about alternative universes, he says. It’s to figure out what happened and why. And, in the history that actually took place, cotton was extremely important in the Industrial Revolution.

Some economists who attack the new slavery studies are “champion nitpickers,” adds Foner…”They’re barking up the wrong tree. They’re so obsessed with detail that they don’t really confront the broader dynamics of the interpretations. Yes, I’m sure there are good, legitimate criticisms of the handling of economic data. But in some ways I think it’s almost irrelevant to the fundamental thrust of these works.”

The article is an excellent introduction to an important controversy in historical scholarship. Check it out.

Review: Fukuyama’s The Origins of Political Order

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Photo by Fronteiras do Pensamento, CC-SA
Photo by Fronteiras do Pensamento, CC-SA

This is part of the DR Book Collection.

I’m writing this review 6 months after finishing the book for a pretty simple reason: I had precisely 100 notes to transcribe into Evernote before I was ready to write my review. That should tell you how much I got out of the book, by the way. There are a only a few books–The Righteous Mind: Why Good People are Divided by Politics and Religion and The Island of Knowledge: The Limits of Science and the Search for Meaning,  maybe The Bonobo and the Atheist: In Search of Humanism Among the Primates–that netted me more fascinating notes and quotes than this one did. I loved it.

I guess it’s a work of political theory, but for the most part it reads as history with a dash of evolutionary psychology. In exploring the origins of political order, Fukuyama starts by going way, way back before pre-history to make his first essential point: biology matters. In this regard, he’s echoing Steven Pinker’s The Blank Slate: The Modern Denial of Human Nature, but the relationship here is fairly specific. According to Fukuyama, the primary problem with thinkers like Rousseau or Hobbes isn’t that they got the particulars of pre-social humanity right, it’s that the concept of “pre-social humanity” is an oxymoron. Humans, as the expression goes, are social animals. And that means we’re political animals. Politics didn’t come later–after the invention of writing or agriculture –but have been there from the beginning, inextricably intertwined with our development of speech. So, from this “biological foundation of politics”, Fukuuama draws the following propositions:

  • human beings never existed in a presocial state
  • natural human sociability is built around two principles, kin selection and reciprocal altruism
  • human beings have an innate propensity for creating and following norms or rules
  • human beings have a natural propensity for violence
  • human beings by nature desire not just material resources but also recognition

After laying this groundwork, Fukuyama than goes on to describe in broad strokes the evolution of human societies from bands to tribes to states. He invokes principles from biological evolution explicitly here, arguing that societies compete against each other in ways that are sometimes (but not always) analogous to competition between animals. This analogy shouldn’t be taken too far: there are treacherous debates about whether organisms or genes compete, for example, and about the viability of group selection, but Fukuyama’s primary concern is actually with the differences between biological and political evolution, and so those nuances are forgiveably overlooked.

As for the bands -> tribes -> states progression, the basic notion is that bands (groups of no more than 100 or so at the most) are held together by actual blood relation. Tribalism is a social innovation that allows bands to come together by claiming (real or fictitious) common descent. Two bands might have the same patriarch or matriarch, and so in the face of a common enemy they can rapidly coalesce into a single unit. This capacity means that it’s fairly easy for tribal societies to defeat band societies, because every time a solitary band and a band that’s part of a tribal society come into conflict, the latter can call upon as many tribal allies as needed to win the fight. As a result almost no band societies are left in existence.[ref]Those that do remain are in remote locations where the benefits of tribalism do not apply.[/ref]

But tribal segments are intrinsically unstable. Fukuyama cites an Arab expression: “Me against my brother, me and my brother against my cousin, me and my cousin against the stranger.” When there is no stranger to confront, the cousins go to war. When there is no cousin on the horizon, the siblings feud. And so states are yet another progression–as superior to tribes as tribes are to bands–because of their ability to support not only temporary, contingent cooperation but permanent, universal cooperation.[ref]Not that states are Utopias, of course, but simply that in a functioning state predation–murder, theft, and rape–are dangers the state opposes instead of relying on individuals to provide their own deterrence and defense.[/ref]

Another argument he makes–and this one seemed just a little tangential but it’s interesting enough to go into–can be summarized as: ideas matter. Fukuyama says, for example, that “It is impossible to develop any meaningful theory of political development without treating ideas as fundamental causes of why societies differ and follow distinct development paths” and that ideas are “independent variables.” He’s reacting to the idea–exemplified in Marx–that to understand history in general and political development in particular, all you need are the physical factors: how much stuff do people have and what do they need to do to get more of it? He’s right to reject this idea. It’s wrong. But I think that–along with lot of other folks these days–he drastically overstates the extent to which anybody actually believes this.

It’s true that Economists talk about Homo economicus (the model of human beings as perfectly rational, self-interested agents), but never without an ironic edge. They know[ref]Maybe I should say, we know, but I’m never sure if an MA in economics makes one an economist or not.[/ref] that this model is broken and doesn’t explain everything. That’s why the leading edge of critiquing human rationality intersects with economics: behavioral economics. Give economists some credit, they’ve already come up with bounded rationality as a fall-back, and you don’t do that unless you know that (unbounded) rationality is broken. Not that they’re satisfied with bounded rationality either, but economists are in the business of making models of human behavior and “all models are wrong.” Most of the folks who seem confused about this fact aren’t the economists, but the folks outside the discipline who don’t seem to be aware of the fact that economists are aware that their models are flawed.

Now, to Fukuyama’s main point: are ideas “independent variables”? I don’t think so. If Newton hadn’t figured out gravity, would some other clever chap have come along and figured it out by now? Probably so. I think that in most cases if you take out one particular genius, some other genius sooner or later comes to the same–or a very similar–realization. There’s no way to test it, but that’s my hunch. In fact, the whole business of a singular genius inventing this or that is often a delusion to begin with. Most of the really big breakthroughs–evolution and calculus come to mind first, but there plenty of others–were invented more or less simultaneously by different people at similar times.[ref]It turns out there’s a name of this: multiple discovery theory. I love Wikipedia so much.[/ref] This is strong evidence to me that something about the historical context of (for example) Darwin and Wallace or Newton and Leibniz strongly directed people towards those discoveries. Which, if true, means that scientific discoveries are emphatically not independent. I have a hunch that’s what’s true of science is probably true to some degree of non-scientific ideas as well. If Marx had never been born, would we have Marxism? Probably not, but we’d probably have something pretty darn similar. (After all, we’d still have Engels, wouldn’t we?) It’s not like collective ownership is a new idea, after all. We’ve had the Peasant’s Revolt and the Red Turban Rebellion and many, many more. Take that basic idea, throw in a little Hegel (Marx just retrofitted Hegelianism) and presto: Marxism. If Marx hadn’t done it, and Engels hadn’t either, someone else would probably have done something similar. Maybe even using Hegel.

I don’t want to overstate my rebuttal to Fukuyama’s overstatement, so let’s pull back just a bit. I’m saying it’s probable that–in a world without Marx–someone else invents an ideology pretty close to Marxism. But does it take off? Does it inspire Lenin and Stalin? Does it lead to Mao and Castro? Do we still have the Cold War? I have no idea. And, while we’re at it, I’m not saying that if you didn’t have Shakespeare, someone else would have written Romeo and Juliet. I think that’s pretty absurd. My argument has two points: first, there’s interaction between ideas and physical contexts. Neither one is independent of the other. Second, human society is a complex system and that means it’s going to have some characteristics that are robust and hard to change (stable equilibria) and others where the tiniest variation could give rise to a totally different course of events (unstable equilibria). Maybe there was something inevitable about the general contours of socialism such that if you subtract Marx, and then subract Engels too, you still end up with a Cold War around a basically capitalist / socialist axis. Or maybe if even a fairly trivial detail in Marx’s life had changed, then Stalin would have been a die-hard free market capitalist and the whole trajectory of the post World War II 20th century would have been unrecognizable. I don’t know. I just do know that–just as ideas aren’t merely the consequences of physical circumstances–they also aren’t uncaused lightning bolts from the void, either. Ideas and the physical world exist in a state of mutual feedback.

But the primary concern of the book is this question: how do political order arise? For Fukuyama, political order has three components:

  1. State building
  2. Rule of law
  3. Accountable government

His account is contrarian basically from start to finish, but never (to my mind) gratuitously so. He argues, for example, that instead of starting with the rise of liberal democracy in the West, the key starting position is ancient China, the first society to develop a state in the modern sense. On the other hand, China never developed a robust rule of law. It was rather rule by law, a situation in which the emperor was not constrained by the idea of transcendent laws (either religious or, later, constitutional) and therefore China’s precocious, early state became as much a curse as a blessing:

[P]recocious state building in the absence of rule of law and accountability simply means that states can tyrannize their populations more effectively. Every advance in material well-being and technology implies, in the hands of an unchecked state, a greater ability to control society and to use it for the state’s own purposes.

Fukuyama’s historical analysis is far-reaching. He spends quite a lot of time on India and the Middle East as well. At last he turns his analysis on Europe where–quite apart from the conventional East / West dichotomy–he goes country-by-country to show how the basic problems confronted by states in China, India, and the Middle East also sabotaged the development of most European states. France and Spain became weak absolutist governments with state building and rule of law, but no accountability. Russia became a strongly absolutist government. The difference? The central rules of Spain and France managed to subvert their political rivals (the aristocracy), but only just barely. In Russia, the czars completely dominated their political rivals, ruling with more or less unchecked power.

Fukuyama spends a lot of this time on England, specifically, which he holds up as a kind of lottery winner where all sorts of factors that went awry everywhere else managed to line up correctly. And the story he tells is a fascinating one, because he inverts basically everything you’ve been taught in school. Here’s a characteristic passage where he summarizes a few arguments that he makes at length in the book:

[T]he exit out of kinship-based social organization had started already during the Dark Ages with the conversion of Germanic barbarians to Christianity. The right of individuals including women to freely buy and sell property was already well established in England in the 13th century. The modern legal order had its roots in the fight waged by the Catholic church against the emperor in the late 11th century, and the first European bureaucratic organizations were created by the church to manage its own internal affairs. The Catholic church, long vilified as an obstacle to modernization, was in this longer-term perspective at least as important as the Reformation as the driving force behind key aspects of modernity. Thus the European path to modernization was not a spasmodic burst of change across all dimensions of development, but rather a series of piecemeal shifts over a period of nearly 1,500 years. In this peculiar sequence, individualism on the social level could precede capitalism. Rule of law could precede the formation of a modern state. And feudalism, in the form of strong pockets of local resistance to central authority, could be the foundation of modern democracy.

It’s a fascinating argument–just because it’s original and well-argued–but I also found it convincing. I think Fukuyama is basically correct.

So a couple more notes. First, there are basically two problems that Fukuyama sees consistently eroding political order, and both of them go back to the biological foundations of politics. The first is what he calls repatrimonialization. To keep things simple, let’s just say “nepotism” instead. The idea is that the band-level origins of human nature never go away, and the temptation to use the state’s authority to enrich one’s own kin is omnipresent. His discussion of the Catholic church’s invention of the doctrine of celibacy to successfully stave off this threat (bishops kept trying to pass on their callings to their children before that doctrine was created) and the unsuccessful attempts of the Mamluk Sultanate to use slave soldiers to stave off this threat (eventually the slave soldiers grew so politically powerful that they “reformed” the prohibitions against passing on property) are some of the most historically illuminating in the book.

The second problem is human conservatism. Fukuyama doesn’t mean in the partisan sense. He’s referring to our tendency–a universal aspect of human nature–to invent and then follow norms and laws. The problem here is that once we invent our laws, we stick to them. And when circumstances change, the norms/laws (and institutions) should change too, but humans don’t like to do that. So one of the #1 causes of the downfall of political order is a historically successful state proving incapable of reforming institutions to meet a changing environment due to sheer inertia. The classic example is pre-revolution France, and here Fukuyama finds a convention with which he has no quarrel:

We have seen numerous examples of rent-seeking coalitions that have prevented necessary institutional change and therefore provoked political decay. The classic one from which the very term rent derives was ancient regime France, where the monarchy had grown strong over two centuries by co-opting much of the French elite. This co-option took the form of the actual pruchase of small pieces of the state, which could then be handed down to descendants. When reformist ministers like Maupeou and Turgot sought to change the system by abolishing venal office altogether, the existing stakeholders were strong enough to block any action. The problem of venal officeholding was solved only through violence in the course of the revolution.

That was the first note (what are the threats that political order must overcome), and we get into those in a lot more detail in his second volume: Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy.[ref]I also read that back in May, it’s also going to get 5-stars, but I’ve got another 100 or so notes to transcribe first![/ref]

The second note I wanted to make was about partisanship. First, it’s important to note that although Fukuyama celebrates the rise of modern liberalism in England, he’s not promoting English exceptionalism. He spends a lot of time talking about what he calls “getting to Denmark.” His point there is that Denmark is also a widely-respected stable, modern, prosperous democracy and it didn’t follow the trajectory of England. The point is that he’s not saying: everyone, copy the English. Although he traces the origins of liberalism the farthest back in time in England, he specifically notes that if Denmark could find its own way into liberalism without retracing that path: so can other nations.

This is an important point, because Fukuyama is dealing in comparative politics, and he has no problem drawing rather sweeping (albeit justified, in my mind) generalizations when contrasting, for example, India and China. This is the kind of thing that anyone in my generation or younger (young Gen-X / Millennials) has been trained to reflexively reject. If you compare societies, it’s because you’re a racist. Given that Fukuyama is comparing societies–and that he arguably has the most praise for the English in terms of the philosophical origins of modern liberalism–there is no doubt in my mind that he’s going to be (has been) attacked as a kind of apologist for white supremacy, etc.

And that’s not true. First, because as I said he’s adamant about the fact that other nations can (and have) found their way to liberalism without imitating all aspects of English (let alone European) culture, society, or politics. Second, because he has plenty of non-European success stories. (Unfortunately, those are mostly from his second volume, since this one only goes up to the French Revolution and so doesn’t cover the explosion of democracy world-wide since that time.) Third, and finally, because he’s more than willing to look at pros and cons of differing systems. For example, going back to China and their problem with despotism, here’s a comment he makes towards the end of the book:

An authoritarian system can periodically run rings around a liberal democratic one under good leadership, since it is able to make quick decisions unencumbered by legal challenges or legislative secondguessing. On the other hand, such a system depends on a constant supply of good leaders. Under a bad emperor, the unchecked powers vested in the government can lead to disaster. This problem remains key in contemporary China, where accountability flows only upward and not downward.

This is the kind of clear-eyed, open-minded analysis that I think we need more of, not less of. It’s hard to argue, for example, with the success of S. Korea in leap-frogging from despotism to liberal democracy. There’s no reason–in principle–that China could not do something similar. (Other than problems of scale, that is.)

So here are my final thoughts. First: this is a fascinating book and it’s a lot of fun to read. It’s full of interesting history along with interesting theorizing. Second: I am convinced by Fukuyama’s arguments. And lastly, I have a lot of respect for his approach. He’s a centrist, and so he’s going to tick some people off for praising the kinds of things that radicals like to attack. If you think liberal democracy is the devil, Fukuyama is an apologist for Satan. On the other hand, it would be entirely wrong to dismiss him as a partisan hack. He interacts with Hayek a lot, for example, but this includes a mixture of praise on some points and also staunch criticism on others. He’s willing to laud capitalism (as the evidence warrants, I might add) but also to tip some of the rights sacred cows. “Free markets are necessary to promote long-term growth,” he says, but finishes the sentence with, “but they are not self-regulating.” He also savages the small-government obsession of the right, arguing that if you like small government, maybe you should move to Somalia. He’s not just ridiculing the right in that case, however, but pointing out that:

Political institutions are necessary and cannot be taken for granted. A market economy and high levels of wealth don’t magically appear when you “get government out of the way”; they rest on a hidden institutional foundation of property rights, rule of law, and basic political order. A free market, a vigorous civil society, the spontaneous “wisdom of crowds” are all important components of a working democracy, but none can ultimately replace the functions of a strong, hierarchical government. There has been a broad recognition among economist in recent years that “institutions matter”: poor countries are poor not because they lack resources but because they lack effective political institutions. We need therefore to better understand where those institutions come from.

In other words–and he returns to this point in the second volume–Fukuyama is dismissive of arguments about the quantity of government in favor of arguments about the quality of government.

His ideas are interesting, they are relevant, and they are compelling. I highly, highly recommend this book.

Freedom in the Interstices of Power Among the Elite

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Photo by Fronteiras do Pensamento, CC-SA
Photo by Fronteiras do Pensamento, CC-SA. Click image for full res and details.

Francis Fukuyama from The Origins of Political Order: From Prehuman Times to the French Revolution:

In Hungary, the absolutist project initially failed because a strong and well-organized noble class succeeded in imposing constitutional limits on the king’s authority. The Hungarian Diet, like its English counterpart, made the Hungarian king accountable to itself. Accountability was not sought on behalf of the whole realm but rather on behalf of a narrow oligarchic class that wanted to use its freedom to squeeze [373/374] is own peasants harder and to avoid onerous taxes to the central state. The result was the spread of an increasingly harsh serfdom for nonelites, and a weak state that ultimately could not defend the country from the Turks. Freedom for one class, in other words, resulted in a lack of freedom for everyone else and the carving up of the country among stronger neighbors.

We are taking the time to consider the Hungarian case for t simple reason: to show that constitutional limits on a central government’s power do not by themselves necessarily produce political accountability. The “freedom” sought by the Hungarian noble class was the freedom to exploit their own peasants more thoroughly, and the absence of a strong central state allowed them to do just that. Everyone understands the Chinese form of tyranny, one perpetrated by a centralized dictatorship. But tyranny can result from decentralized oligarchic domination as well. True freedom tends to emerge in the interstices of a balance of power among a society’s elite actors, something that Hungary never succeeded in achieving. (374)

This seems like a particularly useful lesson for Americans, who often view questions of government power as simply “How much?” without thinking carefully about the fact that there can be multiple, competing nexuses of political power. Historically, you had at least three:

  1. A centralized state (usually a monarch)
  2.  An elite class (usually aristocrats, which are absolutely present in modern meritocracies)[ref]Suppose intelligence corrrelates with income. Suppose intelligence is heritable. Suppose people like to marry other people of similar intelligence. If all three of these reasonable conjectures are true, then a perfectly fair meritocracy would be indistinguishable in practice from an aristocratic society or even a caste system. How’s that for privilege?[/ref]
  3. Everybody else

Seems to me, a lot of conservatives and liberals either can’t or don’t want to keep track of three separate groups and collapse things into just two.

Speaking in broad strokes, conservatives take the side of #3 against #1 and #2, which they see as basically interchangeable. Thus, you get terms like “crony capitalism” and “the establishment.” Liberals take the side of #1 and #3 against #2. Thus, you get lots of advocacy for new rules, regulations, and agencies to stand up against #2 on behalf of #3.

The reason the Hungarian case is so important, then, is to remind us of how dangerous it is to simply conflate the three groups into two for convenience. The familiar failure mode of a centralized, despotic regime (Fukuyama mentions ancient China above, but he’s about to talk about czarist Russia as well) is not the only failure mode available. In Hungary, the centralized state was limited, but instead of freedom the result was serfdom and ruin.

In Fukuyama’s reading of history, it took an incredibly delicate balance of three forces for liberal democracy to actually arise in England, and an overabundance of any one segment led to disaster. It was only due to that tradition that the American Revolution was spared the fate of virtually all other popular uprisings–like the French or the Russian–that, when they didn’t fail outright, merely served as object lessons in how mob rule and despotism are two sides of the same coin. The supremacy of #1 in France under the late monarchs led to the supremacy of #3 during the French Revolution which in turn led back to the supremacy of #1 in Emperor Bonaparte. Same basic deal in Russia, see-sawing back and forth from Czar to people’s revolution, to Lenin and Stalin.

Unfortunately, I don’t think this approach is going to be palatable to anyone in America. Both the left and the right seem so enamored with populism of late (Sanders or Trump, take your pick in this regard), that any nuanced talk about the importance of stabilizing elites is likely to fall on deaf ears.

Mobile Phones, Broadband, and the Poor

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The Telecommunication Development Sector (ITU-D) released their 2016 ICT Facts and Figures with the following chart:

image11003

Technology analyst Benedict Evans tweeted the chart with the tongue-in-cheek caption “The evils of capitalism.” He followed up with, “That 5bn people have a phone & 2.5bn already have a smartphone is a huge achievement of, mostly, free markets and permissionless innovation…It’s been clear for a decade that access to communications transforms prospects for the poorest. A phone *does* put food in your belly.”

People are sometimes skeptical of this last claim, but they shouldn’t be. For example, a 2016 World Bank report found that “[a]lmost every study, despite the methodology and whether it was cross-country or single country, found a positive economic impact from fixed broadband” (pg. 11). A 2016 report from the McKinsey Global Institute found “that widespread adoption and use of digital finance could increase the GDPs of all emerging economies by 6 percent, or a total of $3.7 trillion, by 2025. This is the equivalent of adding to the world an economy the size of Germany, or one that’s larger than all the economies of Africa. This additional GDP could create up to 95 million new jobs across all sectors of the economy.” A 2012 report prepared by Deloitte for the GSM Association found that “[o]n average, across the sample of 14 countries considered, if countries doubled their consumption of mobile data per 3G connection between 2005 and 2010, they would have experienced a growth rate of GDP 0.5 percentage points higher each year” (pg. 7). A 2014 report from the Gates Foundation notes that “mobile data has been used by researchers, mobile operators and governments to help plan emergency response after natural disasters, enhance access to financial services for the poor, track the spread of infectious disease, and understand migration patterns of vulnerable populations. Indeed the full range of ways that mobile data can be used to improve the lives of poor people is only beginning to be explored” (pg. 4). A 2015 study found “evidence that the use of mobile money increases the use of formal savings accounts and allows for more effective risk sharing. In recent research, we show another important channel through which mobile money can enhance economic development. Namely, by allowing easier access to larger amounts of trade credit, mobile money allows firms higher production, with important macroeconomic repercussions.” The situation of Kerala fisherman also demonstrates the impact of mobile phones. As The Economist reports,

Dividing the coast into three regions, [economist Robert] Jensen found that the proportion of fishermen who ventured beyond their home markets to sell their catches jumped from zero to around 35% as soon as [phone] coverage became available in each region. At that point, no fish were wasted and the variation in prices fell dramatically. By the end of the study coverage was available in all three regions. Waste had been eliminated and the “law of one price”—the idea that in an efficient market identical goods should cost the same—had come into effect, in the form of a single rate for sardines along the coast.

This more efficient market benefited everyone. Fishermen’s profits rose by 8% on average and consumer prices fell by 4% on average. Higher profits meant the phones typically paid for themselves within two months. And the benefits are enduring, rather than one-off. All of this, says Mr Jensen, shows the importance of the free flow of information to ensure that markets work efficiently. “Information makes markets work, and markets improve welfare,” he concludes.

A 2008 World Bank study found that the mobile sector and use of mobile phones (1) boost GDP, (2) create jobs, (3) increase productivity, (4) increase tax revenue, (5) enable entrepreneurship and job search, (6) reduce information asymmetries, (7) correct market inefficiencies, (8) reduce transportation costs, (9) create consumer surplus, (10) aid disaster relief, (11) disseminate educational and health information, and (12) promote social capital and social cohesion. Other sources point to access to money and banking, improved governance, and disseminated agricultural, health, and educational information.

These various studies and reports confirm what economist Andreas Bergh found about globalization: larger information flows reduce poverty. If we want to help the poor, we need to integrate them into the global economy.

Infographic: Mobile Phones Tackling Poverty

Discrimination and Firm Performance

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Image result for politically incorrect guide to capitalismIf an employer has an opening that pays $50,000 in salary, and the Christian applicant will bring in $51,000 in extra revenue to the firm while the Muslim applicant will bring in $55,000, then to discriminate against the creed of the latter will cost the employer $4,000 in potential profits…No government inspector or watchdog agency is required: by definition, discrimination is automatically “fined” in the free market. In addition, not only does the market catch discrimination whenever it occurs, but the amount of the “fine” is also exactly proportional to the severity of the discrimination…In short, employers are free to discriminate in the free market, but this discrimination certainly isn’t free.

– Robert Murphy, The Politically Incorrect Guide to Capitalism, pg. 31.

It turns out there is good evidence for this theory. As economist Alex Tabarrok reports at Marginal Revolution,

A nice test of the theory can be found in a paper just published in Sociological Science, Are Business Firms that Discriminate More Likely to Go Out of Business? The author, Devah Pager, is a pioneer in using field experiments to study discrimination. In 2004, she and co-authors, Bruce Western and Bart Bonikowski, ran an audit study on discrimination in New York using job applicants with similar resumes but different races and they found significant discrimination in callbacks. Now Pager has gone back to that data and asks what happened to those firms by 2010? She finds that 36% of the firms that discriminated failed but only 17% of the non-discriminatory firms failed.

The sample is small but the results are statistically significant and they continue to hold controlling for size, sales, and industry.

discrimination

So don’t discriminate. Not only is it unethical, it’s bad for business. But if you do, I hope you go out of business.