02.21.10
Posted in Policy, Book Reviews - Non-Fiction at 6:23 pm by steve
The idea of comparing the asset bubble and the recent contraction against eight hundred years of financial information and anecdote is a powerful one. Human nature is pretty much the same as it has always been; and investment trends are driven in part by search for value and in part by departures from these involving greed and fear. So the same kinds of things happen over and over. The specific financial vehicles that zoom about and crash into hard walls change from generation to generation; but the motivations that drive them remain the same. So it seems reasonable to have high hopes for “This Time is Different: Eight Hundred Years of Financial Folly.”
The authors mine a rich vein of financial data, crunching numbers from a number of large and sometimes difficult to access databases. They evaluate this data carefully, employing good statistical tools; and they build a robust and persuasive model for credit-worthiness of soveriegn entities.
The book starts with a careful definition of terms. It defines inflation. It defines default. It produces solid working definitions for the concepts the authors wish to develop. Before long it is easy to see that its primary focus is on the failure of sovereign nations to meet debt obligations, although there is also a chapter dedicated to banking crises.
Early on, the authors divide nations into three groups:
- Underdeveloped nations into which invested money virtually disappears forever, producing no evident beneficial results and a constant stream of default.
- Developing nations in which invested money sometimes yields good returns and sometimes creates default situations.
- Developed nations in which defaults are rare.
They dismiss the nations in the first category as being hopeless in terms of debt. They claim little interest in the third group of nations because, they claim, these nations take access to capital markets seriously. And they behave accordingly. Defaults sometimes occur. But they are rare. And they are almost never serial. By comparison, nations in group 2 default more frequently and serial default is not uncommon. When they do default, the losses are frequently larger. They are interested in producing a model to predict which group 2 nations are actually good credit risks and which are poor ones.
They go on to suggest that group 2 nations - when they become sufficiently stable - tend to “graduate” and become group 3 nations. In light of the recent debt crisis in Greece, it is interesting to note that Greece is among the half dozen or so of the group 2 nations they suggest worthy of graduating to group 3 status.
Among the truly enlightening models they produce is a graph of cumulative percent chance of default for a sovereign nation as a function of its debt service obligations as a portion of its tax revenues. Predictably, as an increasing portion of tax revenue is consumed by debt service, the probability of default increases. This is a graph that every policymaker who votes on a budget should be able to draw from memory; because it tends to make clear that the risks get big quickly. The same graph serves to prove that a nation whose people and institutions hold more debt is more likely to default for the same level of national debt than one where private debt is small. The lesson: debt destabilizes.
Interesting, too, is the fact that short term debt tends to be more destabilizing because it is so cheap; being cheap tempts overleverage. But the real problem is that it has to be rolled over so frequently. A loss of confidence among creditors means that the debt cannot be refinanced. And default is the only option. A loss of confidence that lasts two years could cause a nation that uses only short term instruments to default on a very large portion of its debt, creating a financial trainwreck.
Financial trainwrecks happen from time to time, and few are so potentially devastating as a broad, sytematic bank failure of the sort that prevailed during the Great Depression, otherwise renamed implicitly by this book as the First Contraction. The greatest part of its harm came from widespread bank failures. Similarly, the greatest threat of the banking crisis of 2009 or Second Contraction was the possible effects of widespread bank failure.
In light of the fact that bank failures wreak much more havoc on western economies than sovereign defaults, it is a bit of a mystery why a single chapter of seventeen is dedicated to bank failures. This chapter is primarily dedicated to convincing us that bank failures are relatively common, even in nations that have good credit sense - the type 3 or developed nations. Furthermore, there is not much the authors have to say about their causes or about how to manage them. It is almost as if the authors take the events as givens and the consequences as unavoidable. After all, bank failures are caused by the fluctuation in value of the assets banks hold as collateral for their debts.
The authors miss the opportunity to quote JP Morgan who - when asked what the stock market will do answered presciently “It will fluctuate.” This means one thing to a person or an enterprise with no leverage, especially when there is a quick recovery. In this case, a downturn in asset prices is nothing but a buying opportunity. But fluctuation means something else entirely to people and business entities that are highly leveraged. The authors make the case that it is the business of banks to deal in leverage. The more leverage a bank uses, the more lucrative its business is in good times. Therefore, inevitable fluctuations must inevitably lead to bank failures. And bank failures wreck economies.
Banks tend to amplify the effects of productivity gains by making it easy for saved surplusses to be reinvested to cause further productivity gains. At least that is so when banks invest in enterprises that expand the pool of real wealth. But, the authors point out, the amplification effect of banks works the same way during business contractions, amplifying the pain of the contraction. This is especially true when banks fail. Assets are frozen or lost. Consumers and businesses fail to pay their bills. Institutions are forced to downsize or to reorganize or to go out of business entirely. And even the ones that do not cannot borrow to expand their successful businesses because credit is fozen. The leverage that banks use, then, amplifies the pain of the inevitable economic contraction.
The book was published during the banking crisis of 2009, and its title is suggestive of the thinking that drove the economy into a ditch: “This time is different.” There was, in the early and mid 2000’s a broad consensus among the financial actors that the things that caused asset fluctuations no longer existed. And that, therefore, house prices would go up at a certain minimum rate each year. Therefore, the best way to make money was to borrow and buy derivatives tied to real estatedasset values. That this happened with a decade of the “dotcom” bust - in which precisely the same arguments were being made for businesses the likes of Cisco Systems whose market capitalization was so big and growing so fast that if it kept doing so for another decade or two would surpass the whole GNP of the US - suggests that the level of sheer stupidity within the walls of the financial community can only be exceeded by a kind of blind testosterone-driven hubris.
The title implies that this book will help us understand why someone might have thought that the dotcom and real estate bubbles of the Greenspan/Bernanke era must be different. But it doesn’t. It implies that it will help us understand why exactly these bubbles were the same as other bubbles. But because its primary focus is on the size of debt and its manageability it fails completely to explain the formation and bursting of asset bubbles.
When it comes to helping describe the conditions that set the stage for the Second Contraction, or the 2009 banking crisis, the authors make the compelling case that:
1) the banking regulations that were in place from WWII until 1970 stabilized the global banking system to the point that bank failures were quite rare.
2) deregulation of banking in the 1970s through the 1990s created an environment in which bank failures increased worldwide.
Then, after firmly establishing that banks inevitably fail, that in failing they crash the economies of whole nations and sometimes the whole world, and that the trend of liberalization has led to a trend of increasing instability in the banking system - a mathematically necessary consequence of increasing leverage and lower barriers - they do something very odd. They suggest that re-regulation should not be used to solve the problem of banking failures. But they give no alternative solutions.
How is one to interpret this line of reasoning?
One interpretation is that the authors view the the banking system as an institution whose purpose is to serve the financial needs of bankers. In this light, the whole of the book makes sense. Most of the book is dedicated, then, to helping bankers correctly assess risk in dealing with sovereign entities. Bank failure is simply an inevitable consequence of asset fluctuation and is to be managed by arranging for sovereigns to dump money into the banking system to keep it liquid during downturns. This maximizes the returns of bank because they risk nothing by being overleveraged. The book is of, by, and for bankers. And the way that the title and subtitle appeal to non-bankers is accidental. The book might better be titled “A banker’s guide to minimizing risk in lending to sovereign nations.”
Similarly, the schema of complete deregulation and saving banks during downturns by handing them money is an excellent way to maximize the amount of capital bankers siphon away from more productive activities in the economy; but it may not be such a good way of assuring that they are very good at serving their social function as reliable intermediaries or of assuring that those rich, group 3 nations continue to be good credit risks.
The authors struggle to explain why, precisely, developed nations tend to be good credit risks. In the end, they fail to produce any convincing argument - even one they themselves find compelling. What we come away with is the especially unsatisfying is the argument that it can’t happen because it hasn’t yet. Or not for a long time. That seems to be the argument for why developed nations will not default on debt. Ever.
If we persist in believing it cannot happen because it has not, it’s only a short time before we will find ourselves hearing “This Time is Different.”
Permalink
02.16.09
Posted in Philosophy &c, Book Reviews - Non-Fiction at 6:20 pm by steve
Jim Holt became popular with his “Stop Me if You’ve Heard This: a History of Philosophy in Jokes.” It is, we understand, a clever way of wrapping philosophical ideas in jokes so that people who don’t wish to study philosophy at a university might become acquainted with the ideas of philosophers. The humor draws us to the ideas. It’s an ingeniously fun way to bring people to philosophical ideas. It’s a brilliant idea and a noble undertaking.
Holt, this week, reviewed the ideas in Cricthley’s Book of Dead Philosophers in the NYT book section. This time things are backwards. He sets out to make philosophers look ridiculous but succeeds in becoming the butt of his own joke. He spends most of his review space ostensibly refuting Epicurus’ arguments on why it is not logical to fear death. Epicurus’ argument goes like this:
1) Death is annhililation, so there is nothing to worry about.
2) Whether I die young or old, it doesn’t matter, either way I am dead.
3) Your existence in death is essentially like your existence before being born. There is no more reason to fear one more than the other.
It seems impossible to interpret the sense of “death” in this argument as anything other than the experience simply being dead: that is the best interpretation of the first clause. There is no sense in which the argument addresses what happens before that - how one comes to be dead, the processes, the experiences, or the implications of death on the living. The argument is simply about how one experiences the state of being dead in the first person.
We intend to argue:
1) There is nothing logically wrong with Epicurus’ argument.
2) Whether it is logical to fear death depends upon whether death actually is annihilation.
3) Either way, it is not unreasonable to fear death.
We may end up arguing for a conclusion not incompatible with Holt’s; but we worry greatly about the path he takes, because it persistently confuses the experiences of being alive with those of being dead.
Holt trots out some refutations by Nagel “Just because you don’t experience something as nasty … doesn’t mean it’s not bad for you. Suppose a person has a brain injury that reduces him to the mental condition of a contented baby.” Nagel argues that this is bad in the same way death is bad. Therefore death is bad and to be feared. But this argument fails to see the experience from the point of view of the person experiencing it. If one is actually having the experience Nagel describes, fear plays no role; for in that state one is neither anxious nor fearful nor in pain. It fact, billions of people regularly seek to exist in this state by taking alcohol or other mind-altering drugs. Some arrive and never leave. We may judge that to be bad; or we may not. But the badness associated with it has nothing to do with the way the person in question experiences it.
We might reasonably fear being in that state; but the reason we would fear it is not because of what one might actually experience when in the state. Rather, fear arises from a realization that we would have failed to meet an expectation of how we “ought” to be - namely rational, functional human beings capable of exerting control over our environment. We fear the loss of control. Having control over our environment may be a reasonable expectation of being alive, but it is clearly not a reasonable expectation of being dead. That’s one big difference between Nagel’s two cases.
Holt, in reasoning about the second argument, once again misunderstands the point of view. He asserts, “The second argument is just as poor. It implies that John Keats’s demise at 25 was no more unfortunate at 25 than Tolstoy’s at 82.”
Is Holt arguing that Keats’s experience after death was somehow worse than Tolstoy’s? I wonder how he would demonstrate that? That is what one would have to prove to demolish argument 2). But he does not attempt it. Instead, Holt points out “The amount of time you’re dead matters only if there is something undesirable about being dead.” This, of course, is the nub of Nagel’s argument. And it is why Nagel’s argument comes perilously close to violating the first premise set by Epicurus. Any contradiction here is Nagel’s, not Epicurus.’
Once again, Holt trots out Nagel to refute the third argument “… there is an asymmetry between the two abysses that flank your life. The time after you die is time of which your death deprives you. You might have lived longer…” Or you might have been born earlier.(1) Once again, Nagel’s argument succeeds only when one starts with the assumption that the experience of being dead is to be feared. But that’s not a logically tenable assumption upon which to base the argument; for that is what we are arguing to begin with.
One may reasonably wonder what Epicurus really thought. Was Epicurus seriously proposing that it was unreasonable to fear death? Or was he arguing that there is no logical imperative to fear death? Perhaps he was doing the latter simply to make a point. There is a great difference between the two. Logic is but the grinding machinery, not the food in thought process. If Epicurus was arguing that there was no logical imperative to fear death, his argument relies on the stated assumption that all sensation and feeling cease with death. Experience ends there.
If this assumption is correct, there is no logical imperative to fear one’s own death. It is an argument that has considerable force. And it can help one live a life with less fear of death. That’s can be both a liberating and an ennobling end; and it is an end to which most religions are disposed.
If, on the other hand one believes that one experiences pain after death, then there is reason to fear. The whole of the logical force of Epicurus’ argument rests on the idea that first person experience of all sorts ends with one’s own death.
Nagel and Holt argue as if Epicurus believed that it is unreasonable to fear death; and that, therefore, no reasonable person actually fears death. Their reasoning does not adhere to the bounds set by Epicurus. It is not unreasonable to argue that, despite Epicurus’ logical construction one might reasonably fear the process of dying; for it can be fraught with pain. One might even fear the state of death itself, despite logical arguments to the contrary. The difference is that good reasoning can take into account emotive inputs. In fact, good reasoning must do so.
Hume observed that all properly motivated actions arise from proper feeling; and reason properly serves empathetic emotions. He argued that if one asked “why?” to any explanation of moral propositions often enough and long enough, one always ended up with a statement about happiness or unhappiness. Death makes us unhappy. Pain makes us unhappy. Injustice makes us unhappy. Not just in the first person, but in the second and third person.
Epicurus was interested in happiness, too. If one believes all experience ends at death, it is illogical to argue that one is unhappy when one is dead. This does not make us stop fearing death; it only helps us understand it is not logically consistent to do so. We fear death not because of the logical imperative to do so but because this is physiologically the way we are wired. Fear is functional; but it is not always logical.
Today we are rediscovering that the worst criminals are, in fact, psychopaths. They are not stupid people; in fact, many appear to be remarkably intelligent and logical. They are, however, people for whom proper empathetic emotions are suppressed or absent. They experience perverse pleasure in observing the pain and suffering of others. By contrast, people who are socially oriented and well - adjusted are informed by empathetic feeling. This gives force to the idea that in the real world, moral action is informed by proper empathetic orientation, not by the force of pure logic.
Holt clearly understands the distinction between logical and reasonable, between pure reason and reasoning in the service of empathetic emotions: he exploits it in a rhetorical flourish at the end of the essay referring to the rather fearful “Falangist cry ‘Vive la Muerte’ - long live death.” This is an appeal to our emotions, not to logic.
We have reason to fear that cry since it is a reference not to one’s existence after one has ceased to exist, but to the whole painful process of dying. It is also a reference to our own experience of the tragedy of loss associated with the death of another. But the fear aroused by that cry has almost nothing to do with Epicurus’ argument.
Holt’s argument employs a time-honored philosopher’s trick of using the same word to signify materially different things. In the Epicurean argument, the linguistic token “death” stands for first person experiences after one is dead. Nothing else. There is, however, no point in Holt’s discussion in which Holt is referring to the same thing. Mostly, Holt is talking about experiences of the living in the face of death. (2)
In some cases he uses the same token to refer to death in some abstract, hypothetical case. Or to death as we now imagine it, anticipate it, and fear it. The abstraction includes both the process of dying and the possibility that the death occurs to someone else. For example, if we were to assume that Keats died leaving a wife, young children, and a parent or two to survive him, then there is a great measure of pathetic feeling surrounding his death. If we were to assume that Tolstoy died after all his known relatives and even his own housekeeper were dead, then there is nobody to mourn his passing. This makes Keats’ death more tragic to all living observers. Similarly, we can assume that civilization lost more in Keats’ death than in Tolstoy’s because the latter, presumably, had fewer good pieces of literature left in him.
The tragedy of Keats’ death is realized not by Keats himsel so much as it is by everyone else. Holt pretends otherwise.
Where the Falangists show up, however, “death” refers not only to death in the third person, but also to the process of experiencing the pains associated with dying in the first person. It refers to death of others brought on by violent means, especially by some institution that has no legal or moral authority to do so. It refers to the fearful pains associated with dying a violent death in the first person. It is certainly reasonable to fear, for instance, the process of being hacked to death by partisans. But this process is not at all what Epicurus was referring to.
Holt is confusing the things we experience after ceasing to exist with those we experience during process of transitioning to that state. He is confusing things we experience after the death of others with those we might experience after our own death. One might as well confuse what one remembers of one’s own experience of birth (what is null) with
i) The birth of others
ii) All the things that preceded our own birth.
Doing so logically nullifies the existence of others. And it denies history.
Epicurus’ argument is a logically sound one. To reject it, one must reject the first premise. If one can fully accept the first premise, then one must logically end where Hume did, asserting no logical reason to fear being dead. That, however, very much different from fearing the Falangist cry - it’s as different as being alive and being dead.
NOTES
(1) If one accepts the premise that when one is dead, all experience ceases, then there can be no difference between the experience that precedes life from the experience that follows it. To try to argue that there is would be as silly as mounting a deep inquiry into what happened before the start of the Big Bang - i.e. the start of time. When there is no matter there is no time; where there is no time, there is no “before.”
(2) It may seem like a trivial distinction - the distinction between dying and being dead; but it is no more trivial than the distinction between the process of having your house painted and living in a freshly painted house, or the distinction between the process of getting a root canal and living thereafter with a tooth that doesn’t hurt. A failure to make these vital distinctions can lead to serious errors of judgment. I hate getting root canals and I hate having my house painted, but I enjoy living with the outcomes.
Permalink
04.15.08
Posted in Uncategorized, Book Reviews - Non-Fiction at 7:36 pm by steve
Reflections on Adam Smith’s Wealth of Nations (Prometheus Books, 1991)
Many arguments about theology have a color-wheel sensibility to them. Red is like scarlet. Scarlet is like vermilion. Vermilion is like orange. Orange is like gold. Gold is like yellow. Yellow is like chartreuse. And chartreuse is green. Therefore red is green. It is useful to keep this idea in mind when trying to justify what “free-marketeers” say about Adam Smith’s economic ideas against Smith’s own words printed in The Wealth of Nations. The religious faithful make claims about Smith’s work that range from being not quite accurate to being completely inconsistent with Smith’s ideas. And the reason for the difference has less to do with good reasoning, perhaps, than it has to do with religious tradition, with a long history of theological analysis of the subject.
We are not so interested in how we got here as we are in comparing Smith’s concept of economic theory with the ideas sold to the American public by the free-marketeers. We wish to learn about ideas that Smith had that are materially more interesting and robust than the ideas represented by the free marketeers. We wish to take themes Smith developed, and develop them in a contemporary light. And we wish to show how various modern conceptions of Smith’s ideas are incomplete or wrong and to show whether the problem is in the original conception or in its contemporary interpretation.
Smith’s work is sometimes treated with a kind of holy reverence by economists. And the general principles he establishes as if they were true as, say, the law of gravitation or the fact that prime numbers are divisible only by one and themselves. The former is a natural law the latter a definitional fact. The idea of the invisible hand that Smth proposes in Wealth of Nations is neither of these. It is an argument, a body of reasoning that applies resonably well to some kinds of economic situations and fails quite miserably in others. Failure to make the right distinctions leads to great mischief and a considerable amount of misery.
If one were to view Wealth of Nations solely in terms of the rather difficult to locate “invisible hand,” one would have to accept the rest of the content of the book as framing that idea. And one would have to grapple with all the unstated governing assumptions, the stated governning assumptions, and the range of limitations Smith argues for. Our own criticism of the “Market Libertarians,” or “free-marketeers” or “American Orthodox Economists” - as we will call them from time to time - is that they have completely failed to do any of this. At least they have failed to do it in public.
They have made economics a kind of religion governed by a single unquestionable orthodox rule, namely “No rules.” It is a rule that deserves a considerable amount of attention; but it is also rule that is demonstrably false for a significant portion of human economic and non-economic activity.
Here are some of the assumptions that underlie Smith’s work. Most of them are given too little consideration by the rabid free-marketeers.
1) People behave in a moral way - ( enlightened self-interest and so on … )
This was pretty much taken as a given for the first century and a half. But after WWII people began to imagine that Smith’s Wealth of Nations was inconsistent with his treatise on morals. But even hidden with the pages of Wealth of Nations Smith shows great distain for morally questionable acts. He hates collusion, for instance. It is not just that he sees it as being economically inefficient; he reacts to it as if he believes it to be morally depraved. There are other hints that he believes that people act morally or that his analysis is built on such an idea. So Wealth of Nations is built on the western idea that liberty in economic practices derives from responsible behavior, just as the American Republic iis built on the western idea that liberty in political practices derives from responsible behavior.
2) All economic goods are available from a great many multiple competing sources. This argument applies to almost no real good. Ironically, returns of scale have brought greater benefits than the idea of perfect competition, manufactured goods have grown differentiated by brand. The result is that the ideas of specialization and returns to scale have meant that the fundamental assumption of perfect competition is not meaningful for most goods.
Manufactured goods, most of them, are quite highly differentiated. If one wants any car, there exist competing sources. If one wants an exceptionally reliable car there are two or three viable sources. In most product areas, each good is differentiated from each other good. Each brand of tomato soup is different. Each potato on the shelf is subtly different from the rest. It is possible, in an economic sense, to treat all apples of a type that might be good for baking as an undiffferentiated product and to purchase these apples from one source or another. There is a kind of practical sense in which some goods easily substitute for other goods.
And at another level entirely it is possible to view food as nothing but a source of nutrients, in which case a potato is pretty much the same as a tomato, a pepper, or an orange. It might be so in a nutritional sense; but it is certainly not true in a culinary sense.
I have tried to think of goods that have multiple competing sources and It seems that there are a few commodities that fit the bill. Corn, the kind fed to cattle. And most other grains. Oil is a possibility. Now that most refineries are equipped to treat “sour” crude oil it is probably so. Sand might be. But sand is expensive to ship. So local suppliers can reasonably differentiate their good locally by price or availability. It seems, therefore, that even among a number of commodities, the notion of perfect competition is a very loose approximation of the real situration.
The notion of perfect competition happens to be a convenient place to start the study of microecomic theory. In this respect it is a powerful concept. But it applies to almost no real good. The factors that lead to this departure and the way it is exploited account for why an unconstrained market economy can sometimes be much less efficient than a wisely constrained one.
3) There exists no collusion among suppliers of like goods. This issue is one Smith talks about. In his own day a great many goods were produced by tradesmen in local towns. The fact of local supply meant there were no multiple sources; but it also meant collusion was difficult. The issue of collusion has profound implications in industries with few suppliers; for it does not take a great deal of effort to get firms to collude. Market shares change slowly; but if one can gain an extra twenty percent in price by collusion, it’s all pure profit. In an industry with slim margins this is a huge windfall.
4) Specialization brings efficiency in production. A skilled production worker might be capable of working two, four, eight, or even ten times as fast as an unskilled one. And she might be capable of using the same raw materials more efficiently. Specialization is intimately linked to returns of scale, for the high level of skill make a worker particularly productive. And if this skill is trasferrable to other means of production that employ more capital and are more productive still, then the scale of production can be increased all the more. This is a topic of discussion for Smith and it is closely tied to his thesis.
5) Natural goods are in finite supply; land for instance. Goods that derive directly from it, are similarly in short supply. This idea was painfully clear to Southern Europeans in Smith’s day. It was painfully clear to Greeks in Plato’s day. And as soon as the great biofuels scam is in full swing it will be painfully clear to most Americans. It is already painfully clear to Mexicans and Haitians. The fragile Haitian government has already collapsed over rising food prices. Mexicans are just short of rioting in the streets over corn prices. Governments of India and a few other rice-producing nations have outlawed the export of rice. And last year saw a lentil shortage. Economists who argue that if one has too little of a vital commodity simply means one must raise the price until there is enough are explicitly arguing to starve the poor.
Some free marketeers imagine that if the price goes high enough it will be easy to get more of anything. Let us suppose that we discover an important economic use for the dodo bird. How would I secure a supply of say, a hundred thousand. How much would I have to pay? I have an idea for an agricultural enterprise that requires 100,000 acres of agricultural land on the island of Manhattan. How would I go about securing this? Is it simply a matter of price?
6) That all economic players know everything there is to know that might affect the outcome of a freely made market exchange. For exchanges to work pretty well most of the time this condition is not so absolute. What is required is that the seller reasonably imagines that the buyer knows much about the good, its utility, its like goods, and competing sources of supply. And that most buyers actually have some good information about most of these issues. It also requires that vital information about what the good is and how much it costs be fully disclosed before the transaction starts. Still, there are a number of times when even the minimum requirements are not met. And, if one is an American in Italy, it means getting cheated.
7) That goods are traded primarily on the basis of their utility, not on the basis of their future price. Economic theory is derived from an underlying idea that the world is a sensible, rational place, and that people make sensible rational decisions. It requires that one not trade speculatively.
The act of speculation is sensible and rational only if one makes two assumptions.
a) that one is going to make excess profits exploiting a speculative trend.
b) that there is no harm in selling a speculatively priced good to another person, knowing that if the good were rationally priced it would fetch a much lower price.
But the secont provision denies the moral actor provision. So Smith’s thesis does not apply to speculative markets. One can derive different kind of economic theory for speculative bubbles; but most of the body of economic theory assumes a kind of quasi-equilibrium based on rational choices.
8) That wealth is not fundamentally about money. Rather, it is about the goods that money can buy. The rather remarkable ability of currency to be used to attain any sort of good or service has frequently been a source of confusion to people not careful in their examination of ecomomic ideas. One does not attempt to get money for ets own end. Rather, money is merely a medium of exchange. It represents other goods and services. A person who knows that an iPod costs $150 and who wants such an object will have some sense about the value of an iPod. And if they can wait on tables and get $50 a night in tips, then an iPod is equivalent to three night’s work of waiting tables. The currency only provides a means of equating the one with the other.
Currency and other financial instruments have frequently been confused for wealth. It turns out that a considerable amount of Smith’s book is concerned with refuting this idea. And it would serve Americans’ joint and seperate interests well if economists and politicians could catch up with Adam Smith in their understanding of the fact. Fundamentally, it is the act of transforming relatively useless raw materials into finished goods that have utility that creates real value in the economy. Other activities are derivative. They either increase the effectiveness of these activities, or they exist for an essential cultural reason adding intangible value - as is true of the fields of entertainment and religion and free-marketeering.
9) The creation of goods is the creation of wealth. Thus, the wealth of nations rests squarely on an ability to manufacture goods efficiently. Labor, capital, and raw materials being the relevant inputs whose finite supply leads to a similarly finite supply of finished goods.
10) Governmental laws, practices, treaties, policies, and other acts that promote local wealth-generating enterprises tend to make nations more wealthy. Practices that degrade the conditions for such enterprises tend to make nations less wealthy. One can judge all tax law, all trade treaties, etc. on the basis of how burdensome or helpful they are in the pursuit of the creation of wealth.
Smith argues explicitly that there is nothing a government can or should do but to work to lower foreign trade barriers to a nation’s goods. We expect that this frequently a good point of departure for discussons on governmental role in the local economy; but it is rarely the best place to end up. Most good solutions will not be profoundly different; but many good ones will be materially different.
11) Because wealth is fundamentally about goods and because it is funamentally about such goods being rationally priced, measures of wealth are a good proxy for the measures of material well-being of a society.
Smith or at least those who follow in his footsteps make a number of false assumptions in their arguments for an unrestrained free market system.
1) That it was principally the commercial freedoms of Holland and England that kept its merchants there. Smith argues that the commercial strength of England and Holland over the several preceding centuries owed, in great measure to the presence of a body of merchant families, which was probably true. It is also true that there were commercial freedoms there. But what caused many of these families to move there in the first place was the Spanish Inquisition. And what caused them not to leave was that there was not a compelling reason to do so. There were not so many better places to go.
It certainly was religious freedom that borught them and may have been religious freedom more than it was commercial freedom that kept the most successful merchants in England and Holland. One can see it as kind of a quibble. In an economic sense it is. But not all important questions are economic questions. And sometimes it is important in the study of economics to remember that there exist rational explanations for behaviors that otherwise do not make a great deal of economic sense.
2) That it was entirely due to the “invisible hand” that England owed her ascent. We have argued elsewhere that England and Holland cultivated a materially different kind of relationship with colonies than did Spain and, perhaps, Portugal. The Latin model was extractive, exploitative, and patriarchical. The foreign lands were given no political autonomy, the enterprises focussed most on mining.
Slaves were imported to work the mines. Holland’s trade was with the Orient. It did not colonize quite so intensively as the British except, perhaps, in South Africa. But the Dutch were very interested in commerce as were the British. In North America, English colonialists came not for the gold but for the farmlands and the religious freedom. And they had a considerable amout of autonomy, with the authority to create their own bodies of law, and so on. So in these respects England’s ascent owes much to the invisible hand.
But England had other endowments. It had a rather remarkable educational system that taught the classics, arts, and sciences. It produced a number of bright, well-rounded, thoughtful graduates each year of whom Smith was one. And because the British saw good government too important to leave to the stupid, or slavish, they established a civil service system that placed the best and bnrightest in relatively h igh government positions. So one strength that is purposefully overlooked by the “free-marketeers” is Britain’s insistence on being governed well by highly trained, intelligent people.
A third endowment consistently overlooked is England’s proximity to the New World. This accident of geography gave England a small but material advantage in accessing North America.
A fourth endowment England had was a weak mornarchy, a lively Parliamentary system, and a tradition of “rule of law.” This meant that the monarch was obliged to obey the law; and not even the least important citizen was beneath its protections, at least in theory. And sometimes practice was not far removed from this. By some measure, England’s best monarchs were her queens whose understanding of their tenuous positions led to extraordinary, almost unprecedented levels of attention to the task of ruling well.
This list is merely a short list of some of the important advantages that England had that help explain her ascendency. The invisible hand was not the only one.
The Big Picture
The question implicit to the title of the book and one that informs much of its material is “What causes differences in nations’ wealths?” If one nation is poor and another is rich, why is this? Indeed, what do we mean when we say poor or rich?
Throughout the book Smith argues that wealth is not currency. Currency is simply a medium of exchange, a way of keeping accounts. Wealth consists of lands, resources found on lands improvements to land, and things derived from land, namely, foodstuffs, and manufactured goods. To the extent that gold, currency, or other financial instruments can be traded for these goods - specifically, to the extent that a nation can export gold and by so doing expand its stock of the aforementioned goods, gold and currency may be considered, if not wealth itself, assets useful in obtaining wealth.
Smith does not try to argue that currency and other fungible assets do not constitute wealth but he does make a forceful argument that wealth does not lie in these instruments alone. Later authors would make the argument that currency itself is but a medium of trade and has no intrinsic value. It is an argument that works a little better for paper money than it does for gold coinage. But perhaps not much.
Smith’s idea of wealth puts him far ahead of a huge portion of the free-marketeer crowd who pretend in public that wealth is primarily about getting more currency or about eliminating laws that regulate how institution A, entrusted with the safe keeping and investment of person B’s money may not use that money in a way that would tend to lead to the ruination of A and B alike. Smith understands that financial manipulations may sometimes make the manipulator wealthy; but they do not actually create wealth. Rather, wealth is created when land is employed to grow food. Or when raw materials are transformed into manufactured goods. Activities that make these more robust and efficient augment the wealth creation process.
Wealth of Nations
Wealth of Nations is structurally divided into two parts. The first part concerns itself with the generation of wealth within a nation and with how this wealth is distributed among its inhabitants. The second part concerns itself with the way a nation interacts with other nations, specifically, the legal instruments it uses to build, redeploy, or be destructive of wealth. These legal instruments include taxes, treaties, special trade agreements, and so on. We note here that this division is not accidental; for Smith wants us to understand that the kinds of arguments he makes about how individuals interact in society can equally well be made for how nations interact.
The first several chapters talk about specialization and its relationship to returns to scale. The term returns to scale is never discussed by Smith, partly because there were so few examples of it in his own day. Arguably, it existed in the textile industry in his day; but otherwise, most goods were made one at a time by skilled craftsmen. And the level of skill proved to be the primary component in the cost of production of many undifferentiated goods. A skilled worker could turn out two, five, or even ten times as many units of a good as could an unskilled worker in the same amount of time using the same tools of production. And since the primary cost of a good has a lower bound that relates to the total amount of labor involved in its creation, skill created by specialization tends to drive down production costs very effectively.
Division of Labor
Smith starts the treatise with what turns out to be a rather important proposition to his thesis; but is so in an unexpected way.
The greatest improvement in the productive powers of labor .. seem to have been the effects of the division of labor.
Smith is writing at the very dawn of the industrial revolution. In his day a large portion of the manufactured goods were constructed by hand using standard tools of the trade. But there were some enterprises that had moved on to more modern manufacturing practices. There existed large, water driven cloth production mills that operated at a level of efficiency that far outsripped that of the old hand- looming days, and did so perhaps by orders of magnitude. So Smith is ignoring the employment of capital at this point in the book.
Actually, specialization spurred capital formation because those skilled in the looming arts would be the people who would make the large-scale mechanized looms work. And specialists in the smithing arts would make larger scale iron-making work. Occasionally, perhaps, the working capital of a very successful proprietor of one of these trades was also used to transform the productive capacities by expanding the stock of capital. But Smith’s purpose in this chapter is to talk about specialization; he will talk about capital later on.
The division of labor alone, Smith argues, improves the productive power of labor. This is the reason for specialization. And it explains the extent to which specialization may proceed in any society. In a society in which eighty percent of the population works as agricultural labor, only twenty percent of the society may be employed in other areas of specialization. In many western societies agricultural labor ranges from perhaps six percent in France to something like two percent in the US - at least if one does not count migrant workers. The remaining people specialize in other productive (or non-productive) arts. They produce other goods or services.
This division of labor, this specialization, assumes another activity with which it is intimately tied, namely commerce. A person skilled in making nails, no matter how skilled, must either cease making nails and tend his garden, or he must trade his nails for parsnips, rutabagas, cabbages, or whatever. Specialization, therefore, depends on commerce. Commerce must precede or arise simultaneously with specialization, else the people who do not tend fields do not eat. And this never happens.
There do exist cultures that are almost totally lacking commerce. And in those cultures, establishing specialized businesses is very difficult. In British Colonial Africa, for instance, the British Colonists typically owned and farmed vast tracts of land. They brought in Indian and Pakistani merchants to run all the commercial enterprises in cities and large towns. Trading was not a valued skill among the indigenous people. Nor was the capacity to read and write widely distributed.
In chapter 3 Smith discusses some limitations on commerce. In his day the transportation of goods was highly costly; therefore it put a severe limit on the extent of trade. For that reason trade early on was frequently confined to finished goods; for the costs of distributing a good would then be small in comparison to the costs associated with its manufacture. This, by the way, is a relatively good measure of efficiency of a distribution system. As a child I learned that the rule of thumb in retailing was to get a 100 percent markup; half the retail price of the good would go to the retailer for the cost of transporting it and for assuming the risk associated with keeping it in stock. Today, Costco works on a 15% markup and Wal Mart chargesl only a little more than that. Commerce, by this measure, is considerably more efficient than it was several decades ago.
Of Cost and Price
In chapter 3 Smith distinguishes between the cost of production for a good and its price. He then goes on to discuss how goods are priced in the marketplace. If one strips all the profit and taxes from all the exchanges involved in making and distributing the good, one can trace the remainder to the cost of labor. Near the end there is the direct cost of assembly, finishing, and distributing the good. Before that there are the costs of making the component parts and raw materials. And, of course, there is the cost of making the capital equipment that help make the good. So in an ultimate way, the cost of a good can go no lower than the cost of the labor involved in making it. If one is a hunter-gatherer and the deer are three miles from camp, one cannot harvest a deer by going only two miles; one has to go, get the deer, and bring it back. But in most cases the cost of labor is a little more difficult to figure out than this.
In general, once one has totalled up the price of all the labor that goes into a good, one has set its minimum stable market price. If this is more than the market will bear, the good is doomed not to be produced. If it is very much less than the market price, profits are likely to be very high. And this will tempt a large number of competitors to enter the business.
One can set a price for a good that is lower than the cost of producing it. This sometimes happens by accident with certain agricultural products when good land is very plentiful. It sometimes happens with certain commodities when they are very plentiful. But it can also happen with manufactured goods - and not just as artifacts of bad retailing operations.
Roughly a century ago a few American industrialists realized that large manufacturing plants had great advantages in efficiency over small ones. They saw this to be especially true in the steel and oil refining industries. And they worked to consolidate business. This meant buying up tiny competitors and simply shutting them down. But bigger competitors required other treatment. So they would sell their goods at a price that was below the cost of production. And in a short period of time, the competitor would be driven out of business.
At first blush it seems like an insane strategy to sell goods below cost, for in the short term it reduces return on investment. But if one has driven all one’s competitors out of business, one can set prices at an artificially high level. Profits can far exceed the levels they would in cases where many suppliers compete for the same customers. And if the business is one such as steel or refining, a huge amount of capital is required to compete. In economc terms, the barriers to entry are high. They are especially high when one realizes that the practices that allowed the monopolies in the first place could be used against any new entrant.
This is an eventuality that Smith, evidently, did not forsee. Companies sold at a loss here and there to drive competitors out of business, then they jacked up the price. The excess profits of the oil and steel cartels of early twentieth century US ultimately motivated action by the government to break up cartels and to pass laws that limited this kind of behavior. Some of these laws are still in place; but the era of deregulation that came in the wake of the Reagan Presidency has seen rather dramatic changes in laws that govern the level of concentration in a number of businesses.
A number of the protections against monopolistic and speculative abuses that were put in place in the first few decades of the twentieth century have been overturned. It has already led to some abuses. One such set of abuses has led to the current banking crisis. And in the next several decades there is likely to be a backlash against the kind and extent of deregulation that has been advocated by the Market Libertarians. Firms in certain industries will be judged to be earning profits that are not useful in tems of motivating the firms to act in the public interest. And some practices will have effects obviously in conflict with the general public interest.
It is here where there exists the greatest gap between the spirit of Adam Smith and the language of those zealots who lay claim to his free-market mantel. Smith was interested in an economc system that delivered the goods. The free-market heretics who invoke his name, however, are only interested in the easy money that arises from the cartels that can be arranged when people can be convinced that economic anarchy is superior to economic liberty. Smith was interested in how liberties in economic practice led to good economic practice. The free marketeers are interested in how the abolishion of regulatory laws can be exploited for financial gain. They are hardly at all interested in the matter of the creation of wealth but highly interested in the matter of transfer of wealth. The liberties Smith advocated for were targeted to increase the efficiency of the activities that create wealth and he judged them in these terms. The freedoms that the free traders seek amount to the dismantling of safeguards that keep the system for blowing up and they are not judged in terms of creating wealth but in terms of conformance to a theological ideal. Smith’s motivation was substantially constructive. the free-marketer’s motivation is substantially destructive.
Returns on Investment
By the time he gets to chapter 9 Smith is talking about returns on investment. Mostly he says what has since then become the usual stuff. He does make a few interesting observations that merit further thought.
He uses interest rates as a proxy for returns, He observes that in large cities returns tend to be high, whereas in small, rural towns they tend to be lower. High returns, he argues, tend to make for a shortage of labor, so people who live in cities are compensated with a higher labor rate. He might link this argument back to returns of scale and specialization, but does not do so. He notes, with some interst that both labor rates and returns on invesment are higher in the colonies. (p97)
Smith is onto the trail of something that few economists have since followed, namely, the importance of frontier. What was materially different about the colonies is that they hold a vast array of unexploited resources. And these resources were, by English measures, underexploited. The lands were covered with timber which could be turned into furniture or fuel. And the cleared lands were fertile and suitable for agriculture. It was this property that created excess returns on investment in the New World in Smith’s time. And it is this property that continues to create excess returns on investment in parts of North America today, namely the relative under-population of the land in comparison to its natural endowments.
Smith stops short of making this argument, but he leads us to the brink on multple occasions. In one place he talks about the clearing of Europe. As the ice age ended and the glaciers receded from Northern Europe ten thousand years ago, forests grew. For several thousand years the humans who inhabited the regions were primarily hunters. But as agricultural methods spread westward out of the fertile crescent, the trees were cut down and land was given over to agriculture. It was at this cusp in time when a culture would reach its apex. It was easy to see why.
Long before this point agriculture was rare and food was relatively scarce. But since farmland can produce perhaps a hundred times as much food per acre as woodland, the transformation of woodland to farmland increased the stock of food and supported a growing population. So long as more trees could be cut down to expose new fertile farmland, the population could continue growing. But as soon as there were no more good plots of land to be had by deforestation, the expansion of the food supply would cease. Simultaneously, the supply of wood would then be depleted and people would be prone to freezing in cold winters. Nor could they build new homes or create the kinds of wood and iron tools required for agricultural practices.
It was in reading Wealth of Natons that I realized this argument. And if one has read Jared Diamond’s Guns, Germs Steel and his Collapse, one will see how Diamond has written the first and third books in a trilogy. The first sets up the story of the ascent of Europe. Smith explains the role frontier fist its own and and then frontiers over seas under colonialism. It does not quite go so far as to systematicaly explore the role of trade and the exploitation of imported resources; but it argues for the importance of this.. Finally, Collapse suggests what happens when all the special resources of frontiers have been played out and the population has reached a level that fully exploits the arable land. By reading these three books in the suggested sequence and fulling in the blank space, one can almost fully explain the arc of western history from the point that agricultural practice stabilized in Greece almost 3000 years ago to the point at which resource wars tear civilization to shreds within the next two centuries ( or not, depending on how far the free-marketeers push things.)
Smith’s work actually comes pretty close to arguing the same thing (p202):
In a country which has acquired its full complement of riches, where in every particular branch of business there is the greatest quantity of stock that could be employed in it, as the rate of clear profit would be very small, so the usual market rate of interest which could be afforded out of it …
Mature industries see few opportunities for improvements and therefore the returns tend to dwindle away to not much more than nothing. Only when something comes along to change the matter, either a new and less expensive source of raw materials, or a materially more efficient way of deploying resources, or a more efficient way of creating finished products, is there hope of gaining a higher return. Higher returns require the identification of unexploited opportunities. Should the system get so advanced that these become too difficult to identify, returns will dwindle to almost nothing.
Furthermore, if the industry depends on resources that can be depleted such as is the case with mining, oil extraction, and some agriculture, industry can collapse for lack of inputs. Any industry that has operated for some time on thin margins is in a tenuous position already. In this sense, Wealth of Nations not only does much to help us understand how nations become rich and successful; it can help us understand why they become poor and fail after having been rich.
Pay
Smith turns next to the payment of workers. Smith’s arguments about pay are not incconsistent with traditional arguments about supply and demand; but Smith does not use this particular abstraction. If one views his arguments in terms of supply and demand, they provide reasons for increases or decreases in supply of labor . He accounts for a great deal of the variation in labor rates by free market mechanisms. But he also talks about how guilds and other kinds of licensing and cartel agreements sanctioned by the government artificially raise the price of labor.
Instead of talking of supply and demand Smith describes factors that might reasonably change the suppy of workers in a field. He notes, for instance, that coal miners make more than most other unskilled workers, and suggests that the reason is that their working conditions are most hazardous and unpleasant. The level of physical hazard, presumably, limits the entry into the field, driving up the cost of labor. If people found risking their lives to dig coal more desirable, more attractive than setting type in a printing house, and if both took the same level of training, coal miners would be paid less than typesetters. It suggests why, in an industrial society machismo is a dangerous word.
But in Smith’s day typesetters had a long and expensive education while coal miners had none. This made the pool of applicants for typesetting considerably smaller. And it may have kept the price of labor in the field higher than it was for coal mining. The level of skill required for a job, then, was one of the considerations in judging level of pay. This is kind of a tautological argument, however, because we have argued that specialization leads to productive advantages and that productive advantages lead to excess profit and that excess profit leads to higher pay. It may be that in many cases these are two ways of explaining the same thing. But sometimes, maybe, they are different.
Smith notes that in cases where labor is highly seasonal, it can command a higher rate. One can pay a productive migrant worker ten dollars an hour at the peak of harvest season, or planting season perhaps. But for the same level of skill under other circumstances, similar labor might command a small fraction of this price. The same might hold for construction work
Finally, notes Smith, the level of trust one can place in a worker and the level independence they display in their work sets a limit on what they can be paid. Untrustworthy workers can only be employed in labors so unimportant that the consequences of failure go virtually unnoticed and can be easily ameliorated. One might employ them at the Weekly Standard or the National Review. In a pinch, one might consider them for the job of cleaning latrines; but one would not have them piloting commercial airliners or running great nations.
Smith notes that the normal rate of profit rises and falls with risk (p 117) Riskier enterprises often are not undertaken because of the perceived risks. The perception of risk acts as a barrier to entry. A firm will only be induced to operate in a risky area if it perceives a chance to make a greater profit than normal. So the hope of excess profits lure firms into risky areas. When firms enter risky areas and make better than normal profits it is customary to imagine that these profits are a kind of just reward for creating economic opportunity where before there was none. And this is probably a good way to look at it.
Labor Cartels
Once he has explained the normal free-market issues that bear on differences in wages Smith turns to the issue of cartels - agreements which have the effect of limiting the availability of certain goods or services and thereby driving up the price.
Smith recognizes what few contemporary free-market heretics acknowledge, that in a large portion of cases labor rates are negotiated. There can be a number of case in which such an arrangement is seen by society as being just. One circumstance is when an emplyee works for a firm that earns excess profits, especially where such profits are achieved by means of a cartel or enforced by law or threat of force. We think first of monopolistic corporations; but we might also think of feudal lords in the middle ages. In both cases special pricing powers arise from an imbalance of economic power.
In such cases, the excess returns derived from systematically bilking the customer are divvied up not only among those who own the business but also among who actually do the work. It is somewhat less satisfactory than not bilking the customer in the first place, but it does spread the economic advantages farther. It serves the end of having a large middle class. And the breadth of a middle class is a traditional measure of how stable and happy a society is. Labor cartels provide laborers with the negotiating strength to succeed in negotiating labor rates higher than the normal market rate.
The first sort of cartel Smith takes on is the cartel of the skilled workman or craftsman. The people who might be members of the population under consideration would include carpenters, masons, plumbers, painters, tailors, glaziers, machinists, butchers, bakers, and candlestick makers. Smith is inclined to see them all as knaves. He argues that they don’t have any real skills, that they don’t receive any real training, and that the fact that they belong to guilds elevates their pay without providing a corresponding elevation in the level of services rendered. The guilds, he argues produce no economic benefits and a considerable amount of harm.
Smith employs a little motif. In the firs occurance he claims that a person trained in a particular field could learn all there is to know in eight weeks. He repeats this claim some pages later about another craft, but with a shorter time period. He does it several more times, each time shortening the amount of time. At first we are inclined to take him seriously. But on each successive occasion we take him less seriously. Eventually the argument tempts the rebuttal “ Speaking of cartels, it is clear that any idiot with about three hours training could write a book economic theory exactly like yours, so why should you own the copyrights to Wealth of Nations?”
A more serious rebuttal might be made by examining the context of the social arrangement. The guild arrangement arose in continental Europe during the feudal ages. A landlord or a very small group of them would live on estates not far from a little town. Such a town would have a butcher, a baker, a storekeeper, and a handful of other tradesmen. It was not unusual for a town to be associated with but a single estate. From that estate most of the local staples of grain and meat were derived. So the estate would command a considerable amount of local economic power.
Tradesmen would sell there skilled services where they could; but the biggest employer was likely to be the estate. This general arrangement of things meant that the estate owner had a great deal more economic power than the rest of the locals. So, under a free market system, if a skilled tradesman seemed too expensive to the estate, tthe estate could simply go somewhere else. This would be a good deal for the estate, but it might mean the local tradesman was out of business. That, in turn, could be bad for the town. And it would prove short-sighted for the estate; eventually, the estate itself would suffer.
So the arrangement of guilds was set up to provide a steady supply of people with defined skills. And in return for this, guilds were able to control membership levels and gain artificial pricing advantages. Guilds, by employing means of collusion could offset the negotiating power fo the local estate. The estate owner lived a kind of parasitic life by virtue of receiving rent on land that he himself did not work. But this largesse found its way back into the community through elevated costs of skilled services.
Of Guilds and Classes
The guild system got much farther on the continent than it did in England. We speculate that it was because estates in Europe tended to be bigger. Thus estates had more pricing power. In order to offset this power, guilds needed to be stronger. There might be other arguments. It might be true that the artisans who descended from the Latin tradition really did then or at some earlier point in time require the level of training suggested by the length of time in apprenticeships. And it may be that tradesmen in England were less skilled. In any case, Smith argues that guilds are bad.
There must surely be some truth in what Smith is arguing here. It is certainly true that self-governing guild organizations when their status is not in question too often tend to work less toward the goal of providing a steady and reliable supply of the skilled labor through training, licensing, and monitoring the guild’s members than it works to extend the political and economic powers of the institution. It strives to gain more political power and takes its eyes off the business of creating guild members who are good at the trade. It is true that they can be abusive of their members and of the people who pay them. And all of these behaviors are destructive.
But these facts do not negate the fact that the guilds exist to counterbalance ( or to exploit ) abusive practices by a guild members’ employers. And it is sometimes true that this counterbalancing force provides greater benefit to guild members and to society at large than the costs associated with the abuses. It might also be true that the English sense of noblesse oblige tended to make English estates, in general, somewhat less abusive of skilled workers than were their continental counterparts. So it may be that guilds were less necessary in England.
Finally, we might argue that the guild system might have saved continental Europe from the ravages of communism because it spread the gains of capitalism more generously to those who labored in factories. Marx might have expected this; but he wrote early enough in the industrial revolution to be forgiven for not understanding that its productive capacity might have the power to materally change the standard of living of workers who labored within it, provided that the gains were equitably shared with workers. For some reason Smith, who wrote eighty years earlier seems to be ahead of Marx on this count.
If one can see the logic of communist revolution occurring first where there was the least developed middle class, namely Russia. And one can explain why it followed in China. And why it tempted most peoples in the poorest lands. Germany never really got very close. France had already had its revolution and was disinclined to have any more. And England had Queen Victoria and Dickens who both worked hard to make the British aristocracy a socially responsible class. Finally, England’s substantial commercial class both wanted to emulate the aristocracy and had no real reason to overthrow it. The nobs might have been twits and dimwits sometimes; but the most dangerous ones were out in Afghanistan shooting Sikhs or something.
The question of how England got a middle class with a weak guild system and whether the English model can be copied broadly or whether it depends of creating a vast system of vassal states is a question deserving lively debate. It seems reasonable, however, to argue that the British model was only sustainable while she could sustain her empire, exporting her poor and criminal classes to the boondox to thrive or starve, sending her aristocrats on great military expeditions, and exporting her petty bourgoisie to India to rule, play cricket, and slowly rot in the sun.
Not every nation wishing to do as well can follow the same model. But they can, sometimes provide rich educational opportunities and support the efforts of its nationals to establish new and more profitable commercial enterprises abroad. Be vigorous in the fields of education, industry, and commerce and success will follow. It’s a message the Chinese have learned from the west and in the narcotic sleep induced by the free-marketeers’ magic potion it is one the west has nearly forgotten.
Rent on Land
Smith turns next to the question fo rent on land. Rent, here, is an amount of money paid to the person who owns a plot of land by a person who uses it for some purpose. Smith starts by observing
As men, like animals naturally multiply in proportion to the means of their subsistence, food is always in demand
This snippet gave rise to the controversial Malthusian idea of population which essentially states that population will expand until most people live lives of subsistence, existing mostly on thin gruel and shivering in damp ruins. Malthus dark view of population dynamics has been used to justify such odd policies as not importing wheat into England during a famine during the mid ninteenth century. The point of debate was whether England should import grain from the US. Membes of the British aristocracy invoked Malthus, suggesting that imported food would simply cause the rabble to over-multiply and things would just get worse. This would have been a mean-spirited argument at best. But these same aristocrats stood to gain the most from elevated food prices during the dearth. The longer the poorest of their countrymen starved, the higher their net profit on the situation.
There is a lesson in this that applies to how we evaluate the claims of the free-marketeer.
The consequence of this abuse is that Malthus has been widely discredited by liberals ever since. But Malthus was probably close to the factual truth. And if one denies Malthus, one can make no sense of the economic problems that plague a number of the poorest nations. The day most people choose not to have sex because they are too poor will be the day we can legitimately claim that Malthus was wrong. But until then, it is reasonable to believe he was right. And Smith, too.
But what we do in light of the fact is a difficult matter. One might believe that if the aristocracy did not actually stand to gain from food shortages, if they were pinched at least a little bit by them as well, they might work toward develomental strategies that improved food production efficiency and helped people do what they could to manage fertility intelligently.
(It is striking that the free-marketeers today are striving for the same kinds of policies that tend to cheapen the lives of all but the richest one in ten thousand. It is almost as if they have read a book about how to create a poor, feudal society in which most people barely subsist and they are just checking things off the to-do list. Eliminate birth controls; check. Eliminate effective education by teaching facts and eschewing judgment; check. Ship manufacturing jobs overseas; check. Import cheap labor from Mexico for all service industries; check. Make sure that this labor is here illegally so that it can be employed at wages far below minimum wage; check. Create an uncritical and fawning press; check. Undermine people’s faith in the western liberal ideals; check. Eliminate discussion of ideas from public discourse; check. Bury people in debt so that they have as few behavioral choices as possible; check. It just goes on and on…)
It is only on rare occasions that Malthus rule has proven unreliable. And those occasions have always been associated with material increases in the land amenable to farming, to new farming methods, or to new and more nutritionally effective foodstuffs. Since the discovery of the New World, Europe has seen at least two waves of cheap foodstuff from the discovery. The first wave was the foods from seed - potatoes, tomatoes, maize, peppers, and squash that were imported from the new world. The next was the wholesale importation of beef and grain from the Americas The third came with the mechanization of production using machines powered by oil.
It is not impossible that there might be more, but the gains will be marginal, not exponential as they were early on. The discovery of the New World increased the potential food supply by at least an order of magnitude. And the mechanization of food productiion along with the rise of new chemicals to aid in food production probably redoubled this. But already humans consume a substantial portion of the sun’s energy that the plant kingdom transforms into plant materials. And some portion is required to maintain soil fertility. We are not very far from the point at which the earth can be pressed no harder.
Unless humans figure out how to seed the great vast oceans with crops for energy and food; there is not much room before the planet’s food generating resources are pushed to a f theoretical limit. Recent food shortages around the globe suggest that once again the view of population dynamics hinted at by Smith and developed more thoroughly by Malthus will prove more accurate as long term views.
Smith goes on to argue how it is that relative shortages of food sharply drive up the rent of land while surplusses of food tend to drive down rent of land. It is probably at least partly in light of this fact that it has been for some centuries that land owners in European nations have insisted that all foodstuffs be grown locally. From a culinary point of view and from a sustainability point of view this is a good idea. But these are generally not the the primary motivations. Rather, it is beneficial to keep a kind of artificial limit on the supply. The French, however, in the case of bread are inclined to keep keep surplusses in order to keep prices low and to keep everyone’s head where it belongs.
Smith argues that a plot of land is capable of producing a great deal more food than a person who cultivates it is capable of consuming. It is an apt obeservation. It is certainly true in every developed western nation. But it is demonstrably false in certain other locations. Jared Diamond (writing more than two centuries later in Collapse) notes that in Rwanda at the time of the genocide, a typical person owned something like an acre of land. That land was intensely cultivated. And it produced very little more than was required to sustain the family who cultivated it intensely.
So Smith has established a condition that is a requirement for an industrial society: namely, that there be an amount of arable land that, when cultivated appropriately, provides a more than ample supply of food; and that this supply of food be ample over the whole range of nutritional qualities; and that the labor required to coax from the land this nutritional bounty be a relatively small fraction of the labor available within the population. He assumes that such a condition might occur in any country. Whether he was right in his own day is open to question. The condition certainly does not apply in a number of poor nations today, however, and the fact is vitally important when one sets out to understand the factors that sustain the high standards of living in the west. There are many but the two germane to the discussion are:
1) a level of population materially lower than what the land would support under the best available cultural practices
2) a level of fertility of the land, a level of technological development, and a level of auxiliary energy inputs that drives the cost of labor on a plot of land to be an almost inconsequential part of the cost of agricultural production.
These certainly are not sufficient conditions; but they are necessary ones if one is to create and sustain a vital industrial or post-industrial economy. Societies that fail to approach these conditions fail to establish industrialized societies with rich middle-classes.
In his section about rent on land Smith also talks about the extractive industries. It is useful to keep in mind that already in 1776 Europeans were using “copper from Japan” (p179) in their manufactures. The Peruvian silver mines had been in production for some time. And the Spanish had been trading Peruvian copper in China for goods that were then imported to Europe. Smith, in an earlier section on money, even complains that Spain’s silver and gold mines in the new world have driven down the value of precious metal currency so one needed to carry around more of the heavy coins in one’s pocket for the purchase of incidentals.
The point, of course, of talking about mines is that extractive industries tend to increase rent on land - at least while the extractive material is being extracted. Since Smith’s time it has become increasingly popular practice to strip land of its qualities of excess value before selling it in a retail marketplace. So in California, for instance, a land owner whose house is demolished by any unusual motions of his land is responsible for the damages. These hazards convey with the rights to build and occupy the land. And a homeower who has the misfortune of locating near open, wind-swept veins of asbestos on public lands or lands held by land speculators, bears the full burden of the carcinogenic consequences of inhaling the asbestos carried on the breeze from another’s property. But if oil or gold is discovered on the property it always belongs to someone else. Perhaps it belongs to the owner of the asbestos. The ways of the free-marketeers have complicated the issue of rent on land. Or they have simplified it; for one no longer has to worry about the corrosive effects of becoming rich by the same means as Jed Clampett and the ensuing social discomforts.
The issue of rent on land has been a central issue in the European study of economic theory because for one or two millenia there was a class of aristocracy who survived by rent derived from their land holdings. It was not that they were farmers, often. It was that they contracted with workers to work their land, claiming all the fruits of the labor, and paying them some portion of the crop.
When food was scarce - as it was with a kind of almost periodic regularity in Europe from the fall of Rome to the discovery of the new world and over a few periods after that - landowners would reap huge profits from their lands. And the serfs working the lands would enjoy some of the bounty. When food was plentiful, as when there had recently been a plague or a devastating war, food prices were generally depressed. Land owners did not receive much rent from the land. And the people who worked it barely survived.
A curious side effect of this arrangement is that bitter and protracted wars might decimate the populatiion, driving down food prices. So the aristocracy, if they understood this fact well, might be disinclined to wage expensive, bloody wars. It is worth noting that Napoleon was not such an aristocrat. And evidently such aristocrats had fallen into short supply by the time WWI came. European politics was driven by its merchant families, a number of whom grew very rich from the conflict.
One of the points Smith makes about the rent on land is that efficient manufacture of non-agricultural products and efficient trade in such products effectively raises rent on the land, for it increases the amount of stuff one might be able to buy with the materials produced on a farm. In his day merchants, bankers, and manufacturers did have a certain amount of political clout; but it was still the landed gentry who had the bulk of the political power. And this is a kind of argument they would be inclined to understand, approve of, and remember.
Scarcity
The issue of scarcity and excess value crops up a number of times in Wealth of Nations. He tells a story from days of exploration. While Columbus was collecting seeds of peppers, tomatoes and squash his shipmates were sowing seeds of their own and creating a conduit by which certain diseases would find there way back to the new world. In the process they engaged the natives who evidently had a generous nature on several fronts. They wore nuggets of gold in their hair. And when asked kindly, they would gladly give them over. It was as if these nuggets were little better than other bits of detritus one finds by the wayside. Part of the attraction of gold, evidently is universal. But the factor that makes it dear, reasons Smith, is its scarcity. To Columbus shipmates gold was both scarce and dear.
Scarcity drives up the price of agricultural good and it drives up the price of manufactured goods. There is, in fact, a sense in which scarcity is at the center of economic study. In a world of no scarcity of any sort, there is no meaningful economic activity. People have precisely what they want. They want precisely what they have. Everything is in balance. The idea is one that can be found in the philosophies of very old civilizations.
Lao Tze, a Chinese philosopher who was a contemporary of Confucius envisioned a perfect world. One lived in one’s pleasant little village. The village had a full complement of artisans and craftsmen. it had tree-lined streets, perhaps. And little shops. It produced all the things one needed from local supplies of resources. A person worked the land, engaged in arts, raised a family. In the morning one could hear the cock crowing in the next village; but one was never tempted to go there because everything was fine right here. It is a vision that eschews bounty and extreme scarcity alike; for bounty encourages wasteful and unsustainable ways.
This is a kind of medieval vision that is borne of a closed, static society. And it is a kind of vision that describes a great deal of human village life in several continents over many thousands of years. It is one that westerners have difficulty understanding since all of western culture - especially that developed over the last half millennium - is built on moving the bounds of the frontier. But it is a vision that might become helpful in the days when there is no more hope of achieving the satisfaction we crave by moving to the frontier.
Similarly, Siddhartha imagined that unhappiness arose from desire and disappointment. And his idea was to overcome desire. One might almost argue that the idea was to embrace scarcity. The old mystical practice of fasting is a kind of embodiment of this idea. Fasting can put one in a different mental space. And some people actually feel much better after a few days without food. So even the body’s own systems tend to reinforce the idea. In any case, Siddhartha’s idea is a kind of idea that one would find gaining popularity in places where the frontier had long since passed. Population levels had reached a kind of quasi-equilibrium. And serious dearths would always take a big toll.
Once again, this idea of overcoming want by sheer force of will is an idea that must necessarily be rejected in frontier societies; for such societies thrive on want. They thrive on the expansion of want, the expansion of territory, the expansion of productive capacity. But should there ever be a day when such expansion is beyond the capacity of the earth to support, scarcity will ensue. And western culture will find itself in need of a new way to deal with scarcity. Whether denying want - or whatever term one chooses to use for the Buddhist practice of driving dissatisfaction from the soul - proves a good way for westerners to deal with unavoidable scarcity remains to be ssen. It does not help one eat better; but it might, sometimes make one less dissatisfied with want when there exist no practical alternatives.
Smith’s understanding of scarcity seems just a little more robust than that of the free-marketeer; Smith understands that real scarcity can exist. And he understands that this causes the price of a good to increase. He understands that while the scarcity persists, the price will remain high. He understands that sometimes a high price succeeds in inducing a subsequent increase in supply; and sometimes it does not. When it does, the price of the good is driven down again. This situation happens from season to season with a number of agricultural commodities. And if it is not regulated to some degree, it can play havoc with food supply.
To the free-marketeer it’s just lines on a graph and equations. The equations say that shortage causes the price to go up; and that high price causes increase in supply; and that increased supply causes price to go down. And in a flash we are back where we started, as if nothing ever happened. By this clever analysis one could prove that any meaningful shortage was, in fact, nonexistent. For before it had any chance to have any material effect, the price would have gone up, the problem with supply would have been corrected, and the price would have fallen. QED.
But it’s the kind of facile argument one gets when one creates a flawed mathematical model of reality and then proceeds to confuse the very limited, simplified model with the reality it kinda represents. In many cases the physical conditions that cause shortages take time to correct if they can be corrected at all. In the world of agriculture, for instance, that time period can be one year. But sometimes unfavorable weather or diseases will affect some agricultural crop for some years. And in some cases resources become completely depleted and there is no more to be had at any cost. Such is the case for extinct species, for instance.
Fifteen years ago when the price of oil hovered around $20 per barrel, free-marketeers argued that the world could never run out of oil. If more were needed, the price would go up. And the oil would start to flow again - simple as that. Today the price hovers around $100 per barrel and exploration activities each year continue to find new reserves at a rate slower than existing reserves are depleted by oil ‘production’. So this particular shortage has, so far, failed to produce the amount of oil necessary to sustain supply at any price. Perhaps at $500 per barrel things will go better. Or at $2000 per barrel. Who can say? But at some point either the west will develop other primary sources of energy such as nuclear, solar and wind; or else the whole industrial society will come crashing down for lack of fuel.
The cost of believing the free-marketeer’s fictions here could be very high. With the amount of money so far committed to the illegal invasion of Iraq America could have built enough nuclear power generating capacity to obviate the need for all of the oil secured by the invasion. And we have not yet even begun to purchase the oil ‘secured’ by the invasion. So when we do purchase it, we will have paid for it two or three times over. If we judge it by its results, we might be led to believe that in contrast to Smith’s goal of creating economic goods the goal of the free-marketeer is to create and exploit scarcity in a systematic and destructive way.
National Interests
in economic terms a nation can be viewed as a kind of economic organism. It has an internal life that consists of trade. Nations with lively internal trade systems tend to generate wealth. Those with little internal trade tend not to do this so well. This is an idea one might take from the first half of Smith’s book. And it explains why the founders the the United States wished to control trade between states; it was so that states would not be allowed to erect barriers to trade by taxing trade. This idea, arguably, was derived from Smith’s work and was advocated by Alexander Hamilton. And it is for this reason that his face graces the $50 bill. But parts of Europe provided a fine counter example. There were fiefdoms that charged excise taxes for all goods that crossed their territories. And this played havoc with trade, especially when a good travelled long distances across land.
Just as living organisms exchange materials with the environment around them, so too nations exchange goods with other nations. And just as organisms erect barriers at their boundaries to gain some control over the flow of materials across the boundary, so too nations place controls on what crosses their boundaries.
There are limits to the analogy, however. One distinction is that if organisms systematically either allow the wrong things to cross the boundaries or prevent certain things from crossing boundaries, the organism dies a quick death. An organism that does it better takes its biological niche. Because this process had been going on a long time, organisms tend to do a reasonably good job of this regulative process while they inhabit regions with environmental conditions similar to the ones they evolved to exploit.
Something like this might be said of nations. It is not necessarily true that a nation must have external trade to surviv; but it is true that external trade can make for a happier place. Where the analogy really begins to break down is that ometimes nations adopt policies that are in the interests of one group but are highly to the detriment of the nation as a whole. Sometimes they adopt policies about trade that are, in the longer term, generally destructive. Adam Smith was interested in this question. And the second half of Wealth of Nations sets out to evaluate various instruments and how their deployment has affected a nation’s wealth, usually Britain’s.
Among the first questions he addresses is the quesion of protectionist policies. He argues that a nation ought to do most what it does best. And from there it ought to trade for the rest. In other words, Smith envisions nations specializing in economic activities in roughly the same way humans do. And he envisions them trading in the same way. Given a fairly well developed nation, one that has at least some healthy industries that manage to export effectively, Smith’s argument is difficult to puncture. And if one looks at the question in a purely abstract way as Smith does, there can hardly be any doubts.
For example, Smith talks about a treaty that liberalized trade with Portugal. The English pledged to lower tariffs on Port if the Portugese would lower tariffs on woolen goods. Now it doesn’t take a PhD economist to know that the English weather could never produce good port. Nor is it difficult to understand that the English had certain local advantages in the cultivation of wool and in the weaving of it into fabric. It would be pure folly to grant to a British firm the exclusive right to produce Port and to exclude the stuff made in Portugal. It is similarly true that, at least until the age of the container ship, it frequently made sense to finish manufactured goods near where the principle raw materials for the good were most abundant.
For some nations getting started has proven difficult. In some nations there simply is no industry of any sort. So where could one start? Well, if its people are not industrious, and if they are disinclined toward commerce, and if its stock of fertile land is pushed to the limit in supporting its population, then there is almost no hope at all. One cannot start with agriculture. One cannot start with trade. One cannot start with industry. There is nowhere to be found any surplus to be traded. The people of the land are permanently wed to poverty. Almost no amount of aid, almost no kind trade policy, almost no factor can change the situation.
If the nation can import the resources it needs from lands with surplus resources. And if its people are industrious and educated, there is some hope that investment can be made in manufacturing facilities. And that such investments might provide excess returns. Such was the case for Korea in the 1950’s through the 1990’s and such is the case for China in the 1970’s through the 2000’s. But where this transformation is occurring nations will be inclined to do what they can to protect their new investments. One does not transplant small nursery plants into the garden without adding some fertilizer to the soil and watering them in. One does not fail to give them protections from pests that might pick them off while they are young and vulnerable. Smith’s argument, then, might not apply when one is trying to establish new industries.
The Chinese, for example, simply took the huge profits their new industries were making and invested the proceeds in dollar-nominated securities, mostly US treasuries. The size of this influx of cash kept the value of the dollar artificially elevated. And it made Chinese goods seem artificially inexpensive to American consumers. It’s not clear how much of a competitive advantage the Chinese gained from this; but presumably the Chinese imagined it was bigger than the loss they might experience once the dollar tumbled after they withdrew their support.
What about the case where an established industry is dying in a rich nation because the same good can be manufactured less expensively in another nation? This is a more difficult question. At the highest level, the answer is relatively straightforward; the good that is produced most cheaply is produced most efficiently. Smith’s argument wins. But the consequence is not everywhere equally desirable. The stakeholders of a firm that closes up in one location and is replaced by a like firm where labor is a great deal cheaper all lose. The stockholders, the employees, the community. Its customers gain.
What would happen to a rich nation that outsourced all its manufacturing? So long as it could cling to all the associated service industries that add value to manufacturing - marketing, engineering, design, accounting, finance, distribution, and so on, there is some reasonable hope that these services would sustain a nation. Nobody has ever done the experiment. Furthermore, while there is some reason to place marketing near the customer, there is reason to move engineering and accounting near the manufacturer. So even the supply of service jobs is likely to move closer to manufacturing. Thus, while one can make a case by case argument for why everyone in a nation wins when one industry relocates to a land of cheap labor; one cannot make the case that it is perfectly alright for all to do so. Rich nations are so because they are productive.
It may be that Smith’s invisible hand will work its way in this case. What is likekly to happen is that, at some point, labor in the far east will grow less cheap in lands that have developed manufacturing bases. At some point the pressure to share the profits of an enterprise with the laborers who do the work begins to bubble up and force wages upward. It happens a little more slowly in in the Orient for social reasons. And it may take some time in China since a majority of the Chinese, arguably, are underemployed in agricultural endeavors. But if one were to project far enough into the future, one would expect labor rates there to go up. (Assuming an infinite supply of resources…) It is also likely that labor in the US will become less expensive. Certainly the minimum wage has fallen considerably in real terms since the liberalization of trade with China. And the recent drop of 30% in the value of the dollar suggests that some of its excess value is eroding.
Once most of the qualified slack labor in the world is used up, it will not be long thereafter that one will find a resurgence manufacturing businesses within the US. But in the mean time the question will be how far will the living standard of the American fall before the rising standard of living in the Orient provides a hard stop? It depends on whether Americans can remain materially more productive than the Chinese. And that, in turn, depends to some degree on how neglected the manufacturing base becomes before the turnaround.
Smith’s invisible hand teaches us what might happen in the long run. Its genrealities are sound. But it is not good at all at telling us how to get through the transition periods. So it’s useful, sometimes to think outside the box defined by Smith.
WHAT ABOUT SMITH”S INVISIBLE HAND?
At one point I had read most of the first two thirds of Adam Smith’s Wealth of Nations; I had carefully browsed large portions of the final third of the book; but I had not yet located Smith’s “invisible hand.” Neither chapter headings nor subchapter headings proved helpful in locating it. I was tempted to believe that Smith, himself, instead of viewing this unshakable tenet of capitalism as the central thesis of the book, veiwed it as an incidental point. In fact, if one reads the material of the book; one can just as easily see it as
1) making argments for other factors in the economic success of a nation or
2) making arguments that serve as some kind of exception to the rule of the invisible hand.
One can locate it near the bottom of page 351 in a chapter about restraints on imports. It appears in a long and passionate paragraph that would not seem out of place in John Galt’s speech in Atlas Shrugged. Smith argues that each person works as hard as she can, as cleverly as she can; that each smploys all the resources at her disposal in a free market economy. Every means to a better end is exploited out of self interest. Since one can extract no more effort and supply no more resources, this must be the best one can do. Sum together all the products of these extreme efforts, and voila.
It’s a pretty good argument.
There are, however, a number of minor problems with Smith’s idea as sensible as it sounds. Smith himself identified one of them when he talked about cartels. Smith hated cartels. But he argued earlier that:
People of the same trade seldom meet together .. but the conversation turns to a conspiracy against the public.
By Smith’s own reasoning people colluded voluntarily and this collusion created inefficient markets. This inefficiency diminished the wealth of a nation. But wait, Smith has just argued that people, in maximizing their own profit also maximize the wealth of a nation. Both of these cannot be true. If his words about cartels are true then it is not true that the fact that a person acting in his own interest axiomatically means he acts in the interest of all of those whom his acts affect. One cannot simultaneously argue that guilds are desstructive of wealth; that people will collude voluntarily, and that all the activities that maximize individual wealth maximize national wealth. It just cannot be so.
In a kind of strict, logical sense the invisible hand idea is not true at all. It is, perhaps, suggestive of something that is true. It might give us a good start in getting to something true, but the issues of cartels - a very common kind of economic activity, and one with profound economic ramafications - is completely ignored by it.
Another problem with the idea it does presume a higher levels of knowledge, and enlightenment, and motivation than are generally widely spread through the population. It also assumes a higher level of access to capital than many enterprises have enjoyed. People do work hard. And they make use of what resources they can. but it is frequently true that the smallest of enterprises dio not have the depth of intellectual resources to do this as well as larger enterprises sometimes might. For this reason it is sometimes true that changes in structure lead to gains in operating efficiency.
By the same virtue it is sometimes true that larger enterprises are formed for the purpose of making a quick buck. They enter a business, make a big mess, then go bust. Certain kinds of industrial scale farms, sometimes, may pay less attention to techniques that sustain soil fertility over many generations than do farmers with a multi-generational link to the land. In such cases small farmers might represent society’s durable interests better by not exploitatively working the land.
It is not axiomatic that all things that create profit are societal goods, either. Pollution is an example. So is carbon dioxide creation. These are side-effects of practices that increase returns on investment. When an enterprise creates an external cost, a cost to society, by virtue of its normal operation, that normal operation is not properly representing the interests of society. Its goods are priced as if the externality did not exist. But it does. So there is an element of deciept here.
Those who are concerned about China’s share of the manufacturing market might note that if there were global pressure on China to clean up the air pollution, and to pay her manufacturing workers a fair wage, and to give them reasonable working hours, many of the business advantages that the Chinese have that seem unfair to western businesses and workers would go away. The respiratory health of the Chinese would improve. And they would be able to enjoy a little leisure time and fewer would work themselves to death.
There are other side effectsto thinkng about the invisible hand in the wrong way. One of the bizarre temptations of Smith’s invisible hand idea is the argument that all that might be done to improve things has been done. If the invisible hand is true not because people behave in a certain kind of rational way, but simply because it is true, then one would be forced to conclude that things are the best they can possibly be because the invisible hand has made them that way.
The spirit of this idea is antithetical to the spirit of Smith’s invisible hand idea for it removes all motivation to improve and to drive more efficient operations. The invisible hand idea depends on the idea that anything that might be done to improve a business is done simply because a person ought to be motivated to do it. But that is not always the case. Sometimes it takes some time. How much time depends on a lot of factors like cost and technical feasibility and political consequences. And it requires that the person running the business does not believe in the invisible hand as a kind of mystical force that substitutes for their own good judgment and diligence. The free-marketeers veer dangerously close to this kind of thinking by assuring us that everything is fine, we don’t have to worry ( see also think) about any of this stuff; the experts will do that.)
There are a number of really h uge notable exceptions to the assumptions Smith makes in his invisible hand argument
1) Slavery.
It is certainly in the economic interest of slave owners to own slaves. The choice allows them to live as rich men, enjoying the rent on huge tracts of land. Smith’s argument says that the slave owner will likely do what he can to maximize the output of his enterprise. So he will keep his slaves well-fed but lean. And he will work them hard but fairly.
In a purely economic sense that is all well and good. But the invisible hand may not tell us that slavery is antithetical to the ideal of participatory government. It may not tell us that the economic idea that humans can be treated as chattel degrades the very idea of humanity. There are issues that impinge on economic practice that are bigger and more important than mere efficiency of production. When cheap stuff is the ulitmate goal of existence life has become unfathomably cheap.
2) Education.
My own father was removed from school in the ninth grade. His parents argued that he belonged down on the farm. And what he learned after ninth grade would be of no help to anyone. At some point my father decided otherwise. He took the GED, went to college and graduated, as he puts it “in the upper two-thirds of his class.” Not so great if one is highly ambitious, but good enough to land him a job teaching high school physics. This he did for something over thirty years. And he was pretty good at it.
This issue is one that has plagued children for a good long time; the tension between their own interests and that of their parents. It is frequently the case that parents, bearing no malice to their children, make terrible economic choices with regard to their childrens’ educations. It is an idea that J.S. Mill argues in On Liberty. There, he grants people a great deal of latitude to make bad choices about their own affairs. But children, he argues, are incapable of understanding the importance of education. And too frequently their parents are not much better at it. When parents withdraw their children from school they mistreat them because they simply misunderstand the importance of education.
In lands where it is traditional for children to take up the family business, the argument against higher education almost always wins. How is one to persuade a small, rural middle eastern family that knots carpets by hand and sends them westward that their six year old daughter must learn to solve differential equations or that their son must read Jane Eyre? What does that have to do with making a living in the carpet trade? But for each year their children are at school they lose not only the income from making carpets, but the ability to become highly skilled at the trade. If they are to be good at the trade they must quit school early. The Massai inhabit the extreme end of this spectrum: they allow only the children too dimwitted to herd cattle to waste their time in school.
Interestingly, the Masai, my grandparents, the middle eastern carpetmakers, and the free-marketeers are all making the same argument as Adam Smith: “Pull the little monsters out of school and set them to work milking my cows!” I guess they must be right! See also item 1)
3) Roads
Let us wave a magic wand that causes every car in the continental US to carry a little black box that bills the owner of every linear foot of private roadway in the US he traverses. This would make private road ownership possible without immediately snarling traffic with toll booths at ever stoplight. What next? Pricing. How is each foot of roadway to be priced? Let us say an average trip caused one to travel on roadways owned by six firms. How do we decide if a route is “the best route?” If we are in a hurry, we might choose the shortest route. But what if too many others find this the most convenient. It may not be the cheapest route. So we must calculate the cost of travel based on a handful of routing choices. And then decide on the best compromise between cost and convenience. Not a problem, I always carry a calculator, a road rate schedule, a notepad, and a pen with me for such occasions. And I love solving integer programming problems. But, I wonder, do people who do not have twelve of fifteen graduate credits of operations research enjoy the task so much as I do?
Next question is the issue of access. If roads are owned and operated by private companies what is to keep them from preventing certain parties from travelling on their roads. Suppose companies A and B are competitors. Now, suppose company B needs to drive on company A’s roads to maintain its own. Suppose further that company A covets B’s roads and wishes to get them as its own. How might it rationally behave. It would deny B access to its roads. B’s roads would deteriorate until A could get them at pennies on the dollar of their real value. And any drivers who needed to use company B’s roads, meanwhile have either moved to where there is a functional road system or are paying their mechanics huge repair bills. One might argue that public roads get bad, too. But the argument here is not just that a company may fail to act in its own enlightened self-interest, it is that one company could render another’s roads useless in order to gain a competitive advantage. The purposeful ruination of a competitor’s functional capital, in this case can be a rational choice. And the only way to forestall such a practice would be to legislate against it.
Were this nation’s system of highways designed by private firms and owned by them there is a high likelyhood that the roadways would be riddled with dysfunctional discontituities. Over and over again one would face a kind of “You can’t get there from here” problem.. Furthermore, if there were more than three or four days per year in which traffic was not parked bumper to bumper during rush hour the private enterprises who owned the roadways would imagine that the roads were over-capacity. They are not paid for efficient travel, only by car-mile.
The fact is that there are so many opportunities for private companies to make more money by making road travel more miserable, less functional, more costly and less amenable to the public interest that it is in the public interest to have roads be constructed and maintained by govermental agencies. The invisible hand, here would create havoc with roadways.
4) Sustainability
If one starts by assuming that the world is flat, that it exists as a kind of semi-infinite plane, and that as all the resources are used up at one location, one can simply move westward and get more, then sustainability is not a very important issue; you just keep moving until you locate the resources that are needed. In a material way this was the way the world looked to the British in Adam Smith’s day. North America was perhaps a hundred times as large as England. Australia was huge. And so was Africa. The amount of resources available seemed practically endless. And, in fact, they have lasted for nearly two and a half centuries.
As big as the resources seemed then, they must rightly seem small er to us now for three reasons.
a) we use far more of them per capita than did the people of Smith’s day
b) we have exhausted a fair portion of the resources already It would not be far from the truth to imagine that we have used up something approaching half the supply of a handful of resources such as copper and oil. There is very little anthracite left, bituminous coal is growing hard to find. And we are strip mining the much lower quality lignite. A recent price hike doubled the price of taconite, suggesting a tightening of supply in iron ore. And iron is a rather plentiful resource.
c) the global population today is more than ten times what it was in Smith’s day. And more people are using more resources. So the second half will take much less time to deplete than the first half of any resource.
These factors suggest that our current model of extraction as the primary source of raw materials is already outdated. Smith’s invisible hand says that when resource shortages start, prices will be driven up and things will take care of themselves. In the case of copper the cycle has started. Unoccupied homes in many neighborhoods are being stripped of copper wiring and piping by thieves. It is only a matter of time before we read stories about people who go on vacation and return to find their toilets don’t flush because the copper piping is gone. This is the new mining.
In the field of agriculture it is sometimes true that large businesses cultivate a huge plot of land, mistreat it for the purpose of making a quick buck and end up making it unfit for agricultural production.
In the field of finance since bank deregulation we find that the whole industry attempted to make easy money by speculating on the value of real estate. When real estate stopped going up in price they were ruined. That’s not a problem when the investors in the instruments understand the game they are playing; but they did not. This is where the invisible hand reaches into your retirement savings account and moves the whole bit into someone else’s account. To the extent that one clings to Adam Smith’s invisible hand argument like a religious tenet this is the effect of Smith’s argument. Smith, I think, would have been repulsed by it.
But the point is that all speculative bubbles, all of the businesses that derive excess profits from the “joining” phenomenon are unsustainable at the limit. And that means that when the joining rate falls below a certain level, the game is over and some of the players are out of money. Such games are decidedly not in everybody’s best interest. And to the extent that they derive excess profit in an unsustainable way they are both deceptive and destructive.
This is one of the perfect examples of the distinction between economic anarchy and economic liberty. Ecomomic liberty allows the pursuit of all constructive economic games. Economic anarchy allows also economically destructive games, ruinous games, not just on an individual level but on a national level.
There is still a question whether the mortgage security crisis will destabilize the US banking system. A number of large players have been on the brink for some time. The whole reason for the crisis is the change in banking regulations in 1996 that moved the system toward anarchy.
Because Adam Smith’s invisible hand is not concerned with the liberty to make speculative decisions that fail to actually generate wealth but is interested in decesiond that deal with with getting favorable outcomes and actually generating wealth, I think Smith might have been disinclined to use the invisible hand idea to argue for the wide deployment of unsustainable economic games. In the promotion of such games the free-marketeers have made bad use of the invisible hand idea
5) Question of Terms
The invisible hand is an equilibrium argument. That means that it is descriptive of something that markets tend to approach over a long enough period of time. But it is less helpful in telling us how long this takes or what we should expect to see on the way. As one prominent economist once quipped “In the long term we are all dead.”
The fact that it was a long-term argument has not made a great deal of difference over the term that it has been used. But if conditions change in a way that makes the excess resources of frontier disappear, then the surplusses that drive large-scale commerce may cease to exist, and the very energy that makes the transportation of goods so cheap might disappear as well. In other words, if the term is long enough, the very physical factors that make commerce possible might not exist.
So if one looks far enough out, there is a real possibility that the world will look much like a sixteenth century Afghan village or a twelfth century Lithuanian village. Or even a third century American Plains village once all the coal and oil is used up.
The fear is that that’s what would happen if the free-marketeers have their way with the electorate. At that point there won’t be very much use for Smith’s theories because commerce will be dead. The invisible hand idea will not be wrong, it will be irrelevant. Our hope, in setting out on this little diversion has been to help forestall such a bleak future.
6) Pollution and other Externalities
Let us suppose that You and I live in the Adam Smith Invisible Hand enclave of Freedom City. The city is build on uneven ground and I happen to live in an appartment that is higher in elevation than yours. Now, because this is a modern city our apartments are fitted with the modern fixtures such as flush toilets. But because there was no law requiring otherwise and because it was cheaper to do so, the builder plumbed the effluent of my bathroom so that it falls into the street. Much to your own inconvenience, because of the various spacial and temporal relationships at play, the matter I flush down my toilet lands in precisely the same spot that your milkman uses for deliveries of milk. And it coincidentally does so soon after the fresh milk is delivered. This set of coincidences makes your breakfast of cereal and milk simultaneously less appetizing and more hazardous than they might be if the world were arranged in some other way.
To westerners today such a construction may seem hyperbolic to the point of being absurd. But conditions not fundamentally much different from this reigned in all cities in the world until some point in the ninteenth century. Then Loui Pasteur lived and proved that microorganisms caused infectious diseases, sewers were built in Paris, Victor Hugo wrote Les Miserables, and the notion of the modern city changed forever. In the first few decades of the twentieth century virtually every western city and town undertook public works that collected and treated sewerage and that treated drinking water and made it sanitary and relatively safe to drink. Only in this last decade has more than half of the human population of the world gained access to pure, potable water. In the west, the creation of vast distriubution networks to collect and process sewerage and to distribute safe, potable drinking water alone added almost twenty years to the average life expectancy.
The free market did not do this. Nor could it.
The Invisible Hand Meets an Ignoble End
The problem with the city until the deployment of sewers and public water works was was that everybody’s shit was killing everyone else. And you couldn’t fix the problem with any certainty until you had systematically collected everyone’s shit and systematically provided everyone with clean drinking water. One person’s shit in the wrong place could ruin everything.
The invisible hand does not create good solutions for problems like this. It is capable of creating bottled water that costs half an hour of labor per drink - a hundred or a million times as much as potable tap water. With such a solution only the reasonably well-off can drink safely. And the shit is still rotting in street. We live longer, some of us; but we still live in shit. If we want to get the hell out of there for a little while on the weekend, we travel by taxi on a private road to a private park where all the trees have been painted orange and reek of grape Koolaid because such an arrangement brings in more revenue.
This is the world you get by slavish adherence to the free-marketteer’s cheap idea of the invisible hand: you live your life knee deep in shit and on your day off you pay an arm and a leg to go elsewhere and see smelly orange-painted trees. Let the buyer beware.
Permalink
03.26.08
Posted in In the Garden, Book Reviews - Non-Fiction at 7:29 pm by steve
Review of the Sunset National Garden Book, 1997 ed.
The New Yorker cartoon is so famous it exists as a poster. It depicts a New Yorker’s view of the world to the west. Manhattan is drawn in detail, street by street. It takes up more than half of the picture. Then there is the Hudson River. New Jersey is a sliver. What is west of NJ is given only sketchy, almost parenthetical treatment. At one level the cartoon is a laugh at the New Yorker who cannot see past the edge of Manhattan Island. At another level it captures a truth that challenges all far-ranging projects: we make careful distinctions about what we know well, but we make much less rigorous distinctions about things with which we are not familiar. The problem is as old and as pervasive as the distinction between “us” and “them.” The British tried to rise above this in their undertakings; but that tradition seems to have died out with US ascendency.
This issue crops up in many places. In this case, it is in gardening.
On each little spot of earth, the specific cultural practices that are required for the successful cultivation of the vast array of farm, garden, and landscape plants is so overwhelming that no single person can hope to learn all the cultural practices for all the cultivated species grown, say, in all the continental US. Each location is different. Each offers opportunities and challenges for each cultivar. It is a daunting task to describe which cultivars will thrive where.
From the perspective of the gardener in Northeastern US, the first great challenge was cold hardiness. This is a concern that descends partly from British Victorian days when plants from the tropics were imported to England on a grand scale. And it is reinforced by the fact that much of the gardening land in the are lies to the south. If one is writing from NY or Boston and one covets cannas, jasmine, and pelargoniums, this is the challenge.
To address this challenge the USDA published the Cold Hardiness Map some decades ago. It was a great success because it provided simple, common language that people could use to talk about which plants would grow where. Every plant lable uses this system. More recently, there has been a heat index map. This adds a little new information because, while there is a general trend of places with warm winters getting hotter summers along the east coast, the moderating effects of oceans is diminished in, say Nouth Dakota. Brutally cold winters give way to blistering summers. The cold hardiness index proves to be ever less useful in determining summer heat index as one moves west. In fact, Colorado - two or three USDA zones warmer in the winter - can be cooler than South Dakota during the dog days of summer. And this is not reflected in the USDA hardiness map.
What we learn, if we look carefully at the regions west of the Hudson River, is that there is a great deal of variation in climate that arises from different east-west locations. The variation arises from proximity to oceans. It arises due to the prevaling west winds. It occurs because of variations in elevation. It occurs because of differences in rainfall. And it occurs because of differences in soil. As a result, the USDA zone system is not ideally suited to garderners in the west. If the USDA system works well, it does so on the east coast. It has some breakdowns by the time one reaches the Mississippi. By the time one gets to California, things look different. It is always so.
The Sunset Garden book is designed to address these problems. It is designed for the gardener in the west. By west, here, we mean two things. a) west of the Mississippi River and b) California. The question that rightly ought to arise is this: Are a) and b) the same or two different things?
Overview
The Sunset National Gardening Book derives from the idea that a host of factors influence the kind of flora best suited to a location. It considers: winter temperatures, elevation, summer temperatures, total rainfall, how rainfall is distributed throughout the year, winds, soil, even how cool night air moves in relation to hills and valleys. By considering all these factors, it makes a great number of distinctions about gardening zones. It defines twenty four gardening zones west of the Mississippi and twenty one zones east of it. And it lists horticulturally important plants from hundreds of genuses, providing the zones in which a plant will thive.
The book is divided into two sections. The first section describes 45 gardening zones in Contintental US and Canada. It provides maps showing where these zones exist. It briefly sketches the kind of vegetation one can find. And it tells of how one species or a group of species have been used to define zone boundaries. For example, it distinguishes zone 1 from zone 2 with the example that the MacIntosh apple tree will grow happily in zone 2 but not in zone 1. And it distinguishes the bottom land in California’s central valley from the hills that edge the valley by describing precisely why members of the citrus family do better in the lowest hills.
The idea of defining zones by what will grow there we find to be an inspired, practical idea. It is a common, age old practice to define lands this way. Deserts, for instance. Or savannah. Or swamp or rainforest. The list is long, supporting the intuitive strength of the idea. What Sunset is not quite so good at doing, however, is providing a list of plants used to make the distinctions. Nor do they provide a rigorous list of climate criteria - temperature, rainfall, etc.
One is given some rationale for comparing a zone with its typical neighbors; but one is left not understanding the vital measurable criteria that define a zone. This matters, because it is not the zone numbers that the plants themselves care about; it is the physical properties that characterize the zones. If one lives near a zone boundary or if one has a property with microclimates, or if one experiences unusual weather understanding the physical distinctions is vital.
The overall arrangement of the 45 climate zones is very roughly arranged as a clock but running counter-clockwise. The center of the clock is not far from Dodge City, Kansas. Zone 1 stretches north from here into Canada and west to the warm, damp western fringes of Washington and Oregon. The damp, warm ocean-moderated fringes of these two states and their river valleys rate three or four more climate zones. Then it’s on to California. In California, almost every one of the twenty four western climate zones of the west exists. Zone 10 is reserved for western Kansas, New Mexico, and Arizona. The rationale, here, is that whereas California gets dry summers, these areas get most of their rain during the summer, making certain kinds of agriculture possible.
Florida gets zone 25. The zones 26-45 between Florida and northern Minnesota and Maine range in great arcs that generally parallel the Appalachians. As a person who has lived in three or four of these zones and driven through many more, I can say that the system seems quite sensible in the way it makes zonal distinctions. And if one tests this against the zonal lists for plants, one tends to get reasonably good predictive results.
The second section of the book is an accounting of commonly cultivated plants and how they fare in these zones. It is arranged alphabetically by genus. Where a genus offers a large variety of cultivars with subtly different cultural requirements, the pages of the book will usually offer a table with each cultivar getting a row entry and columns listing zones and describing requirements.
The Details
The guiding principle of the book is that a really useful zone system makes really useful distinctions that flawlessly and seemlessly guide a gardener in the selection of plants for a local garden. There can be little question that the book has done a laudable job for California gardeners. The map of the Los Angeles metropolitan area painstakingly shows at least ten separate climate zones. Similarly, the boundary delineating Sunset zone 7 from colder alpine zone 1 is painstakingly drawn to indicate each little creek valley that extends into the Sierra Nevadas. The kinds of distinctions the Sunset system makes are ideally suited to California gardeners. It makes those distinctions sensibly and communicates those distinctions clearly.
Similarly, the climate zones east of the Mississippi make careful and useful distinctions based on summer and winter temperatures, humidity, soil type, elevation, and so on. The zone boundaries rarely address issues of microclimate; but the local variations in climate east of the Mississippi are generally much less geographically dense than they are in the West. In California and Arizona, for instance, one can drive from warm, subtropical weather to hot desert or to snow-capped mountains in a few short hours, crossing many zone boundaries. In the east, one needs to get on an airplane to cross so many boundaries in so little time.
The Sunset zone system, when judged by its implementation in California and in areas east of the Mississippi, is sensible. It is an improvement on the USDA system for these parts of the nation, frequently a vast improvement.
The next step in a usable system, then, is for all plants to be rated according to this system. Sunset has undertaken to do this. And for most plants they do a good job. Entries for each genus will list sun and shade requirements as well as water requirements. And they list which zones they thrive in. Where these vary significantly within a genus they are listed by species or cultivar.
Of Russell Hybrids Lupines we read:
Perennial Zones 1-7, 14-17, 34, 36-45. Not suited to hot climates. Best in cool areas of the West Coast, Pacific Northwest, New England, northern tier states, and southern Canada.
In my own limited experience, in zone 34 without supplemental water they tend to dry out, even in the shade. We observe that the Sunset zones are defined in such a way as to make it possible to communicate precisely where these lupines will not grow, even without the additional text. In the case of lupines, the limitation is much less about cold hardiness than it is heat tolerance and drought tolerance.
Artichokes, we are told, do well in zones 8,9, 14-16, 18-24, and especially 17. Those of us who have lived in Texas, in Michigan, and in the Northeast will happily divide the country into two sorts of artichoke - growing zones; where they grow and where they do not. The zone in which artichokes do grow is tiny. They have peculiar and exacting requirements that include cool summer weather, adequate moisture, and extremely mild winters. Of the arable land in the world, perhaps not one tenth of one percent is suitable for artichoke production. Perhaps it is not a tenth of this. After all this, it rates twelve separate climate zones!
While the Sunset Garden book is an improvement on the USDA zone system for eastern gardeners and while evidently makes finely honed distinctions needed by California gardeners, there is some concern that the quality of the distinctions it makes is not uniform over the nation.
There are compelling economic arguments for the appropriateness of this fact, were it so. California has a lot of gardeners. Also, it is large; and it is capable of growing a lot of plants. Other places are less well suited, perhaps. California, for example, is this nation’s vegetable garden. If a food is not derived directly or indirectly from corn, there’s a good chance that it was grown in California. So making good distinctions is not just about happy gardeners, it is about successful agriculture.
The Zone 1 Problem
That said, we cannot help but be skeptical about a single climate zone that lumps together such far flung places as Taos NM, Casper WY, Vail CO, Fort Collins CO, Bend OR, Great Falls MT, Truckee CA, and Minot ND. Sunset places these in zone 1.
We understand that two issues seriously limit plant growth and viability in zone 1: cold temperatures and lack of moisture. And we understand that, to some degree, these places all suffer from a lack of at least one of these elements. Compared to Los Angeles, all these places get cold. But that is like saying, compared to Bar Harbor, ME all of the US has hot summers. If one is obsessed with lupines and gives not a whit about any other plant, such a point of view is not seriously limiting. But if one’s gardening aims extend beyond the lupine, one will want to make more finely honed distinctions.
If Sunset were to make distinctions that correspond a little more clearly to how we perceive a location and its vegetation, they would make some meaningful distinctions within the zone they call zone 1. Take Taos NM, for example. The town lies at the western edge of a national forest. In town, the streets are lined with towering trees. Many yards have the normal sorts of grasses and flowers. One gets the sense in driving up from Albuquerque that the town towers high above a brutal, dry desert plain. Nor does this relative lushness evidently rely totally on irrigation systems as do, say, the verdant lawns of Orange County. If one drives not half an hour west of Taos, one will be on a flat plain that seems to stretch out many tens of miles in every direction. Nothing grows here. Almost nothing. It is flat and stark. While it may take a trained eye of a horticulturalist to distinguish even three different climate zones in LA, a four-year-old could distinguish the plain from the forest or the town.
Analogously, the plain east of Ft Collins is farmland. It does get some irrigation - which it needs to produce corn reliably. But this plain, arguably, is categorically different from the plain west of Taos. One might be able to grow barley here without irrigation. Probably the same is not true at Taos.
Much colder in winter and hotter in summer, but about as dry, is Minot ND. It’s hard to understand how anyone could confuse Minot’s climate with that of Taos, unless one is simply lumping together all the things that are categorically different from any one of LA’s ten zones.
Similarly, the climate of the mountains of Colorado is categorically distinct from the climate of its flatland. On the plain, plant culture is most severly limited by lack of moisture. In the high lands, moisture is frequently less of a problem than temperature. This distinction is crucial. Again, drive west of Fort Collins for one hour and the plant life is markedly different. It is ironic that the very people who fail to make the distinction depend so heavily on water that originates in these very highlands to irrigate their farms and gardens.
The alpine ranges of California, too, get cold winters. Large swathes of upland northern CA lie in USDA zone 5. That’s as cold as Pittsburgh. Almost as wet, too. That makes it categorically distinct from either Minot, ND or the plain west of Taos. In between these extremes is Bend, OR. Here, rainfall is precious, but the air temperature is much less extreme than it is in Minot, ND. Many types of grasses and trees are wll adapted to the region. With just a bit of supplemental watering, gardens can be quite glorious. It is a little difficult to believe that it is indistinguishable from Ft Collins since its rainfall pattern is markedly different; but it does, at least, share a common USDA hardiness zone.
How seriously one considers the zone 1 problem depends on how one looks at it. A huge portion of the commercial and recreational plant cultivation takes place in zones other than Sunset zone 1. Not many people live in this zone. And, almost by Sunset’s definition, plants do not grow there. So in most practical senses this is not very important.
Still, we have difficulty swallowing this argument. Sunset zone 1 covers perhaps 25 percent of the Continental US, maybe more. Each location offers a different combination of difficulties. By treating the whole vast space as a single zone one must either believe that the same things grow throughout or that nothing does. One is tempted to believe nothing does. The dry land farmers of eastern Montana and the Dakotas might not believe it - not every year. Nor would the people whose Taos yards sport 100 ft tall trees. Given the kinds of distinctions used for artichoke-growing zones, it’s hard to understand the almost complete absence of fundamental distinctions within Sunset zone 1.
While we must laud Sunset for doing an enviable job on California zones, and for refining the zone system in the east, we expect that the gardeners of what is now (was in 1997) zone 1 may hope for a system that is as careful about distinguishing verdant, chilly upland areas from blistering, dry, northern plains. The rigors that were used to arrive at the almost two dozen zonal distinctions Sunset made within California might well be applied to their own zone 1. This would produce two kinds of zones; one in which vegetation is typically water limited, and one in which it is typically coldness limited. This is an absolutely essential distinction. Probably one could subdivide Sunset zone 1 into at least half a dozen truly meaningful, distinct zones.
In some ways, our concern is less about the practical than it is about the symbolic. There is a sense in which the Sunset system projects a kind of provincial self-absorption. And this strikes us as being serious flaw in a work that shows as much practical promise as this work does. It is a little ironic since the left coast is treating the central states even more parenthetically than the right coast treated them with the USDA zone map.
With its cold hardiness map, the USDA failed to make all the important distinctions that affect plants. But the problems were at least rather more uniformly distributed across the US. Problems that arose were typically due to the fact that garden writers in the east were thinking in eastern terms and writing primarily for eastern audiences. If one lived on the west coast; one quickly learned that summer moisture was an issue. And if one lived between California and Kansas, one learned that water was a problem in general. Within these parameters, the USDA guide was a great deal of help, even in California.
The Sunset climate zone system was started as a local system for California gardeners. Then it was extended to include more of the US. Actually, it seems that for the west it was more projected than extended. The question was less “how do we treat climate west of the Mississippi as we treated California climate?” than it was “how do we project the zones defined for California onto other areas?” Sometimes when this rendered nonsense new zones were defined. But not often.
Outside zone 1 Sunset does a good job - frequently an exemplary job - of making important distinctions, distinctions that are really meaningful to people who garden or farm. The great irony of this is that once one gets outside California, the Sunset guide’s treatment of the west may be even less suitable than the USDA’s treatment. At least the latter will tell you that it gets colder in North Dakota than it does in Taos and Bend. Sadly, if we start out hoping it was designed to serve all regions of the west equally well, we end up seeing its designers as making the same sorts of errors as the New Yorkers depicted in the cartoon.
Permalink
12.12.07
Posted in Book Reviews - Non-Fiction at 8:33 pm by steve
Dress any idea in modish clothing and it will have legs. Express an idea vaguely enough and it will be immune to attack. Modish today are commercial and scholarly plugs for laissez faire capitalism. Whatever idea can make pure economic anarchy look “natural” is assumed to make it most palatable to those it is most likely to consume. It was, therefore, only a matter of time before an economic historian would attribute to evolution some aspect of the industrial revolution. And now it has happened.
The question at hand is this: What caused the industrial revolution in England in the ninteenth century? Why did it happen first there? Why did it spread to Europe, America, and Japan quickly? Why did it spread to Korea later? What explains the fact that Mali and Chad and Bolivia are just about as far from the industrial revolution as they would be had it never taken place anywhere in the world? To what extent is the difference cultural? Assuming the difference is cultural, where, when, and how did the culture arise? What, precisely, are the cultural elements? And how are they propagated in society? To what extent is it correct to think of the industrial revolution as a heritable trait? To what extent is it more useful to think of capitalism as an infectious disease to which some cultures are immune?
These are the ideas and questions inspired by reading Benjamin Friedman’s book review of Gregory Clark’s A Farewell to Alms : A Brief Economic History of the World. Clark’s work sets about to provide a new explanation for the industrial revolution, the rise of England and the rise of the West. Clark sets out to prove that the industrie\al revolution was a cultural event and that the culture evolved. He argues that cultural change was driven by environmental factors in England. Rich and well educted people have survived and reproduced preferentially there for almost a millennium. This he can prove with records, we are told. His argument might be summarized as “survival of the richest.” It is an argument that financial success is an inherited trait and that evolution has made western man fit for capitalism.
Clark is clearly saying that wealth conveyed survival and reproductive advantages. And that those advantages were a primary cause of the industrial revolution, of the success of capitalism.
Benjamin Friedman describes the central pillar of Clark’s research.
The heart of Clark’s analysis consists of a detailed examination of births, deaths, income and wealth in England between 1250 and 1800, as evidenced primrily by wills. Although the records are scant, he finds that on average richer people were more likely to marry than pooere people, they married at earlier ages, they lived longer once married, they bore more children per year of marriage, and their children were more likely to survive and to bear children themeselves. The result was cneturies of downward mobility in which the offspring of richer families continually moved to lower rungs of society. Along the way their behavioral traits and attitudes became more dominant.
The thesis evidently assumes that in 1250 there was a particular set of cultural values widespread in the British aristocracy, but not widespread in its underclasses. It goes on to assert that over the centuries between 1250 and 1800 the particular set of cultural values spread to the underclasses via evolutionary means. The particular cultural values Clark chooses are “thrift and industry.”
In order for Clark’s thesis to be meaningful he would have to establish:
1) Precisely how wide-spread the cultural values in question were within the aristocracy in 1250.
2) Precisely how wide-spread they were in the underclasses in 1250.
3) How wide-spread the values were in 1800.
4) How wide-spread they would have to be for the industrial revolution to survive.
5) How consistently the values propagate within families.
6) How they move from family to unrelated family or why they do not.
7) How precisely the same mechanism explains the success of the industrial revolution in America, China, Korea, and Japan.
His thesis depends upon some aspect of each ot these ideas.
1) In order for Clark’s thesis to have any predictive value he must chose values that have two properties. First, they must be uniquely English. If they are more widespread in other cultures and if the same values propagate because of the survival benefits they confer, then if the cultural values he identifies exist more widely in other populations, they would lead to the industrial revolution in those populations first. So, if Clark is talking about a cultural value brought to England from somewhere else by, say, the Normans then one would expect that the cultural value was one that lurked in their cultural background, one held broadly in a culture from which they descended. The value would necessarily be more widespread in the populations from which the Normans descended than it was in England in 1250. So for Clark’s thesis to succeed he must choose a cultural value uniquely English. And he must choose a cultural value that is practically non-existent anywhere but within the British aristocracy. He’s in luck here, because it is possible to do this. But he doesn’t. We’ll talk more about this below.
2) Clark’s thesis depends on the slow spread of a cultural value or practice through a population. If the idea or practice is in wide currency in 1250, then his thesis fails technically. He would have described a process that didn’t actually occur. Clark has chosen the Calvinist values of “thrift and industry.” This pattern of values attaches a kind of holiness to hard work and to plain living. This is a nice start. And, in fact, Clark will not be the first to notice that the industrial revolution advanced fastest in cultures that had these values, once it started.
But his thesis fails on two points here. The first failure we talked about above; any value more widely spread about in some population outside England is a non-starter for it suggests that the industrial revolution, if it depended on that value alone, would start elsewhere. The second failure is the assumption that it was only the British aristocracy who had these values. If we assume, as did Clark, that the population of England did not have these values before the first wave of Germanic invasions we can agree with him that there could have been a point in time when the values in question were not widespread in England. But the Angles and Saxons began invading England in 450 AD. The Anglo-Saxon yoeman farmer had been a fixture in that land for nearly 800 years when Clark’s story begins. There is simply no question that the Anglo Saxon would have embraced the ideas of thrift and industry. And there is no question that the values would be widely spread geographically in England by 1250 and they would be deeply rooted in the middle classes by then. But Clark’s thesis requires the values to be relatively scarce when he starts the clock. Otherwise the process he discribes is not responsible for changing things very much.
3 and 4) For Clark’s thesis to survive he would have to show that the values in question were sufficiently wide spread through the English population in 1800 for the initiation and the sustenance of the industrial revolution; but not before. Here again, Clark has set up an impossible game. If Clark were arguing that “thrift and industry” were necessary conditions within a population for the sustenance of a capital intensive industrial revolution, there would be a hope for his argument. But, according to Friedman, he is not. He is instead arguing that they are sufficient.
The difference is crucial. If the industrial revolution depended on two or more crucial factors, then the cultural ideals upon which it would reliably be sustained could have been in place for centuries before the event actually took place. All one would have to establish was that there was good reason to believe the cultural ideals were held widely enough. One could still explain why cultures lacking “thrift and industry” frequently failed or underperformed in capitalist pursuits. But according to Friedman, Clark is arguing sufficiency. His thesis, therefore, must establish the threshold level of “thrift and industry” within a population and prove that England reached precisely that threshold at the start of the industrial revolution, decades or centurlies before other industrial nations. If the industrial revolution depended entirely on this one mechanism, it’s not much of a theory if it cannot specify with some exactitude precisely what level is required and precisely how that level changed in time. We are talking about quantitative measurements, here.
We must leave the judgment of whether Clark does this up to someone who has actually read the book. But we are skeptical that he has done so adequately because we doubt that the mensuration tools so far developed are capable of providing the data.
5 and 6) The issue of propagation is a thorny one for Clark’s thesis. First, he is vague about the mechanism. Is his thesis a biological one? Do people literally inherit “thrift and industry” genes. Or are people acculturated to thrift and industry. Because the idea of biological evolution is much more orthodox than the idea of cultural evolution, Clark would be able to dress his theory in a cloak of respectability if he could prove it was a biological phenomenon.
We know that some kinds of behavior can be bred into populations a famous Soviet scientist showed that he could selectively breed populations of aggressive or docile foxes, minks, and rats. So the idea that one could set up environmental conditions that favor “thrift and industry” is a plausible one. In fact, people who live in cold climates inhabit environments where food is unavailable most of the year. That is, one cannot simply go outside and pick fruit off a tree. Such an environment does differentially favor thrift and industry. Europeans and North Asians with agricultural heritages have been living with this reality for between two and five thousand years. They could not have survived long in many of those environments without these values. So there is a strong likelihood that coping strategies that look exactly like “thrift and industry” would be found in all such populations. The fishing populations of the Mediterranean had less need for such cultural values. And hunter gatherers in tropical lands had essentially none. It is, therefore, no surprise that Clark finds the values of “thrift and industry” in the British population.
But here again Clark runs into the problem of setting up an argument that applies much better to other places. London’s climate is positively balmy when compared to the climate of St. Petersburg. So one would expect Clark’s “thrift and industry” genes to preferentially propagate there.
Thrift and industry are behaviors. And behaviors all have some learned component. Therefore the values he is talking about might be passed through families through some shared experience. If they are learned, then they would necessarily propagate at a speed differnt from the speed of biological evolution. And that speed could be significantly higher. Good ideas spread quickly. Practices that always convey benefits spread quickly. So we would expect thrift and industry as cultural values, if not as actual practices, to spread through a population reasonably quickly.
Clark does not specify whether he is talking about biological evolution or cultural evolution. We cannot help but wonder whether this is a purposeful dodge. The idea that “thrift and industry” might have a genetic component is not politically correct. And it is all but impossible to prove. So one would not try. On the other hand, learned behaviors we would expect to propagate too quickly for the time frame of Clark’s thesis to apply. One would have to demonstrate precisely why this one propagates at an evolutionary rate. And if one succeeded, then the theory would be less popular because most people are not very familiar with the idea of cultural evolution. It is not widely accepted as a sound scientific theory. So the simple act of comitting to a mechanism undercuts the public acceptance of the thesis.
But this choice not to specify is precisely what sets the book outside the realm of good science or even of good scientific speculation. Clark, by evoking evolutionary processes has dressed his thesis in the robe of science, but if it is to be a scientific theory it must have the bones of science. Good science requires that a specification be made and defended if the thesis is to survive.
7) At the end of the day a good scientific thesis is both simple and powerfully explanatory. A good scientific thesis that fully explains the industrial revolution in England must fully explain how capitalism and industry fare in other spots around the world: how it fares in other geographical settings different in kind from England’s, and how it fares in other cultural settings different in kind from England’s.
Clark’s notion of “thrift and industry” do well enough in predicting in which cultures capitalism is likely to thrive and in which it is likely to flounder. But the thesis would falsely predict the emergence of capitalism in locations where people are a great deal more thrifty and industrious than are the English. Nor does it do well at predicting failures that are largely due to geographical factors.
For example, the Chinese and the Japanese are thrifty and industrious. If we were to compare the level of thrift and industry of the the typical Chinese or Japanese worker to that of the typical American or European worker, we would find that the Asian worker expends more energy at work, works longer hours, and saves a much larger portion of his income. One economic estimate I saw recently in the Economist suggested that the average Chinese may be saving over 30% of his income. And for the last ten years most of the western economies have been accumulating debt while China and Japan have been almost exclusively financing that debt. It’s a macroeconomic testament to the thrift and industry of the oriental cultures.
On a more easily comprehended level we recently read about cases of Chinese workers who literally collapse and die from exhaustion, working twelve or more hours a day, seven days per week, three hundred sixty five days per year. They are exceptional cases, but they are suggestive of a kind of commitment to industry that westerners cannot begin to imagine. Nor is this simply an artifact of geography: Asian expatriates in the US, Europe, and Canada display the same qualities, though not necessarily to the same degree. And those same behaviors extend through at least two or three generations. So if Clark’s theory were correct - if thrift and industry are sufficient conditions for the industrial revolution - the industrial revolution would have started in China or Japan.
And if Clark‘s theory is formally correct - that is, if he got the right mechanism and propagation rate but specified the wrong cultural values - and the values in question originated with the British Aristocracy circa 1250 and were propagated via breeding, then the British must have gotten around more than we ever imagined. When one realizes that Korea went from solid third-world status in the 1950’s to solid first world status by 2000, one cannot help but imagine that the ministrations of the British Aristocracy in that population of nearly 50 million people must have been much more vigorous than their ministrations in England between 1250 and 1800. But this pales in comparison to what Clark’s thesis requires of the British Aristocracy in China. Who would have guessed that 1.3 billion Chinese descend from British Aristocracy? And all since WWII.
According to Friedman, Clark writes with fluidity. He tells good stories in support of his thesis. But we see a thesis plagued with problems. One can raise two kinds of objections to Clark’s work. One kind focuses on questions of adequacy in Clark’s thesis. These are about whether his methods are sound and whether his claims are coherent and well supported. And so on. The other type of objection is to question the assumption that it is reasonable to attribute the industrial revolution to a single factor. And if so whether he has the best one. We will start by touching on a few difficulties inherent to Clark’s treament. Then we will look at the bigger question.
Technical Questions
There are a few technical questions. One may ask, for instance, to what extent the records Clark used were about males. And to what extent they were about females. Wills in western culture, at least before 1800, generally dealt with disposing estates to male heirs. We remain to be convinced that wills would mention female offspring often enough to be useful. It seems likely that they would do a poor job describing unmarried females in a household. Furthermore, the poor and illiterate had no property and left no wills. So it seems a little puzzling how one could properly ascribe to the population a relative measure of breeding success on the basis of wills.
It would be very interesting to know how Clark dealt with the regression problem. One of the most famous erroneous arguments in the field of statistics was the proof that people were getting shorter. A statistician measured a large population of very tall men and discovered that, on average, their sons were shorter. And their grandsons were shorter yet. He concluded that people were getting shorter. He had very compelling statistics to support the claim. But the issue was not that people were getting shorter; the issue was that the measurement method had a built-in bias. He was not using representative samples of the population. The statistical method he used is still called “regression” in honor of the correct observation that in large populations characteristics that are the result of a large number of genetic and biological processes tend to “regress toward the mean” over generations. Measure height or weight or any other characteristic that has a wide spectrum of genetic components, and one will find, if one starts with samples at the statistical fringes that subsequent generations will tend to “regress toward the mean.”
The use of wills presents analogous sampling problems. Wills exist preferentially among the rich. And they typically make one descendent relatively rich and one or more relatively poor. Or they make all descendents relatively poor compared to their parents. Thus, the simple fact that wills exist preferentially among rich landholders will produce the illusion of downward mobility. But to some extent this is nothing but an artifact of the sampling method.
Look at it another way. Imagine there were a collection of English documents from 1250 to 1800 that preferentially tracked the daughters of the poorest folk in the county. Middle class daughers would have fewer records. Upper class ones would be represented rarely. It is impossible to imagine why such a collection might exist; we simply need to imagine that it could. Given a large enough collection of these, one could easily show that the women from the underclasses percolated up through society, perhaps reaching very high levels. One could then write a book demonstrating that the industrial revolution in England was caused by the culture of its most indigent womenfolk. And the logic would precisely match the logic of Clark’s thesis. It would make no less sense.
In short, if one wishes to maintain that the industrial revolution was an inevitable consequence of a quality uniquely British, one passed down by evolutionary means, one creates a thicket of untenable problems. This is not to say Clark’s thesis has absolutely no merit. It’s merit is not in what it says, but in what it suggests. If we start as Clark did, looking for one or more cultural values uniquely British, and we assume that these values or practices, while not sufficient to trigger the industrial revolution, caused England to progress more quickly than other countries that had England beat on “thrift and industry” then we might learn something useful.
One would have to look for a cultural value that was unique to England and relatively new to that land in 1250 AD. Clark’s thesis is framed as a question of culture. So we will look for a unique cultural value or set of values among the British.
A Quuestion of Culture
There is no question that some cultures fare better with the transition to an industrial society than others. One can cast it as a game theory question. What cultural values and practices cause the fundamental practices and institutions of the industrial revolution to thrive, to be stable? Here’s a counterexample, the Massai think schooling is stupid. They only allow their dullest children to engage in the practice. This is a cultural practice much better suited to preserving a herding culture than to creating an industrial society. It may be argued that under such conditions, an industrial society simply cannot get started. And if it did get started, it could not survive. Literacy is a necessary condition of a stable, dense agrarian society; and a stable, dense agrarian society is a necessary condition of an industrial society. Therefore, reading and writing are a requirement of an industrial society. It’s not that the Massai are stupid, it’s that they have a completely different set of values. They value manufactured goods differently than do people who descend from agricultural cultures. They see work and ownership differently, too. But this set of values actively undermines the success of an industrial society.
At the other end of the spectrum one might find the Japanese. The Japanese were scrupulous about isolating westerners from their culture until after WWII. And only a few cultural ideas and practices in currency in Japan today can be traced directly to the west. Yet the Japanese have one of the most industrialized societies on earth. By a number of measures it outstrips all Anglophone cultures. So how would Clark’s theory explain the ascent of Japan? How did 125 million Japanese descend from a handful of British aristocracy when not one in ten thousand has ever so much as seen one pass in a street? Korean culture starting from a trigger point in the mid twentieth century. In a matter of less than fifty years it has completely caught up with the west in many aspects. The South Koreans have more high speed internet access points per capita than Americans.
Maybe it would be better to start out asking what these cultures share in common? How are they the same? How are they different? How can we explain their common successes in terms of similarities? How can we explain their different histories in terms of differences?
The similarities are actually quite profound. They all have long histories of agriculture, living in towns too large for each person to know each other person. Written language, rule of law, a long history of government by local and distant bureaucratic institutions, cultural attitudes that value commerce, arts, study, and work. Ownership of property and individual ownership of the gains from cultivating land are all part of a long-standing tradition. On the surface the customs may seem unfamiliar, but when one compares cultures with a long history of agricultural practice, individual ownership of property, and urban life, one sees they have all undergone a transformation from communal, unspecialized, hunter-gather cultures.
Take the industrial revolution to places lacking every one of these values and what is the result? Aboriginal hunter-gatherers do not cultivate the land and they frequently have no meaningful property rights. In such societies the industrial revolution must fare poorly. When returns on investments of effort or capital bring no preferential advantages to those who would invest, there can never be extraordinary efforts, conentration of capital, or investment. Fuzzy notions of ownership make keeping extraordinary gains that come from extraordinary efforts completely infeasible except through means of extraordinary force.
The consequence is that enterprises that rely on these sorts of notions must fail miserably in these cultures. It is frequently true, too, that crime and corruption flourish in all densely populated areas, and for many of the same reasons. These are problems faced by every culture when it faces a transition from low density communal living to higher density urban living. And the problems have been dealt with by the impostion of special codes of behavior: laws, ethical norms, and so on. Where these are weak, compromised, or nonexistent, commerce always flounders.
So, to the extent that Clark is asserting that the British aristocracy had a post agricultural culture but the aboriginal English did not, he might have a legitimate point. But one would get into some difficulty defining the aboriginal English. Was it the population in England before the Romans arrived? Or the one there just before the Angles and Saxons arrived? Or the one there when the Normans arrived in 1066 with their large contingent of Celtic expatriates?
One might argue that the British aristocratic culture took some form resembling the current form with the signing of the Great Charter. This defined many of the relationships between low and high nobility. And it set up the general shape of society, one in which power flowed up and down the chain of command. The Great Charter, too, placed significant limits on the amount of power that could accumulate in the office of the monarchy. It was at this point in history that England defined itself in a way that would meaningfully and permanently distinguish itself from the continent.
The charter and all that it meant created a world in which ideas could live or die primarily on the basis of their merit rather than on the basis of the favor they curried with an omnipotent monarch. We have already mentioned the rule of law, by which we refer to the idea that the provisions of law apply to all peopl; and that government status not convey privileges that put one beyond its sanction. Attitudes of fairness and noblesse oblige were also part of the British ideal.
Having not read Clark’s book, we are at a disadvantage: we do not know to what extent he is talking about these ennobling ideals. But unless the book is ironically titled, Clark is thinking about something else. The ideal Clark has in mind is, says Frieman, the list of Calvinist, bourgois values. Max Weber a century ago called it the “Protestant Work Ethic.” In Weber’s work northern European nations that became Protestant during the reformation had it. Southern European nations that did not become Protestant, did not. We will refer to this set of values as “industry and thrift.”
For Clark’s thesis to survive, the ethic in England has to be somehow different from the ethic in Sweden or Denmark. It has to be different either in type or extent. Surely Clark does not wish us to believe that the English aristocracy - latecomers to and equivocators with the Reformation - were more steeped in these values than their counterparts on the continent. There is nothing uniqutely British about the values he espouses. There is no reason to believe thay arrived in England in 1250.
Nor is there anything necessarily “upper crust” about them. The ruling class after 1066 were Normans. The Normans were nominally French. But they were also Vikings, sort of. So they had a strong Germanic heritage that would propagate precisely the values of industry and thrift Clark is talking about. This makes them distinct from the English commoners who were Angles and Saxons, how? The Angles and Saxons had a similar Germanic heritage. They were no less keen on the ideas of industry and thrift. You see the problem. To the extent that Normans are Latin, French, they cannot be exemplars of the work ethic Clark is talking about. To the extent that they are Germanic, they become indestinct form the Angles and Saxons. And the body of values he is talking about had to be broadly practiced in England by the yoeman class for centuries before the Normans showed up. You simly cannot get anywhere with the thesis until you define cultural ideas that are uniquely English.
We must grant Clark some part of his argument. The process he describes might work; but it might work on a cultural element different than the one he described. For the one he described was at work on the continent and it was at work in the far east, too. It seems likely that over a long enough period of time there is differential breeding success between classes in an agricultural society. (One that defines individual ownership and welfare distinct from the group’s, one that defines the concept of ownership of means of production in any meaningful sense, and so on.) In essentially all agricultural and post-agricultural societies there is a “survival of the richest effect.” If this is true, then Clark’s thesis might be technically true but still have absolutely no explanatory power. It fails to distinguish the England’s experience from that of other populations.
We can certainly agree with Clark that cultures that lack thrift and industry can fail quite profoundly with modern industrial ways. But the culture of thrift and industry must have been widespread in England long before 1250. And it cannot have been unique to England or unique to the west. If it is a set of values spread by evolutionary processes, it must have been in place long before the industrial revolution; otherwise it is impossible to explain the relatively quick industrialization of China and Korea.
We have identified a cultural component unique to England, exclusive to its upper class, and newly formed in 1250 which may have played some role. So one could imagine a thesis that suggests the uniquely libertarian point of view of the British - a point of view that imbued individuals with liberties rarely defined or honored under rule of law in other nations - allowed members of British society more latitude to vary from some expected cultural norm. The practice of being different was so dear to the British that at one point being called “mad” amounted to the highest praise one could give a fellow aristocrat and “boring: amounted to the greatest insult. Such a culture is bound to produce new ideas eventually.
But this is evidently not what Clark’s thesis is about. It is about thrift and industry and the evolutionary processes that propagate this value.
A cursory study of Chinese history suggests that the differential breeding process has been happening there for about five millennia. Once every six or twelve of fifteen centuries the country has a social upheaval and land is distributyed among peasants in a way that allocates it evenly across a vast swath of the population. But some peasants prove better farmers than others. And they begin to accumulate land. Others move off the land to become tradespeople. Or they work the land under directions from its landowners. In the early stages of this process ever larger plots of land come under the ownership of the most successful farming families. Their superior methods realize returns to scale, farms grow highly productive, food is cheap, the economy flourishes. Arts and industry flourish. People are happy. They reproduce quickly.
But after a number of generations land ownership becomes concentrated among a small number of families, maybe ten percent of the population. These families become wealthy. Once they are wealthy, their welfare becomes less closely tied to the agricultural success of their farms. This means that less effort is spent improving working methods and processes. Instead, landowners engage in commerce. They seek educations. They pursue the arts.
While they attend to other business their farms become less productive. Meanwhile, the population has grown and is dependent on the high outputs of the farms. At some point, perhaps centuries after the last upheaval, the economy stagnates. At this point landowners have no difficulty marrying, breeding, raising children. But peasants without land may have difficulty doing so. Nor do the professional classes. One consequence of this cycle is that certain cultural values are propagated at least among a large minority of the population: value of study, value of hard work and industry, value of cultural arts, value of thrift, value of correctly reconning one’s place in society. For these are the values of the people who survive.
The whole cycle can take many centuries. In China’s most recent two thousand years of history land has been redistributed two, maybe three times. The act itself starts a cycle of death and rebirth. And that cycle started most recently in post WWII China. Westerners may argue that much of China’s success owes to outside investment. But the returns on that investment are ensured by the success of China’s culture and its social institutions; a stable and productive agricultural base, and effective educational system, and effective means of keeping social order and of limiting corruption. Those profits are also ensured by a level of thrift and industry among the Chinese that is simply unimaginable to Americans. There are Chinese who literally work themselves to death. And by some estimates Chinese save over thirty percent of their earned income. If it is thrift and industry alone that power industrial societies, then the industrial revolution was destined to happen first in the far east. But it did not.
If Clark were right in assuming that the “right culture” was unique to thirteenth century British aristocrats, and that the culture only propagates along family lines, then the only possible explanation for the recent industrial revolution in China is that a fair portion of the 1.3 billion Chinese descend from British aristocracy. It is a proposition too absurd even to be reliably humorous.
The title of Clark’s work fails in the humor area, too. “A Farewell to Alms” is meant to suggest that it’s a rough and tumble world. And that we must rely on natural forces to weed out the weakest of us. Let the strongest reproduce most. Who are the strongest? The richest, of course. Everything is precisely as it ought to be so long as we let the rich do precisely what they please and just let the miserable poor die. For if they do the world the courteousy of dying before they reproduce, the act leaves it a better place. While this may be factually true, it may strike some as being a gratuitously cruel sentiment. But perhaps it is not quite so true as we are inclined to believe.
Let us suppose for a moment that Clark’s idea of weeding out the impoverished by means of the preferential reproduction of the rich were the only cultural idea that is required for success. Where should the industrial revolution started? In Islamic lands a man can take up to four wives. The richest men do this. As a consequence, the poorest men take none. It is assumed among evolutionary biologists that almost all females reproduce, and to the extent this is true, evolutionary processes depend much more profoundly on male selection. Following this logic, the strongest selection force of the type “survival of the richest” to be found among humans exists in Islamic lands. For it is only here that rich men have four wives. If Clark’s thesis is meant to suggest that capitalism and the industrial revolution are natural and inevitable results of natural selection, we would expect it to arise first in Arab lands. But it did not.
Alternative Hypothesis
So why did the industrial revolution arise in England? And why did it spread in precisely the way it did? Any person with a bit of British schooling would be quick to suggest that it is probably not a good idea to settle for quick and easy answers to such a question. The answer has lots of parts. There are lots of helpful ways of looking at the question. We have already suggested that one of the necessary conditions was culture. In fact, we have suggested that there were two cultural components. One was the culture of “thrift and industry” that was already widespread in England when the Normans landed. The other was a unique liberal culture unique to England. But culture is not enough.
Jared Diamond answered part of the question in Guns, Germs, Steel. Diamond asked why Eurasia was so technologically advanced compared to the most advanced civilizations of the Americas. He explained how the west overran America in terms of geographical assets. The fertile crescent had better grains and pulses. And it had animals more amenable to domestication. Furthermore, the east-west orientation of Asia and Europe facilitated an exchange of agricultural goods and methods that was less practical in lands oriented north and south. Diamond’s explanation will suffice in explaining why the industrial revolution did not take place in Patagonia or Mozambique. But it does not expain why the industrial revolution occurred in England rather than in Spain. Or Turkey or China. All of these cultures had equal access to the geographical heritage in Diamond’s discourse.
We will argue here that it had to do with the particularly productive relationship the English cultivated with their overseas colonies.We might make some headway by comparing England and Spain. Spain had a favorable climate. It was once rich with minerals. And it was once at the intersection of the Moslem, Jewish, and Christian world. These attributes made it Europe’s richest and most promising area a millenium ago. Then, when the New World was discovered and Spain annexed an area twenty times the size of her original self, it would rightly be assumed that Spain would be the world’s premiere nation.
But it never happened.
England, by contrast, was tiny. It was miserably cold. It had no gold or silver or precious jewels. England was seen by Latinate nations as a kind of distant outpost of civilization. And was treated almost parenthetically. The English responded by asking themselves what it would take for them to be taken seriously in Europe. Early on they built Oxford and Cambridge to educate the ruling classes. Every young aristocrat learned Greek and Latin. This rigorous training taught discipline. And it taught them to see the world from a different perspective. Both of these were cultural distinctions of the British when compared to other European cultures.
This ability to see the world from different perspectives would foster the rise of a liberal tradition that would tolerate a vast range of eccentric ideas. During Ferdinand and Isabella’s purges, by contrast, Jews were cast out. Religious orthodoxy was enforced by the inquisition. And the intellectual culture of the Spanish grew narrow and dim. The Jews composed much of the Spanish middle classes moved to England or the Netherlands. And it was not long before these nations eclipsed Spain in the area of commerce. The liberal tradition that welcomed the Jews into England was running strong several centuries later in the mid ninteenth century. It is no accident that Karl Marx wrote and published his works there; no other European nation would have him.
The liberal tradion is inextricably linked to another tradition, the tradition of commerce. The British, having no natural resources, learned that if they were to play a part on the world stage, they must be better at commerce. They would import raw materials, transform those raw materials to finished goods, and trade those finished goods on the free market for more raw materials. To win at such a game, one had to be much better at the processes of transforming goods than one’s competitors; for they may have the advantage of not having to move raw materials quite so far to be finished.
So being good at commerce almost axiomatically meant being good at industry. (There are other commercial traditions. In the mideast, for instance, the tradition is to be good at controlling markets. Commerce, in this tradition is not about making, but about connecting customer with producer in a way that makes each invisible to the other. It was this tradition that forced the Europeans to find alternative paths to the far east for spices. And it was this tradition that will force Europeans at some point to find alternatives to oil. )
In terms of commerce and industry the Spanish viewed the New World in more of an extractive sense. For example, they rounded up Easter Islanders, and indigenous Peruvians and used them as slaves in their silver mines. The silver they then traded with the Chinese for silk, porcelain, and other finished goods. Their focus on extraction was not entirely accidental; for Spain was originally a Roman outpost, a collection of silver mining settlements. Spanish aristocratic culture had, at some point, defined itself in terms of extraction. Commercial opportunities in the New World, then, were somewhat less evident. And they were less exploited by the Spanish than they were by the British.
In fact, the English saw the Spanish loading galleon after galleon with gold and silver and hauling it back to Spain. When this great haul of precious metal was used to launch the Spanish Armada, the English made a number of crucial decisions. One was to hire “privateers” to sink Spanish ships. This unfortunate decision spawned a whole class of “pirates” who would board the ships and hoard the loot. It played havoc with commerce in the Caribbean for more than a century. (An early experiment in privatization of the military that went terribly wrong)
But the English also decided that their material defense lay in defending their isle on the seas. This proved a remarkably good decision. First, it meant that they could minimize the number of standing army. Second, it meant that their armed forces were highly mobiile well aligned with their commercial enterprises, defending ports and colonial enterprises. Third, it meant they would trade capital for labor in the arms race. It was good guns that held the Spanish Armada to a stalemate. And it was problems of navigation on the part of the Spanish that led to its demise. If the British could keep an upper hand in these technologies, they could beat the Spanish and anyone else with a minimum number of troops. All of these strategic decisions point in the direction of bolstering commerce and gaining technological advantages that overcome shortages of manpower.
While the Spanish were enslaving local populations to serve in gold and silver mines, the English were writing charters, giving North America to some of its prominent citizens. Those citizens would move to the new lands, set up farms, colonize, produce manufactured goods and raw materials of many kinds that would find their way back to England. Even by Adam Smith’s day England had been enjoying a steady flow of goods from its colonies for some time. It is impossible to know what impact these raw materials and finished products had on British welfare; but the thirteen colonies covered an area many times the size of England they were well populated, and they were highly productive.
It is likely that some of the success of the British economy that Adam Smith attributed to “laissez faire” capitalism would have been better attributed to other attributes of British culture, namely,
1) The focus on commerce
2) The cultivation of a middle class
3) A culture of industry and broad ownership of capital
4) Its cultivation of highly productive colonies in the new world
5) Its outward-looking and highly disciplined educational system
These qualities distinguished the British from the French and Spanish in the way they settled of the new world and exploited its resources. And they can be at least as explanatory as the absence of government interference. In fact, one might argue, it was not lack of government interference that set up the English colonies. Rather, it was England’s guarantee to defend her grants to private citizens. This is nothing like “laissez faire” economics. It is government sponsored commerce. The government guaranteed a body of supporting services to new and promising commercial enterprises. It removed the greatest risks. And the result was productive overseas colonies that quickly raised the standard of living in England.
British superiority over other European nations arose primarily from its success in exploiting commerce with the new world. Here it had several advantages. One advantage was the attitude of cultivating new commercial enterprises, which we have talked about. Another advantage was geographical. The British were geographically closer to their colonies than the Spanish. This was a small incremental benefit. But it was a real one. It made the return on capital slightly larger for any given load of cargo in any given vessel. This would make commerce betwen England and her colonies slightly more profitable than it could be for Spain. And compounded over a few centuries and extra percent or so as a return on investment can provide a huge incremental benefit.
The Elephant in the Room
The issue of frontier is a big one. It is, in fact, so big that we usually cannot see it. Frontier is where radical new agricultural or industrial methods reach fertile new ground. When this happens there is a great explosion of wealth. This happens because in lands where the agricultural and industrial methods are old, populations have expanded over time to make resources scarce. But in frontiers new methods can bring huge excess returns. And if the the frontier is large enough, it can be centuries before the population reaches a level that fully draws down all the excesses.
Meanwhile, this explosion of wealth leads to a flourishing of arts and culture. It enables education and the learning of specialized skills. And this culture of learning can bring new methods to bear on old ground, raising productivity where it might otherwise have saturated. Bringing potatoes to Poland and Ireland and tomatoes to Spain and Italy might be examples. Or the creation of shorter, high yield wheat.
European history since the plague has been profoundly affected by the frontier of the Americas, the greatest frontier since the end of the ice ages exposed Europe. And while it is true that European culture made the exploitation of this frontier possible; the resources provided by the new world completely changed European history. It was the intersection of rich resources and a particular set of cultures and technologies that explains both the industrial revolution itself and England’s role in it. It explains, too the ascent of the west, the present distribution of relatively rich and relatively poor nations, and the way this distribution is changing. Clark’s thesis, by contrast fails completely on every count.
The excess goods from the New World, then, were what propelled European growth. Because the British were the most successful in cultivating the new lands they enjoyed the benefits first. The industrial revolution occurred in England simply because it enjoyed all of the cultural assets of old civilization equally with old world nations and it enjoyed the assets of the New World differentially.
The industrial revolution depends on thrift and industry. It depends on commerce. It depends on information. It depends on rule of law and principled behavior. Groups with certain geographical attributes and cultures succeed. Groups with other geographical attributes and cultures lag far behind. In places that border the ocean, places with good natural ports, commerce frequently thrives. Commercial interests can be powerful forces in tranforming cultures at the margins. Commerce necessarily makes one more open to ideas from far away places. Because transport by ocean-going vessel is now and has for five centuries been the most cost effective means of transport for most goods, all commercially successful areas are closely connected to the ocean. Places actually from the ocean may thrive, but only when connected well by road or rail. And usually they thrive only because of the concentration of a rare resource, as gold in Timbuktu ( once long ago) or Johannesburg today.
There are places poor in resources, as was England, that have taken the European colonial model and run with it. The Japanese did it early on; they were working on it contemporaneously with the Europeans. The Japanese culture of cooperation, hard work, and study meant that the industrial revolution would take root their early on. Koreans were further behind; but they mastered it. The Chinese were even further behind; but they have too. So have the Indians.
In the case of the Chinese, one discovers that they have expended huge efforts to copy or supplant European relationships with governments whose territories are rich in strategic resources. They started building railways in Zambia in the 1960s; and the Chinese are the largest expatriate population in Zambia’s capital city, Lusaka. Zambia, by the way, has some of the world’s richest copper ore deposits. They have a strong presence in Sudan and one frequently hears of resource deals between Latin American nations and the Chinese. The Chinese, then, are learning the European strategy of looking globally for resources to power industry at home. Gone is the isolated, inward looking China of the eighteenth and ninteenth centuries. Then, China lagged England not for the cultural reasons Clark identified, but for reasons of resource limitation borne of the medieval value of self-sufficiency. Once the Chinese rejected that value, looked globally for resources, and became successful at getting them, the missing resources were provided the industrial revolution was as alive and well in China as it ever was in England. Whether one defines the issue that stopped the Chinese from joining the industrial revolution in terms of cultural attitudes or in terms of access to material resources, it is completely clear that the culture of thrift and industry is a very old one in China; and it was not sufficient to start the industrial revolution.
There are places blessed with resources and good geography where industry and commerce have not managed to take hold and produce strongly rising standards of living. When all other variables have been eliminated, one is left with the idea that culture must play a strong role.
Full Circle
This brings us full circle. Jared Diamond explains in some detail in his work Guns, Germs, Steel that culture bifurcates when civilizations become dense due to successful agricultural practices. Hunter-gatherer civilizations tend to be egalitarian and non-specialized. Agricultural and post-agricultural societies tend to be specialized and heirarchical. It is, he reasoned, a natural outcome of the conditions. His argument is mostly empirical; things work out this way over and over. There are are no exceptions. And the reasons for the differences are compelling. It is this bifurcation that makes the difference. It probably was working itself out at some time in the last two millennia in England, but probably it had gotten much farther along by 1250 Clark asserts. And certain populations on the European continent and in Asia were much further along in the expression of industry and thrift.
Clark is almost certainly correct that “thrift and industry” is a necessary component of an industrial society. But the idea that “thrift and industry” provide sufficient conditions for the initiation or sustenance of an industrial society is simply absurd. Clark may be right that the British aristocracy on or around 1250 produced a new set of cultural values. He might be right that these cultural values diffused into the broader population by some means resembling the one he talks about. But this cultural value or practice could not have been “thrift and industry.” It had to be something else. It might be that the cultural value in question does give some kinds of advantages to cultures that have it; and it might be that where it works along with industry and thrift it augments the success of commerce and industry.
I happen to imagine that there is a set of cultural values that makes industrial society work. Thrift and industry must surely be among them. But there might be other values such as those that encourage the free flow of information and ideas, or those that set people on equal standing before the law. Some of these, in fact, appear in the “transparency” indices published periodically in the Economist. They have real, measurable economic impact. There might be others, too. For example, ideas about constraining one’s actions on the basis of principle, not just by social pressures and institutions. It might be useful to try to work out what all the useful values are and what their effects are on society. To the extent Clark is trying to do this we give him credit.
We note in passing that despite all its benefits the industrial revolution is not everything. There are a great many values that convey greater satisfactions on man than do the values we find underlying the success of capitalism. The values Clark is peddling don’t necessarily satisfy. Except in cultures that succeed completely in convincing its members of the holiness of work, these ideas tend to spread mostly frustration, anxiety, and disaffection. It is, we imagine, the divorce of industry from the Calvinist God who sanctified it that is responsible for much of America’s sense of meaninglessness. And for a resurgence of fundamentalism in the West. And we might see Clark’s work as an effort to prop up with bad science what bad religion has failed to do.
After exploring the many ways in which it fails we must conclude tha Clark’s thesis makes sense only to those predisposed to hold the same prejudices. The thesis seems to come perilously close to simply assuming a kind of “King Arthur” class unique to England’s thirteenth century aristocracy, and pretending it might breed its way to a kind of worldwide hegemony. By comparing it to an accepted scientific theory the author pretends to prove that the outcome was an inevitable result of the qualities of the people in that mythical class. It comes out as a new twist on an old theme “We are desceded from the Gods; but you are not.” Whether Clark does so intentionally or not, his work clears a path for just such an ethnocentric intepretation. That’s dangerous stuff.
It looks like Clark’s work will do a fine job of bolstering prejudice and of giving rich Anglos a sense of righteous entitlement. This is bound to make the work a bestseller, to make Clark a rich man, and to place his work in the western canon for some time. But if one cares about actually describing the causes of the industrial revolution, the central thesis of Farewell to Alms seems perfectly poised to stop us from looking in all the right places. We cannot help but wonder whether that’s the point.
Permalink
01.31.07
Posted in Philosophy &c, Book Reviews - Non-Fiction at 3:54 am by steve
Meyerson’s Game Theory arrived late last year and I have just now gotten to page 10. At page 10 we are presented with substitution laws written in terse and exact mathematical language. I will try to describe the notion I find in the four substitution laws on the bottom of page 10. Suppose I prefer a to b. They assert that if I have z, I will prefer a and z to b and z. This is a lovely mathematical argument. But it is categorically silly. Let us suppose a is cheese and b is jelly. I actually prefer cheese to jelly. Served alone, I will not hesitate to eat cheese. Not so with jelly. Now, suppose z is toast with peanut butter. The substitution idea suggests that, given my choice of cheese over jelly, I must choose cheese when presented with toast and peanut butter. But it ain’t so.
Game theory, at least at its development on page 10 neglects the notion that some goods or events have synergistic qualities and some have redundant qualities. Well balanced meals and portfolios alike eschew certain redundancies and work for synergistic qualities. I have always found choice theory confusing - it has always asserted things I thought had no connection with reality. I am sure there are compelling computational reasons for this approach. And I imagine that if the problem were abstracted in some different way these objections could be overcome. That is, one might be able to discover abstract variables based on the qualities goods deliver to us that really do behave as expected. But the behavior postulated is not categorically true for all material goods.
At page twenty three we run into a nice little problem that illustrates something like the argument I made above. It succeeds by confusing expected value with utility. The example neglects to distinguish between the expected value of a bet and its utility.
It implicitly suggests that ten apples have ten times the utility as one apple. But in my own experience, whether this is true depends on the situation. If I am equipped with the means to transport and store ten apples this might sometimes be the case. If, however, I am eating lunch, one apple is generally more than enough. Ten is no better than one. Therefore the situation in which I have one chance in ten of getting ten apples has no definable preference relationship to a sure bet of getting one apple, not unless I happen to be in a small group of ten people who all make the same bet, agreeing to share the apples. And even in that case it depends on the nature of the game. Is one person in ten to win? Or will there be ten independent trials, each with a one in ten probability?
So now I realize why I never amounted to anything. I find an argument that supports my own reasoning but I reject it because it has a different set of flaws altogether.
Well, despite these two little problems, I like the way the book reads, I like the way it is structured, and I like the choices of problems. I look forward to learning more about Game Theory. I appreciate the author’s awareness of many of the pitfalls and shortcomings of the methods he describes and advocates.
Permalink