Siren Servers

The stories about NSA surveillance of email and phone metadata are one more boost to skepticism about the new digital economy.

Here's a separate article in the NYT about digital concentration of influence and wealth.

DISSECT almost any ascendant center of power, and you’ll find a giant computer at the core. In the past, power and influence were gained by controlling something that people needed, like oil or transportation routes. Now to be powerful can mean having the most effective computer on a network. In most cases, this means the biggest and most connected computer, though very occasionally a well-operated small computer can play the game, as is the case with WikiLeaks. Those cases are so rare, however, that we shouldn’t fall into the illusion of thinking of computers as great equalizers, like guns in the Wild West.

The new class of ultra-influential computers come in many guises. Some run financial schemes, like high-frequency trading, and others run insurance companies. Some run elections, and others run giant online stores. Some run social network or search services, while others run national intelligence services. The differences are only skin deep. I call this kind of operation a “Siren Server.”

The irony is the original image of the personal computer was of liberation, such as Apple's famous Superbowl ad in 1984. The Silicon Valley political vision of the world - a kind of libertarian paradise - is encountering increasing resistance and skepticism.

So the author of the NYT article suggests we should move towards micropayments for our personal information, to reduce the advantage of the "siren servers."

Of course, the counterargument is today's titans - Google, Facebook, Amazon, Apple - are likely to be tomorrow's Dell, Compaq, MySpace, or AOL, let alone earlier titans such as Bethlehem Steel or Pennsylvania Railroad. I doubt there are natural monopolies or network effects sufficiently powerful to entrench the current digital elite for long.

Algorithms can be replicated. That kind of information wants to be free, too. And if people find their personal data is being over-exploited, they will find alternative ways to communicate.

There can often be something of an arms race with technology. Take airline fares, for example. Large centralized computing power originally enabled the airlines to segment their customers in the 1970s and 1980s, and extract the maximum amount people would pay for a certain route. But the consumer caught up. Technology also brought transparency before long, including sites like Expedia or Kayak. Large centralized computers still price airline fares, but the airlines barely stay out of bankruptcy most of the time, and their only way to get pricing power is to cut capacity. Their industry became commoditized.

People have also feared the use of technology for surveillance for decades, but it usually enables transparency and less power for gatekeepers too.

The whole economy is changing in deeper ways, and that is irreversible. But I doubt that technology will enable any enduring center of power.

 

 

 

 

 

From Mercantile Exchange to Railroads

We're looking at Double Entry: How the Merchants of Venice Created Modern Financeby Jane Gleeson-White, starting here.

So double-entry book-keeping served as a foundation stone of capitalist rationality and, on an individual level, business success. Luca Pacioli's advice would echo through generations of clerks laboriously maintaining ledgers.

In Pacioli’s view, three things are needed by ‘anyone who wishes to carry on business carefully. The most important of these is cash or any equivalent, according to that saying, Without this, business can hardly be carried on.’ The second thing necessary in business ‘is to be a good bookkeeper and ready mathematician’. The third ‘and last thing is to arrange all the transactions in such a systematic way that one may understand each one of them at a glance, ie, by the debit and credit method’. Not much has changed today.

Production and Decisions

Capitalism developed and changed in the eighteenth and nineteenth centuries, however. Book-keeping evolved into accounting. The medieval core of double entry proved durable for these new, much larger enterprises.

This vast new range of double-entry applications reflects the extraordinary expansion of business from the late eighteenth century to the close of the nineteenth, a period which saw the rise of the joint stock company (a business organisation which was funded by selling shares to investors who became partners in the venture), and marks the formative era of accountancy. During these decades, accountants transformed a mere system of recording exchanges into a method of managing and controlling business. The first signs that double entry would be equal to the task of monitoring and directing this new industrial world of factories, wage labour and large-scale capital investment were found in the north of England, in the pottery works of Her Majesty’s potter, Josiah Wedgwood (1730–95)—a factory called Etruria, named, by chance, after the ancient Italian region home to Pacioli’s Sansepolcro.

Wedgwood ran a large business that often did not make much money, for inscrutable reasons. So he decided to investigate.

During this period of scrutiny, Wedgwood made an important discovery—the distinction between fixed and variable costs—and he immediately understood the implications of their difference for the management of his business.

A new form of production - large factories - led to the beginnings of cost and management accounting. This was part of a much broader evolution from a system centered on mercantile exchange to one also suited for production and accountability.

The shift in outlook required to move Pacioli’s bookkeeping system beyond its mercantile origins in an exchange economy (where it recorded the exchange of goods, owing and being owed, paying and collecting debts) to manufacturing, where the emphasis is on the production of goods (the conversion of materials and labour into products) was huge.

The growth of railroads in the mid-nineteenth century brought a whole new set of issues. They required outside investment, which both meant more audit control to prevent fraud, and clearer distinctions between income and capital, so investors could be paid dividends out of actual income.

Not only did a new form of production—factories—challenge and alter double-entry bookkeeping from the 1770s, but the financing and managing of the vast investments required to build railways during the same period of industrial expansion brought new issues of accounting and accountability.

The key accounting issue in a corporation is the amount of profit available for dividends—which means that a corporation must properly distinguish between capital and income, because profits derive from income, not from capital. This new laser-like focus on profits and dividends brought two new accounting questions to centre stage: How to calculate income or profit? And how to value assets? These questions were rarely asked before 1850 but by the end of the century they had become the major preoccupations of practising accountants.

 

Double Entry and the Modern World

I read Double Entry: How the Merchants of Venice Created Modern Financeby Jane Gleeson-White last week, largely motivated by wanting to know some of the deeper reasons behind the surface apparatus of Quickbooks, which for various reasons I have to figure out soon.

It sounds like a dry subject. But the book is historically colorful, thought-provoking and well-written. Accounting numbers rule much of our lives and way of seeing the world. But they have a history and limits and flaws.

Measurement and capitalism

She tells the story of how Italian monk and mathematician Luca Pacioli in 1494 first wrote down the methods Venetian merchants had used to keep accounts, possibly for several centuries before that. The invention of double-entry clarified notions of cost and profit. According to some historians perhaps it led to capitalism itself.

In six pages Sombart set out his belief that the emergence of capitalism and the appearance of double-entry bookkeeping in the thirteenth century are causally related. He wrote: ‘It is simply impossible to imagine capitalism without double-entry bookkeeping; they are like form and content.’

Weber’s definition of a ‘capitalistic enterprise’ is derived from the concepts of double-entry bookkeeping: ‘a rational capitalistic establishment is one with capital accounting’. Like Sombart, Weber argues that double entry is significant because it makes possible an abstract measure of income and expenses—and therefore enables the calculation of profit, the key component of capitalistic business practice. Weber also believed that the formal rationality of double entry made the world a cold and disenchanted place—and, ominously, predicted that double entry would continue its rule ‘perhaps until the last ton of fossilized coal is burnt’.

The new double-entry methods caused a deeper change in perception:

He calls Pacioli’s treatise on double-entry bookkeeping ‘a major innovation in economic history’. First, because double entry provided the means of discarding all information extraneous to decision-making, leaving behind only numbers. And second, because it translated these numbers into a common measuring tool called ‘profit’, which allowed a relatively precise evaluation of actions. Double entry thus transformed business books from mere memory aids into records which allow the calculation of profit—and which can therefore be used to measure the success of each individual transaction and of a business generally.

But this did not come without a price.

We are now so familiar with this once innovative (and largely arbitrary) cost-benefit way of thinking that we take it for granted and cannot imagine it otherwise. And yet, as we shall see, this profit-driven way of thinking encouraged by double entry is not only driving managers to drink, academics to pull their hair out, politicians to short-term opportunism and most human beings to suffer in some way, but it is also destroying the world beneath our feet.

She argues that accounting is poorly suited to count environmental damage, for example. This is a problem when accounting has become central to the practice of policy and government.

National statistics

One of the main extensions of accounting is modern national income accounting. It is so familiar (at least if you have studied economics) that we forget how relatively recent it is. Keynes and Kuznets largely invented it, and both were skeptical about its use.

As a thinker of great depth and complexity who saw economics above all as a moral practice, Keynes was suspicious of statistics and considered these quantitative measures of the national economy as exceptional, emergency measures demanded by the times. In the budget speech which presented these accounts for the first time, the British Chancellor expressed the same view, stressing that the publication of official estimates of national income and expenditure should not be regarded as setting a precedent.

That did not stop a massive increase in the use of techniques which had proved useful during the war.

In 1952, very few statisticians were familiar with the theory and practice of national accounting. This would soon change irrevocably. The work done by Stone, Kuznets and others became the foundation of international accounting, and their national income statistics used to measure economic growth would soon become the key indicator of national success and government performance.

But even the main originator of much national income accounting was skeptical of its application.

But the accuracy and usefulness of national income measures have been questioned from the beginning, by Keynes and others, including Simon Kuznets himself. For example, Kuznets believed the national accounts should include the value of unpaid housework, despite the fact that including this vast contribution to the national economy would present statisticians with the difficult task of making monetary estimates of this valuable work. The US Commerce Department refused to calculate these estimates—and as a result Kuznets broke his association with the department in the late 1940s. Kuznets was also concerned about the effects on people’s lives of the modern economic growth that these statistics encourage as an end in itself.

GNP continues to be questioned as an adequate measure, most significantly recently in the Stiglitz-Sen-Fitoussi study.

Perpetual scandal

The numbers can often conceal as much as they convey, and we can mistake a false impression of precision for truth. The numbers sometimes are outright lies, for one thing. Accounting is also inseparable from scandals, she says, and always has been. People have not lost confidence in accounting despite failure to detect fraud or indications of problems on a litany of cases from Enron to Worldcom to RBS.

However, not only has no such fall ensued but it turns out that these accounting scandals are a regular feature in the landscape of accounting. They are as old as the profession itself, dating back to the earliest days of the formalised use of collective capital: the corporation. Corporations and accounting scandals go together like Gordon Gekko and greed. The nineteenth and early twentieth centuries are rife with corporate collapses of the magnitude of Enron’s and comparable in their elements. And they all stem from significant accounting misstatements orchestrated by influential senior managers. Equally, the responses of lawmakers and watchdogs have been the same over the past one hundred years: tinker around the edges of the law, found new watchdogs, proclaim a new era of greater scrutiny and let accountants and auditors out to play with the managers of vast sums of other people’s money.

We'll look at more tomorrow.

 

Companies which lose good ideas

I subscribed a month ago to a wonderful daily e-mail, delanceyplace, which provides excerpts from current non-fiction books, with links to Amazon which benefit a children's literacy project. Today's excerpt is from a book called Advocacy by John A. Daly, with remarkable examples of how people with good ideas could not get them accepted in their original companies. Check it out on the delanceyplace site. An excerpt from the excerpt:

"Business history is dotted with stories of opportunities lost because people within companies were unsuccessful in pitching their ideas. And those neglected opportunities were consequential. Competitors seized market share that could have been kept and increased if the good idea had been adopted. Take the minivan. Who came up with that idea -- Chrysler? No. Ford engineers came up with that idea -- they called it the van-wagon -- but they couldn't convince management that customers would buy it. In fact, one executive who endorsed it, Hal Sperlich, was fired and went on to lead the effort at Chrysler, which then dominated the minivan world for many years. Ford lost out. ...

"Sam Walton, the founder of Walmart, started his career as a franchisee in the Ben Franklin chain of stores. Walton tried to convince the Ben Franklin executives that his model of buying directly from manufacturers and offering deep discounts would lead to incredible opportunities. They didn't listen, Walton implemented the idea himself, and Walmart became an international phenomenon. ...

The same applies to Intel, and many other companies. But the best example is Apple.

"Steve Wozniak, a cofounder of Apple Computers, was working at Hewlett Packard when he and Steve Jobs designed their first personal computer. Wozniak had signed a document at HP saying that whatever he designed as an employee belonged to HP. He said, 'I loved [HP]. That was my company for life. So I approached HP .... Boy, did I make a pitch. I wanted them to do it. I had the Apple I, and I had a description of what the Apple II could do. I spoke of color. I described an $800 machine that ran BASIC (an early computer language), came out of the box fully built and talked to your home TV: And Hewlett-Packard found some reasons it couldn't be a Hewlett-Packard product.'

"Later, when HP began work on a computer, Wozniak approached the project managers and asked to work on it. 'I really wanted to work on computers. And they turned me down for the job. To this day I don't know why. I said, 'I don't have to run anything,' even though I'd done all these things and they knew it. I said, 'I'll do a printer interface. I'll do the lowliest engineering job there is.' I wanted to work on a computer at my company and they turned me down.' Think how different the computer industry would be if Wozniak had successfully pitched his ideas to HP. ...

I read a good book about pitching ideas and overcoming objections a while back, Buy-In: Saving Your Good Idea from Getting Shot Down by John Kotter. I've had good ideas shot down nonetheless. Sometimes no amount of persuasion will work. 

The reason capitalism works better as a system is not because it's efficient or elegant - I was talking about this concerning General Electric the other day - but because in the medium term, in aggregate, fewer good ideas are shot down. So it is more adaptable and innovative.


 

 

Investing in local neighborhoods

This is a fascinating piece in Atlantic Cities:

The Millers have invested the last two years and nearly a million dollars in trying to answer this question: Why can’t small-time investors put their money in their own communities? Then, finally, in August, they successfully took a single property on H Street public

 

Aristotle: Justice and Law

I've been taking an extended look at Aristotle's The Politics , starting here. It helps to see political issues and dilemmas in very long view.

We have been looking recently at how impartiality and fairness are not the whole of our moral sense. It a running theme on this blog. Empty neutrality is not necessarily the end point of humanity.

 

Justice

There is a frequent tendency to identify justice with fairness or equality. But, says Aristotle, justice is not the same as equality.

So it thought that justice is equality, and so it is; but not for all persons, only those who are equal. Inequality also is thought to be just, and so it is, but not for all, only for the unequal. We make bad mistakes of we forget this "for whom" when we are deciding what is just. P195

Nor does he believe the state can just be a neutral referee between different views of the good life, as contemporary liberal theory mostly believes.

..a state's purpose is not merely to provide a living but to make a life that is good. .. all those who are anxious to ensure government under good laws make it their business to have an eye to the virtue and vice of the citizens. It is thus evident that that which is genuinely and not just nominally called a state must concern itself with virtue. p197

The purpose of the state is not to be a referee, but to enable its members to live well.

it is clear therefore that the state is not an association of people dwelling in the same place, established to prevent its members from committing injustice against each other, and to promote transactions. Certainly all these features must be present if there is to be a state; but even the presence of every one of them does not make a state ipso facto. The state is an association intended to enable its members, in their households and the kinships, to live well. ; its purpose is a perfect and self-sufficient life. p198

This, again, thoroughly goes against the grain of contemporary liberal thinking in its Rawlsian mainstream, which is interested in minimal coexistence rather than living well.

Virtue does not imply absolute equality,says Aristotle.

Those who contribute most to this kind of association are for that very reason entitled to a larger share in the state than those who, though they may be equal or even superior in free birth and in family, are inferior in the virtue that belongs to the citizen. p198

The strong may need to be restrained, however.

It is always the weaker who go in search of justice and equalty; the strong reck nothing of them., p367

Law and appetite

The advantage of law is it takes emotion and self-interest out of the equation.

Therefore he who asks law to rule is asking God and intelligence and no others to rule; while he who asks for the rule of a human being is importing a wild beast too; for desire is like a wild beast, and anger perverts rulers and the very best of men. Hence law is intelligence without appetition. p226

"Intelligence without appetition" is marvelous, and similar to ideas about "public reasoning." But, law is also a search for the mean, not simply impartial enforcement of universal rules;

Again, doctors when ill call in other doctors to treat them, and trainers other trainers when they themselves go into training - on the principle that it is impossible to give true judgment when their own interests and thir own feelings are involved. So it is clear that the search for what is just is a search for the mean; for the law is the mean. p227

And one must be wary of interests that cloak themselves under the cover of law.

 

Cities and the public good

Republicans do particularly badly in cities, says Atlantic Cities, and it may not be a matter of race and demographics alone. Where people are squashed together, the need for public services is more obvious than on a tract of land in the exurbs.

In a good piece on the GOP’s problem with geography earlier this week, The New Republic’s Lydia DePillis interviewed Princeton Historian Kevin Kruse, who made this point succinctly: "There are certain things in which the physical nature of a city, the fact the people are piled on top of each other, requires some notion of the public good," he said. “Conservative ideology works beautifully in the suburbs, because it makes sense spatially."

The real urban challenge for conservatives going forward will be to pull back from an ideology that leaves little room for the concept of "public good," and that treats all public spending as if it were equally wasteful. Cities do demand, by definition, a greater role for government than a small rural town on the prairie. But the return on investment can also be much higher (in jobs created through transportation spending, in the number of citizens touched by public expenditures, in patents per capita, in the sheer share of economic growth driven by our metropolises

There may be something to this. It is indeed partly a matter of the public good, in the economic sense. But I would like to see more money spent on parks and libraries and infrastructure and other actual public services open to everybody - not transfers, entitlements and padded union pensions that go to particular individuals for their private use. I pay a staggering amount in New York City taxes, only a tiny fraction of which goes to actual public goods rather than entitlements or subsidies.

As often happens, the principle is correct, but the practice can be corrupted in machine politics and clientelism. In a similar way, I'd double spending on NASA and the National Parks at Federal level, things that everyone benefits from, so long as we eliminate soybean or corn subsidies, say, or limit the proportion of the federal budget spent on services and entitlements for the over 65s.

But it is not simpy about public goods, either. It is also a matter of being able to articulate a notion of the common good. Aristotle, as we saw, defined any constitution that does not aim at the common good as "deviant". Both parties have trouble with the common good, the Democrats because they are a coalition of sectional and selfish pressure groups, the Republicans because their libertarian and oligarchic country club wings both deny any notion of the common good at all.

 

Aristotle: The Middle Way

I've talking about Aristotle's The Politics , starting here. We were just talking about his warning about over-reliance on expert judgment, and the need to emphasize the "middle" kind of life.

This leads to a very important point. One major criticism of virtue ethics is that it is only for an aristocratic elite. I looked at an Oxford roundup of articles, here.

One of the contributors, Schneewind, says

The Aristotelian theory may have been suited to a society in which there was a recognized class of superior citizens , whose judgement on moral issues would be accepted without question (p200)

But in fact Aristotle is not arguing for exclusive reliance on a higher class of superior individuals. He says:

If we were right when we stated in our Ethics stated that virtue is a mean, and that a happy life is a life without hindrance in its accordance with virtue, then the best life must be the middle life, consisting in a mean which is open to men of every kind to attain. p266

This is very important, because it refutes one of the principal objections to virtue ethics that we have come across: the argument that the good life is only one philosophers can aspire to.

The state aims to consist as far as possible of those who are like and equal, a condition found chiefly among the middle people. And so the best-run constitution is certain to be found in this state, whose composition is , we maintain, the natural one for a state to have. p267

it is the middle citizens in a state who are the most secure: they neither covet, like the poor, the possessions of others, nor do others covet theirs as the poor covet those of the rich. So they live without risk, not scheming nor being schemed against. p267

 

Faction

Aristotle is not arguing for a guardian class, like Plato. Even further,

The superiority of the middle constitution is clear also from the fact that it alone is free from factions. Where the middle element is large, there least of all arise factions and divisions among the citizens. And big states are freer from faction, for the same reason, that their middle element is large. p268

Faction seems endemic to just about any human group or organization, unfortunately. He specifically warns against the "greedy grubbiness of the rich."

But at all times a legislator ought to include the middle peope in the constitution. .. The better mixed a constitution is, the longer it will last. It is a mistake made by many, even by those seeking to make an aristocratic constitution, not only to give to great a preponderance to the rich, but to cheat the people. In the long run mistaken good inevitably gives way to unmistakable evil for the greedy grabbing of the rich does more harm to the constitution than that of the people. p272

So there is a sympathetic element to the Occupy 99% there. On the other hand,

In democracies the rich ought to be treated with restraint: there should be no redistribution of property, nor of income, such as goes on unnoticed in some constitutions. p327

Confusions arise from overextending the ideas of equality, or inequality.

Democracy arose from the idea that those who are equal in any respect are equal absolutely. All alike are free, therefore they claim that they are all equal absolutely. Oligarchy arose from the assumption that those who are unequal in some one respect are completely unequal: being unequal in wealth they assume themselves to be unequal absolutely. p296

I think this is a common problem. Gay marriage, for example, is a claim to be 'equal absolutely' even if other citizens have to be coerced or sued into accepting it. Any difference in any respect in equality or any disparate impact is seen as unacceptable.

But, says Aristotle, there are two kinds of equality - numerical, and what amounts more or less to proportionate equality:

Inequality is everywhere at the bottom of faction, for in general faction arises from men's striving for what is equal. .. Now, there are two kinds of equality, the one being numerical, the other of value. I use 'numerically equal' to cover that which is equal and the same in respect of either size or quantity, and 'equal in value' for that which is equal by ratio. ... To lay it down that the equality shall be exclusively of one kind or the other is a bad thing, as is shown by what happens in practice: no constitution that is constructed on such a basis lasts long. p298

Too much emphasis on simplistic equality, taken to an extreme in either direction , can lead to political collapse.

He is also wary of faction arising from different regions or ethnic backgrounds.

Then there is difference of stock, which remains a stimulus to faction until such time as the two groups learn to live together; for just as a state cannot be made out of any and every collection of people, so neither can it be made in any space of time at will. Hence faction has been exceedingly common when the population has included an extraneous element, whether these have joined in the founding or have been taken on later. p304.

The "learning to live together" takes time, and multiculturalism, so to speak, can just as much lead to bitter faction instead of universal harmony. This is a common theme with Aristotle: you most often cannot simply enact things by will. People have to be habituated to them.

Of course, much of this runs counter to current liberal orthodoxy. But it may be there are some timeless issues with human nature that we have to remember to make genuine progress possible. This does not mean we should not look to have people from different backgrounds living together, of course, in the interests of diversity. But it does suggest we need to be on the lookout for faction if so.

He also has a precursor to the "broken windows" theory of law enforcement that became popular in the 1990s, which said minor crimes like turnstile jumping could lead to more widespread major crimes like assault or murder:

Now in constitutions that are well-blended it is essential to take many precautions, and certainly against anything being done contrary to the laws; and it is essential in particular to guard against the insignificant breach. Illegality creeps in unobserved; it is like small items of expenditure which when oft-repeated make away with a man's possesions. The spending goes unnoticed because the money is not spent all at once, and this is just what leads the mind astray. p323.

We will look at Justice and law next.

 

 

Aristotle: Household, Wealth, Common Property

We're talking about Aristotle's The Politics , starting here.

The household

The first few chapters, on the household, do seem like a relic of a distant 350 BC, and are best hurried through. It is hard to relate to the small farms or city households of ancient Athens or the Troad. This household management, oikonomia , is however the origin of the term "economic."

Most objectionately to modern readers, he believes some people lack the capacity for deliberative reason, so that they are slaves by nature ( although ancient slavery was not racially based). He also takes for granted strict division between the sexes. The head of the household must have moral virtue in its entirety; others, such as women, children, and slaves, in lesser degree.

He was perhaps more enlightened than many of his time , but he was of his time. He took for granted that, as a matter of practical necessity, some had to labor, not least because they were not suited to do anything else.

Of course, for us automation has removed much of the raw mechanical labor from life, although the economy still has an insatiable appetite for cheap labor in many agricultural and service industries. And we more optimistic about people's capacity for reason (although sometimes I wonder, if you see any episode of Access Hollywood or other celebrity glop).

What he says also entails one expects much more from the free, independent head of household in moral terms than children or servants or dependents. We still believe that of children, of course. Perhaps the capacity for moral virtue differs, and that is something we set aside in contemporary debate.

Wealth

He talks about the acquisition of property, and the definition of wealth. Wealth, properly thought of, is a tool:

Solon in one of his poems said "no bound is set on riches for men." But there is a limit, as in the other skills; for none of them have any tools which are unlimited in size or number, and wealth is a collection of tools for use in the administration of a household or state. (P 79 in the Penguin edition).

Of course, one can acquire goods without limit, but the function of the household is to use them.

The reason why some people get this notion into their heads may be that they are eager for life but not the good life; so, desire for life being unlimited, they desire an unlimited amount of what enables life to go on. Others again, while aiming at the good life, seek what is conducive to the pleasures of the body. So, as this too appears to depend on the possession of property, their whole activity centers to business. For where enjoyment consists in excess, men look for that skill which produces the excess that is enjoyed. (p85)

This of course is still a live political issue - is there a point where we have enough? How much is enough? (the title of a book I looked out a few weeks ago). It is also very much linked to questions of environmentalism. There is a very old tradition which sees the answer to human happiness not in prosperity and abundance but in limiting human desires. That ancient ascetic creed can surface today in those who want us to abandon growth and return to a significantly simpler lifestyle.

I think the answer is it is almost impossible to define what "enough" is, or what wealth itself is, without some conception of the good life and flourishing. Seeing wealth primarily as a tool for particular purposes, something to use and activate, rather than a pile of gold or financial assets is productive. It can be hard to transform financial assets into a flourishing, happy, secure life, as many celebrity divorcees or high-profile occupational burnouts know.

Aristotle also somewhat disapproves of trade and charging interest, "since it arises not from nature but from men's gaining from each other", views which were to still resonate late into the modern period, and underpinned nobility looking down on the merchant classes. We have seen this before, (including a quote from the Politics) in the deep suspicion of many religious and philosophical traditions of the institution of money.

But pragmatist that he is, he can have a shrewd appreciation of business. Thales of Miletus, he says, was criticized for making little money from philosophy. So one year he cornered the olive oil presses on his island just before a good harvest.

He made a lot of money, and so demonstrated that it is easy for philosophers to become rich, if they want to; but that is not their object in life. .. the principle can be applied more generally: the way to make money is to get, if you can, monopoly for yourself. (P90).

And that is also why we have to be very careful of monopolies and businsss restrictions and regulation sometimes.

It is also an illustration of how most ideas in the humanities and social sciences are rediscoveries or permutations of much older themes. Michael Porter would advise the way to profitability is to build barriers to entry (Competitive Strategy: Techniques for Analyzing Industries and Competitors). Warren Buffett looks for businesses with a "moat."

Against common property

Aristotle then turns to the state and comparative politics, looking at a number of constitutions including Athens, Sparta, Crete and Carthage.

He has a modern skepticism for Plato's notion of communal ownership or modern socialist property, not to mention sharing wives and children:

The greater the number of owners, the less respect for common property. People are much more careful of their personal possessions than of those owned communally; they exercise care over common property only insofar as they are personally affected. Other reasons apart, the thought that someone else is looking after it tends to make them careless of it. P108

That is also true for organizations, which is why assigning responsibility and accountability is often so important.

What was later called "to each according to his needs" is also met with skepticism by Aristotle.

For if the work done and the benefits accrued are equal, well and good; but if not, there will inevitably be ill-feeling between those who get a good income without doing much work and those who work harder but get no corresponding extra benefit. To live together and share in any human concern is hard enough to achieve at the best of times, and such a state of affairs makes it doubly hard. P114

This has a very contemporary ring about it, no doubt because it is such a timeless human response. So common ownership of property has inherent difficulties. At least, he says, existing laws are strengthened by familiarity.

Far better is the present system - provided that it has the added attraction of being a matter of habit and of being controlled by sound laws.

Even if you could fix a level of common possessions, and achieve absolute material equality,

to fix a moderate amount for all, that would still be no use: for it is more necessary to equalize appetites than possesions, and that can only be done by adequate education under the laws. ... And civil strife is caused by inequality in distinctions no less than inequality in property, though for opposite reasons on each side; that is to say, the many are incensed by the inequality in property, whereas more accomplished people are incensed if honors are shared equally, for then, as the tag has it, 'good and bad are held in equal esteem. p129

This is very important for my interests, as an obvious response to economic abundance is some kind of minimum or basic income. It is an essential illustration of the issues which surround distribution more generally.

The matter of equal esteem and distinctions is also important. It suggests the difficulties of those small slivers of society which have actually achieved abundance in the past. The behavior of aristocracies (or as Aristotle would more likely say, oligarchies) is highly instructive. When landed estates mean they have no immediate material needs, the result has often been a focus on rank and status and courtier affectation, not a higher form of achievement or freedom.

It also is clear that many of our contemporary political issues are claims or conflicts about equality of esteem, more than economic equality.

Moreoever,

Secondly, the depravity of mankind is an insatiable thing. At first they are content with a dole of a mere two obols, then, when that is traditional, they go on asking for more and their demands become unlimited. For there is no natural limit to wants and most people spend their lives trying to satisfy them. p131

Such is the fate of the welfare state as it develops toward fiscal catastrophe, perhaps. And it is a general warning about the complications and difficulties of redistributing wealth.

In general, he is concerned with the immediate psychology of how people will see things and behave in practice, rather than ultimate principle, which is why it is useful wisdom.

We of course instinctively see how what he says helps explain why the USSR and other communist states got into trouble. But it is also a warning against some of our own practices, though that may be harder to see.

 

Change

He is very conservative with a small c.

.. it is clear that there are some occasions which call for change and that there are some laws that need to be changed. But looking at it in another way we must say that there will be need of the very greatest caution. ..A man will receive less benefit from changing a law than damage from becoming accustomed to disobeying authority. .. The law has no power to secure obedience save the power of habit, and that takes a long time to become effective. Hence easy change from established laws to new laws means weakening the power of the law. p138-9

Habituation is a major theme in his ethical approach. There can be significant downside to basing institutions and expectations on the thin and fragile ground of rational choice alone.

What should reformers take from that? Not that reform or major change is impossible, or ought not to be attempted. But that you have to be aware of the practical difficulties and downsides, and do something to avoid or confront or control them. As I said before the election, the left's dreams often turn into darkness , because they look at one shining principle at the expense of daily reality and psychology.

Progress should be measured not by intentions but by actual flourishing lives.

Of course, seeing this as wry, shrewd advice depends on assuming that some elements of human nature are constant, and the human predicament has some timeless elements that unite us with someone who lived so long ago. In international relations, there has been a long debate over Thucydides, and whether his similar observations of power politics and war and history in Ancient Greece (The History of the Peloponnesian War) still have application today.  

I would say that we do advance a little in social understanding over time. But not as much as we think.

I'll look at more tomorrow.


 

 

Intellectual Property..and Theft

The NYT has a very interesting series on the impact of intellectual property disputes. The cost of litigation is becoming astronomical:

In the smartphone industry alone, according to a Stanford University analysis, as much as $20 billion was spent on patent litigation and patent purchases in the last two years — an amount equal to eight Mars rover missions. Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.

IP law is a mess, and it is holding back innovation - especially by small companies who cannot afford battalions of lawyers and lobbyists. I was talking about patent trolls here.

Copyright ls is just as much of a mess - for example, Google and publishers continue to fight over orphan copyright works, although they have apparently just settled terms for other uses.

There's a common theme here. Our basic intutions about property and property rights don't work very well for many kinds of intangible property. And much of the value in the economy is now intangible. Instead of owning defined parcels of land, this is more like an evolving ecosystem, like a coral reef, where interactions and recycling and reuse can be highly complex and interdependent.

At very least, patent and copyright terms ought to be getting shorter as change accelerated, not longer.

It isn't clear we do need such an elaborate patent system to incentivize innovation. MIT and public universities and NASA and the national labs and DARPA and the National Institutes of Health are churning out new innovations all the time, and that is just in the US. The fundamental long-teamwork is much more likely to be done this way.

In fact, the worst way through most of history to generate innovation has been to let huge corporations and organizations get monopolies, often at the expense of startups, disrupters and the less connected.

Much of the value in the Economy is increasingly nonrival and largely nonexcludable. An economy based on ideas and innovation has to work differently to one based on manufacturing trucks or toasters or life insurance. That's a fact. We have to get used to it.

 

 

The Untouchable Economy

...or, subtitle, "Why Americans Are Turning Against 'Stuff'" by Michael Mandel in the Atlantic.

Millennials are shifting from tangibles (cars and homes) to intangibles (education and access to data), but they are not alone. In today's data-driven economy, the business sector is moving along the same tangible-to-intangible path as the Millennials, perhaps at an even faster pace. Business spending on nonresidential structures, other than mining-related, is roughly 30% below the 2007 pre-recession highs, while investment in software is up almost 20% over the same period.

It ought to have much greater implications for how we think about the economy. An intangible economy works differently. Our time-honored intuitions about property rights and exchange and marginal cost don't work reliably.

Chefs and Earls

G and I have been watching the second season of Downton Abbey on Amazon streaming, covering the First World War and Spanish flu.

 

There is a lot to say about war and class and change. One thing particularly struck me, though. In some ways social prestige has almost inverted. The Earl and his family are at the pinnacle of society and very wealthy. The kitchen staff labor anonymously downstairs.

Now a successful head of the kitchen, a Chef, is more likely to be famous and a rich media celebrity than the Earl. Aristocracy has lost most of its unconscious social prestige, the money has mostly gone and they have little or no power.

(As you can see, I have discovered the ability to search and drag google images into a post using Blogsy. So I am crazed with power.)

 

Policy Prescriptions

The Skidelskys sugget a number of policy prescriptions. In essence, they want to share the benefits of productivity growth more widely, and to reduce pressure to consume.

• reducing inequality, partly by raising public sector pay.

Thus the problem which Keynes identified in 1930—“our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour” has not been solved in the way he envisaged. Automation in manufacturing has led not to massive increase in leisure but to a massive transfer of labor to the lower-paid service sector where people have to work longer hours to make ends meet; while those not reabsorbed in the service economy have become unemployed, under-employed or casualized.

We need to reduce inequality of income, because average hours of work will continue to fall only if the real incomes of the majority are raised relatively to those now enjoyed by a minority. ..A sustained effort should be made to raise the share of income received by teachers, doctors, nurses and other public service professionals.

• A basic income, an idea, they say, with a long history. It could be either a capital endowment of suffiicent assets or a guaranteed income, paid unconditionally. It is neither unaffordable, nor would it necessarily destroy incentives, they argue. Nobel Winners in Economics including James Meade and Milton Friedman have suggested similar schemes. Some places, like Alaska, already make payments to citizens. There could be more capital endownments, like Gordon Brown's since-cancelled plans for "baby bonds." Just like heirs, there could be limits on "blowing" capital endowments, like restricting access before the age of 30. And there should be more "education for leisure." A basic income would 'liberate work from the tyranny of the job."
• Less emphasis on the financial sector, "the real driver of contemporary capitalism" and the source of as they see it "socially useless" financial innovation. This could involve Tobin taxes on financial transactions and discouraging the growth of financial derivatives.
• More taxation of consumption rather than income (and a backwards glance at the sumptuary laws of the middle ages).
• reducing the tax deductibiity of advertising. People do not come to advertising with fixed preferences, they say, but advertising helps form preferences and inflames the pressure to consume.
• "honest paternalism" by biasing people's decision in favor of the good life, instead of obscuring or ignoring the ethical choices which are already being made in any case. The state cannot simply maintain that it is acting in the interests of an isolated consumer.
• A retreat from integration of the world economy.

The conclusion we draw is that in order to satisfy the requirements of the good life we will have to retreat from the further shores of economic integration, at least until “catch-up” has become a fact, not an aspiration.

So, as they admit, it adds up to a very "European" way of looking at things, which might not seem that attractive when Europe is in a dire situation (albeit for other reasons.)

 

The material basis for our updated version of Keynes’s “Economic Possibilities” is rooted in the logic that gave rise to his possibilities in the first place: the long-term decrease in the demand for labor resulting from continuous improvements in labor productivity. We can either turn this to our advantage by greatly expanding the domain of shared work and leisure—a solution that at least some European countries have adopted—or continue with the Anglo-American system of want-creation powered by insatiability, maintained at the cost of growing job insecurity and income inequality, and heedless of humanity’s future.

One consistent theme in their approach is they want to be non-coercive - no one should be forced to alter their behavior, given the Skidelskys' basic goods of respect and personality. State powers may be used to promote the basic goods, but "only insofar as this does not damage the central good of personality." Personality is their version of liberal autonomy, with a slight polish of Catholic social teaching.

I think this ducks the issue of incentives, which lurks beneath all of this, and which is their main weakness in the face of libertarian attacks. As with Marcuse, they ignore the fact that some kinds of behavior ought to be actively discouraged. They continually criticise the liberalism of economics, but cannot quite take the step of acknowledging many of the same problems afflict political liberalism as well. Their arguments point away from the liberal shore but they want to stay on land. No doubt conversations at high table would be too difficult otherwise.

I still identify with the grandeur of the liberal project, but we have to ask deeper questions again. I have to think more about how and to what extent autonomy is still important as the prime value.

They identify the right questions to ask the philosophical reasons for our problems. But they give very social democratic answers. They are reasonable arguments, but they are not the only potential answers.

 

"Experts eat crow on ruling"

It's never easy to predict the court. And expert prediction is very often wrong, as we've discussed before. But it has to be said almost no one got this Supreme Court decision right in advance. As the Hill says:

 

The Supreme Court’s healthcare ruling upended conventional wisdom and expert predictions at nearly every turn.

 

The court said in a 5-4 decision this week that the individual mandate in President Obama’s healthcare law is constitutional. The court also said the law’s Medicaid expansion was unconstitutional, but found a fix that didn’t require striking down the entire law.

 

Even lawmakers and legal experts who correctly predicted that the court would uphold the mandate were surprised by the details of the decision and the makeup of the court’s majority.

 

If Court outcomes are so unpredictable it detracts from the image of neutral legal reasoning and settled expectations.

Why Nations Fail: Extractive Institutions

 

Time to look at another very interesting book on economic history that recently came out: Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Damon Acemoglu and James Robinson. It is a huge achievement, but I have mixed feelings about it.

On the one hand, it is dazzling in scope, with historical references and interesting detail ranging from the Roman Empire to contemporary Egypt and Colombia and China. To their credit, they deal with tangible reality, not simply mathematical models. There is a myriad of actual names and actual evidence in the book, not just another irrelevant econometric torturing of national income accounts data. You will encounter everything from the disappointments of inventors in Elizabethan England to the reasons for the decline of Venice to the career of Deng Xiaoping to the structure of the telecoms market in Mexico. Some of their examples and stories are riveting.

On the other hand, they try to explain too much with one parsimonious theory. There is a lack of consideration of counter-evidence in most of the book, and one is left with a feeling that it is just a little too neat. I was left intrigued but without much sense of just how far it was legitimate to push their approach.

They do argue against other explanations, such as Jared Diamond's natural endowments, in a persuasive way. They can shape a wide array of different case studies to suit their argument. But it isn't always clear how much they may be cherry-picking or leaving out or ignoring countervailing evidence. They don't engage with other views in the detail that Dierdre McCloskey does in the book we recently looked at starting here.

Just like in markets, you can often backfit any number of explanations to past data.

That said, their willingness to try to explain actual realized situations is very interesting, all the more so because Acemoglu is a winner of the hugely respected John Bates Clark medal in economics and teaches at MIT. So he comes from a very conventional economics background, and has more than paid his dues. Yet with his co-author, a Professor of Government at Harvard, he has written a book which is very much political economy in nature. It is a welcome small evolution of open-mindedness in economics.

They stress that political institutions tend to shape the economic institutions and performance of a society. It is as if an economic Pope has suddenly become much less catholic.

A larger slice versus growing the pie

The core of their case is a distinction between "extractive" and "inclusive" political and economic institutions. I'm not always sure the definitions are clear, however. At first they seem straightforward, but they can become blurry in the context of individual cases or examples.

In essence, extracttive institutions try to seize a larger share of the pie for some groups in society, at the expense of making the pie larger. Inclusive institutions prefer to see the size of the pie grow, in the interests of the majority, even if it means disruptive change for the privileged few with a valuable stake in the status quo.

So, the authors argue, the Glorious Revolution of 1688 laid the grounds for inclusive institutions in the UK, and that, together with other contingent factors like the enrichment of a broader coalition of interests from Atlantic trade, led to the industrial revolution. The king could not simply grant monopolies or restrain trade any longer.

It makes sense, but in that case it isn't clear - as McCloskey argues - why the industrial revoluton did not tke off much earlier, in Athens, say, or Republican Rome or Tyre or Alexandria. Yes, all these socieites had inequality and slavery. England had already benefitted over centures from the end of feudalism. But this is where the notion of inclusivity becomes blurry. How inclusive is enough? How and at what point do you reach escape velocity? Why couldn't you have an aristocracy that was massively competitive and open to change within its own ranks, but limited the benefits to outsiders? Indeed, that was what the Roman Republic was like in practice.

They tell a consistent story, but it still comes across largely as a plausible story rather than as a proven case.

Institutions matter, not culture

Development isn't a matter of geographical endowment or even culture, they argue. Indeed, they start off with one town that lies on both sides of the US-Mexican border.

The reason that Nogales, Arizona, is much richer than Nogales, Sonora, is simple; it is because of the very different institutions on the two sides of the border, which create very different incentives for the inhabitants of Nogales, Arizona, versus Nogales, Sonora. The United States is also far richer today than either Mexico or Peru because of the way its institutions, both economic and political, shape the incentives of businesses, individuals, and politicians.

This was not inevitable. If you go back five hundred years North America was sparsely populated and lagged economically far behind the great civilizations of Mexico and Peru. Incentives matter, they say.

Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works.

As for political institutions,

Political institutions include but are not limited to written constitutions and to whether the society is a democracy. They include the power and capacity of the state to regulate and govern society. It is also necessary to consider more broadly the factors that determine how political power is distributed in society, particularly the ability of different groups to act collectively to pursue their objectives or to stop other people from pursuing theirs.

 

Extractive elites

 

One of the most conspicuous features of their theory is they are very willing to divide the world into good guys and bad guys. Elites most often prefer to maintain their power and wealth and influence, at the expense of "creative destruction" which would undermine their power - even if society as a whole became much richer. There is always someone to blame.

And they do marshall many fascinating examples of when elites did just that, such as the refusal of the Austrian Empire to build railways, the refusal of Roman emperors to adopt new transportation techniques, or the refusal of Gautemalan elites to build roads. Traffic jams near the port in Lagos, Nigeria, are caused by truckers parking on the highway and bribing the police to avoid moving them , leaving the rest of society in traffic jams that can last six or ten hours.

 

Even self-declared good guys often become bad guys. There is an 'iron law of oligarchy'. Extractive institutions mean that even if new rulers do take over, they will most often maintain the same ruthless policies. Lawrence Kabila if anything was worse than Mobutu in Zaire, for example. The sheer wealth that can be accummulated by such extractive elites also makes civil war and political instability much more likely, because the stakes are so high.

This means the problem of development is tougher than several generations of development economists believed.

This persistence and the forces that create it also explain why it is so difficult to remove world inequality and to make poor countries prosperous. Though institutions are the key to the differences between the two Nogaleses and between Mexico and the United States, that doesn’t mean there will be a consensus in Mexico to change institutions. There is no necessity for a society to develop or adopt the institutions that are best for economic growth or the welfare of its citizens, because other institutions may be even better for those who control politics and political institutions. The powerful and the rest of society will often disagree about which set of institutions should remain in place and which ones should be changed.

Importantly, this explains why "ignorance of policy" is seldom the reason policymakers do not follow sensible economic policies, a point which is surely correct. Nkrumah's Ghana was not badly run because they did not listen to development economists.

This endless stream of economically irrational developments was not caused by the fact that Nkrumah or his advisers were badly informed or ignorant of the right economic policies. They had people like Killick and had even been advised by Nobel laureate Sir Arthur Lewis, who knew the policies were not good. What drove the form the economic policies took was the fact that Nkrumah needed to use them to buy political support and sustain his undemocratic regime.

So you have to look at how decisions are made in practice. Standard economics presupposes much politics.

To understand this, you have to go beyond economics and expert advice on the best thing to do and, instead, study how decisions actually get made, who gets to make them, and why those people decide to do what they do. This is the study of politics and political processes. Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality. As the economist Abba Lerner noted in the 1970s, “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.”

We will argue that achieving prosperity depends on solving some basic political problems. It is precisely because economics has assumed that political problems are solved that it has not been able to come up with a convincing explanation for world inequality.

 

Importantly, inclusive institutions must extend across society for there to be a chance of sustainable growth. Extractive societies can grow for a while - such as the USSR before 1970, or indeed China today. But because such elites cannot stomach creative destruction, growth is bound to run out.

Their argument also usefully sidesteps the government versus market debate. Some degree of state centralization is essential:

Secure property rights, the law, public services, and the freedom to contract and exchange all rely on the state, the institution with the coercive capacity to impose order, prevent theft and fraud, and enforce contracts between private parties. To function well, society also needs other public services: roads and a transport network so that goods can be transported; a public infrastructure so that economic activity can flourish; and some type of basic regulation to prevent fraud and malfeasance.

Occupy the Academy

In some ways - although they do not develop this view- it's a charter for thinking in terms of the 1% versus the 99%. You could run the argument in terms of greedy Wall St bankers and private equity titans versus ordinary citizens.

But I'm not sure things are so clear cut. Are the elderly in the US an extractive elite in some respects? They certainly grasp a hugely disproportionate share of government resources at the expense of other groups.


Acemoglu and Robinson are also notably willing to believe something which sails close to "revolutionary ends justify the means": they believe the French Revolution was a great success because it swept away many older restrictions, even if there was much regrettable violence and war.

In fact, Mancur Olson's notion of distributive coalitions and ossification of institutions in The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities may be more widely applicable than the "extractive institution" in this book. It may not always be a narrow elite which serves to defend its interests at the expense of the common good. It can also be labor unions. richer provinces, specific professions like the AMA or the Bar, or even older generations versus the young. Societies tend to pick up social rigidities like barnacles.


Acemoglu and Robinson very much endorse disruptive creative destruction as the way to wealth and prosperity - and I agree with that. But there may be times when people actually value some features of their current situation for more than purely selfish reasons - pride in a culture, for example, or attachment to a way of life. There can be more trade-offs in change than the authors are willing to acknowledge.

Speaking to the converted

And they do not really acknowledge that development economics in general, and the IMF and World Bank and major development ministries in particular, have been moving in the direction of emphasizing governance for almost twenty years now. The discipline of economics simply lagged behind what was happening in the field and in the committee rooms. The major international donors have tried to put more emphasis on NGOs rather than state aid, or imposed conditionality related to opening up monopolies and other extractive mechansims favored by local elites.

So on that metric, the book is not really arguing for anything new in practice. It is simply giving a more generalized public-choice explanation of why that ought to work, without a lot of attention to the history of those public choice ideas. There is too much attention, in the end, to illustrative examples than the story of how we think about these issues - the intellectual development of these ideas.


There is a limit to what a parsimonious social theory can ever hope to do. And I'm not convinced that the notion of theoretical "explanation" using these theories is that valuable. The only way theory really helps in the social sciences is to educate the "prepared mind", but in practice it just as often leads to professional blindness.

But the book is certainly along the right lines, albeit lines which have already been trodden by many international organizations in practice.


It is a magnificent hedgehog of a work. But I remain a fox. I enjoyed the fabulous diversity of examples. But I remain unconvinced that the hedgehog theory at the heart of the book is really that new or transformative, beyond warning us not to make the mistakes of previous all-encompassing hedgehog theories.

 

 

A Swipe at Douglass North and Institutional Economics

We're still on Bourgeois Dignity: Why Economics Can't Explain the Modern World. Here's one point where I think McCloskey goes too far, even if you can understand her reasons. She is bitterly critical of Douglass North, who I have talked about with some admiration on this blog. She believes North is still far too trapped within the Samnuelsonian rational-actor methodological cage.

The economists want the big change to be a matter of Northian "institutions" because they want incentive to be the main story of the Industrial Revolution and the modern world. But suppose incentive (Prudence Only) is not the main story, and cannot be the main story without paradox: if it was Prudence Only, then the Industrial Revolution would have happened earlier, or elsewhere. Suppose that other virtues and vices matter a lot-not only prudence, beloved of the Samuelsonians; but temperance, courage, justice, faith, hope, and love, which changed radically in their disposition during the seventeenth and eighteenth centuries.

So North does not take religion seriously, for example. And the approach has led to the excesses of agency theory in finance and corporate compensation. CEOs have to be incentivized and aligned - and paid as such - but the results have often been disastrous. Prudential incentives do not make up for the lack of other virtues. Instead,

A good deal of life and politics and exchange takes place in the damning of incentives and the assertion of meaning-the mother's love or the politician's integrity or the teacher's enthusiasm, what Keynes (and after him George Akerlof and Robert Shiller) called "animal spirits" and what Sen calls "commitment" and what I call "virtues and corresponding vices other than Prudence Only.

She insists that ideas and beliefs still matter.

I believe on the contrary, with Alexis de Tocqueville in 1853, that "institutions" such as laws are not fundamental: "I accord institutions," wrote Tocqueville in 1853, "only a secondary influence on the destiny of men.... Political societies are not what the laws make them, but what sentiments, beliefs, ideas, habits of the heart [in his famous phrase from Democracy in America], and the spirit of the men who form them prepare them in advance to be.... The sentiments, the ideas, the mores [moeurs] ... alone can lead to public prosperity and liberty."

I take the point, but not everything about rational-actor economics is wholly wrong. I've tended to take North as an example of thinking about people, rather than simply automatic equilibrium on the model of 19th century physics. It is not the whole story, of course. But it is a useful chapter. I agree with her general point that ideas matter. But I think we have to take motivation very seriously. Perhaps North has too narrow a view of motivation. But his work is still a step forward, which is more than you can say for much standard economics. It is about influencing human behavior, not simply laissez faire. He is asking the right questions, even if he is still restricted in methodology. And even then, his work is discursive rather than simply math. It isn't just "as-if" models. Still, perhaps I need to think a bit harder about the limits to North's approach. I might come back to this in due course.

Property rights don't explain the Great Leap

McCloskey is on stronger ground when she criticizes the specifics of the institutional explanation of the industrial revolution. It was not caused by better property rights, she says. Property rights had been relatively secure in England for centuries.

lack of defined property perhaps characterizes some parts of Europe during the ninth century (though consider the ordered realms of Charlemagne or Alfred the Great) but certainly not England in the seventeenth century, as North to the contrary claims….No quantitative case can be made, in short, that it was after 1689 that England moved from predation to security of property.

After all, if anything our existing property rights today are not necessarily stronger.

An American government armed with the doctrine of eminent domain and the power to tax incomes at combined federal and state proportions of 35 percent, and with administrative agencies having broad powers over labor relations and air pollution, not to speak of unusual definitions of torture and the ability to tap telephones, and a passionate desire to limit people's consumption of recreational drugs, seems in this respect to be more, not less, like the Muscovy of old than did, say, France in 1576.

Nor was there obviously better treatment of intellectual property rights or incentives to innovate:

A recent calculation by the ever-useful economist William Nordhaus reveals that nowadays an inventor gets a mere 2.2 percent of the economic gain from an invention: "Only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

Innovation is not purely a matter of incentives. But that leads to the question: what does facilitate innovation? So far she says it is bourgeois dignity and liberty. But she has not explained why that should make such a huge difference.

 

Internet Privacy: It could be the worst deal ever

Cory Doctorow writes in the MIT Technology Review:

Why do we seem to value privacy so little? In part, it's because we are told to. Facebook has more than once overridden the privacy preferences set by its users, replacing them with new system-wide defaults.

..Even if you read the fine print, human beings are awful at pricing out the net present value of a decision whose consequences are far in the future.

 

Browser makers have imposes some sort of order before, he says, especially when they gave users the ability to block the pop-up ads that infuriated them. And the same principle should apply again.

Far from destroying business, letting users control disclosure would create value. Design an app that I willingly give my location to (as I do with the Hailo app for ordering black cabs in London) and you'd be one of the few and proud firms with my permission to access and sell that information. Right now, the users and the analytics people are in a shooting war, but only the analytics people are armed. There's a business opportunity for a company that wants to supply arms to the rebels instead of the empire.

 

Indeed. I haven't posted anything on Facebook for years because I distrust it so much. I take grim satisfaction in seeing its stock price plunge.

 

And I notice cookie permission requests popping up on major sites in recent weeks, so things are beginning to tighten up.

 

That same wariness is why I like to stay anonymous even if I love blogging here.

 

Organizational change and trust

Back to our discussion of Brink Lindey' book, The Age of Abundance.

One point which Lindsey puts across very clearly is how the success of capitalism depended on institutional innovations. Many of the features which seem so dominant and inescapable and natural in our lives today are not, in fact, very old or deep-rooted. Imagine a world without corporations, for example.

Industrialization was as much an organizational as a technological revolution, and at the center of the action was the development of the large-scale business enterprise. Prior to 1850, it didn’t really exist. Nicholas Biddle ran the Second Bank of the United States during the 1820s and 1830s with only two assistants. Around the same time, John Jacob Astor, the richest man in America, employed just a handful of clerks to manage his American Fur Company.

That soon changed, as huge amounts of capital were devoted to large scale enterprises like railways or steel mills. The corporation became one of the central institutions of sociery.

But it was not simply a matter of organizations. It was a mater of cultural norms which encouraged trust. In many ways, a reputation for sober, church-going virtue and commited work ethic was essential to elicit cooperation.

 

Decline of Trust

Cooperation was essential to wealth and affluence.

The stupendous levels of wealth enjoyed today require the ability to pursue large-scale as well as long-term projects. We depend, in other words, on the cooperation if not the kindness of strangers—anonymous millions who somehow trust each other enough to do business together, and even to put their lives in each other’s hands. The Protestant bourgeois ethos greatly facilitated the emergence of such large-scale trust by providing a new and abstract form of unity founded on a shared faith and lifestyle. In their worship, dress, and manners, the members of America’s Protestant establishment ostentatiously advertised their “respectability,” and thus their trustworthiness in business dealings.

But the countercultural trends that developed in the sixties put some of this in doubt.

The continued commitment to the work ethic was also tinged with doubts. With the ebbing of religious zeal, worldly success no longer signaled proof of divine favor. And with the ebbing of scarcity, the once-obvious prudence of hard work and incessant accumulation was no longer unquestionable. Middle-class Americans sensed, if only dimly, that they were now in the realm of freedom—that continued participation in the extended division of labor was a choice, not a necessity.

Americans were steadily less willing to put up with deferral of pleasure, self-restraint or patience.

Now, rather than serving as a balm, affluence acted as instigator and rabble-rouser. The ethos of self-realization, unleashed by prosperity and empowered by the technologies and trust networks of the mass-consumption economy, would follow its own ineluctable logic—and the prudence and self-restraint born of the Depression and war years would soon be swept away.

Society became more socially liberal.

Now that the mass pursuit of happiness had begun in earnest, Americans grew increasingly restive in the face of any obstacle or constraint, no matter how deeply rooted or time-honored. In the logic of affluence, once physical necessity receded, the confinements of conventional necessity—the dictates of custom and established authority—began to crack and crumble.

 

Other people are the challenge

This also meant that for the first time the main obstacle to progress was not indiferent nature, with its storms and famines and floods - but lack of social cooperation with others.

According to Riesman, the rise of the other-directed ethos was a product of growing affluence. “Increasingly,” he wrote, “other people are the problem, not the material environment.” As a result, the pugnacity and intolerance of the old Protestant bourgeoisie had become outdated and dysfunctional. In the kinder, gentler world of the office place and suburban block party, a more genial, tolerant, relativistic frame of mind was needed. “The other-directed person must be able to receive signals from far and near; the sources are many, the changes rapid.

 


This recalls a point we saw Douglass North stressing in his book about understanding economic change. According to North:

The contrast between the institutions and beliefs geared to confronting the uncertainties of the physical environment and those constructed to confront the human environment is the key to understanding the process of change.

Problems posed by the transition of a belief system from one constructed to deal with the physical environment to one constructed to confront the complex problems of the human environment are at the core of the problems of economic development. There is nothing automatic about such a transition being successful.

The approach of the sixties radicals did not deal successfully with the human environment. It reinforces the core of what North says:

The ideal economic model comprises a set of economic institutions that provide incentives for individuals and organizations to engage in productive activity.

The Aquarians did not do that. Our challenge as a society is to adapt to change with new institutions that do. Some of our most familiar institutions, such as corporations, the labor market, and money income, may need to evolve and adapt a bit.

 

What does it mean? "we don’t have enough ways for people to work and prove that they deserve this stuff."

So, to conclude this discussion, according to Diamandis and Kotler, we have a new world just coming into being.

At the very beginning of this book, we argued that the true promise of abundance was one of creating a world of possibility: a world where everyone’s days are spent dreaming and doing, not scrapping and scraping. Never before has such promise really been in the offing. For most of human history, life was a constrained affair. Just finding ways to survive took most of our energy. The gap between one’s day-to-day reality and one’s true potential was vast indeed. But in these extraordinary days, that chasm is beginning to close.

Of course, technology historically does not destroy jobs in aggregate so much as free people to do higher-level jobs.

“At a high level,” says Second Life creator Philip Rosedale, “humans have consistently demonstrated an ability to find new things to do that are of greater value when jobs have been outsourced or automated. The industrial revolution, outsourced IT work, China’s low-cost labor force all ultimately created more interesting new jobs than they displaced.”

Much of that involves learning more advanced skills or dealing with more complexity. But what if the greater value option this time does not look like a traditional job?

In addition to training up, others might simply retire. SU AI expert Neil Jacobstein explains, “Exponential technologies may eventually permit people to not need jobs to have a high standard of living. People will have many choices with how they utilize their time and develop a sense of self-esteem—ranging from leisure normally associated with retirement, to art, music, or even restoring the environment. The emphasis will be less on making money and more on making contributions, or at least creating an interesting life.”

The greatest line in the book

And here is the greatest line in the book - almost at the end.

Our problem is not that we don’t have enough stuff—it’s that we don’t have enough ways for people to work and prove that they deserve this stuff.

And this is also the problem with the book, too. Technologists can point to where the problem is. But they don't have much to say about how to solve it, because the solution is not primarily a technological issue. It's an ethical, political and economic problem.

We've seen this before with other brilliant writers on technology like as W. Brian Arthur, who also stops at much the same point. if you follow the link to the older post, Arthur said:

This suggests to me that the main challenge of the economy is shifting from producing prosperity to distributing prosperity. The second economy will produce wealth no matter what we do; distributing that wealth has become the main problem. ... The system will adjust of course, though I can’t yet say exactly how.

The problem, say Diamandis and Kotler, is how you move beyond scarcity economics.

Part of the problem is that most contemporary thinking about money and markets and such has its roots in the scarcity model. In fact, one of the most commonly used definitions of economics is “the study of how people make choices under conditions of scarcity, and the results of those choices for society.” As traditional economics (which believes that markets are equilibrium systems) gets replaced by complexity economics (which both fits the data significantly better and believes that markets are complex, adaptive systems), we may begin to uncover a postscarcity framework for assessment, but there’s no guarantee that such thinking will result in either more jobs or a different resource allocation system.

So we need a different resource allocation system (not to mention a revolution in the discipline of economics). But, as I've said so often, our traditional broadly liberal approach completely lets us down when we try to think about resource allocation.

It's a problem for the left, who either stress procedural justice or varieties of equality but whose 20th century welfare state has produced unsustainable fiscal problems and stunted lives. The whole notion of "redistribution" has failed.

It's a problem for libertarians and the market-oriented right, because markets will not allocate intangible goods as effectively as the port wine or better mouse traps. The boundaries of the market could move back sharply and make market exchange a less central part of the economy, whether we like it or not.

It's a problem for economics, which is still stuck with a thin welfare economics based on revealed preference, pareto-optimality and other vestiges of Viennese positivsim. And it's a problem for traditional conservatives because technological change is shaking up communities and transforming society.


In fact, it's a problem for the whole liberal tradition as it has evolved since its birth in the enlightenment response to the carnage of the Wars of Religion. We have to think about what the purpose and ends of life are again, what flourishing means, what the good life is, rather than just adopt a neutral stance. And we have to rethink some of our fundamental institutions, such as the 19th and 20th century models of "the job." Most of our mental furniture is arranged so that we feel proud of not answering the most important questions.

When people have material abundance, what do they do next? Suppose you were told all your shelter, energy, food, healthcare and education costs were taken care of for the rest of your life. Hard to imagine, but try it. What would you do?

And how do we run an economy if that choice is open to most people?