the dismal science


In 1989 the Peruvian economist Hernando de Soto published a remarkable book, The Other Path, a detailed exploration of the extralegal economy, mostly based on his research in Peru.  He pointed out that the informales controlled 60% of the Peruvian economy, and his group painstakingly documented the barriers to full legality.  To open a tiny garment factory, for instance, took nearly a year as well as fees totalling five times the monthly minimum wage.  (And none of this red tape had any actual social utility: not a single bureaucrat actually asked to see the factory.)

In 2000 he published a follow-up, The Mystery of Capital, which presents research in more countries (Egypt, Haiti, the Philippines, and Mexico) and makes a bolder thesis: that extralegality is itself an oppressive situation that results in the underdevelopment of the Third World.  In the Philippines, for instance, he estimates that extralegal property alone is worth $132 billion– four times the value of all the firms on the country’s stock market.

As he documents, the informals have their own property arrangements among themselves for recognizing ownership.  So why is legalization important?  Mostly because titles allow mortgages.  He points out that 70% of new businesses in the US raise capital by mortgaging property.   There are other benefits as well, from the use of the court system to access to insurance to better relations with law enforcement.  Informal companies can do a lot but they can’t expand into major companies or take advantage of economies of scale.

Just recording titles isn’t enough, and he criticizes governments who think high-tech computer mapping is all they need.  People will only use systems that seem fair to them, and that means recognizing and regularizing the informal systems they’ve developed themselves.  To make it all work requires work by politicians, lawyers, banks, and the residents themselves.

Intriguingly, he shows that the same problems hit the US, Europe, and Japan.  In the US, for instance, in theory the government managed the westward expansion, selling land to settlers.  In practice much of the settlement was started by squatters.  There were big fights in the 1800s over this, and a slow turn from fighting the squatters to recognizing them as valuable agents who were creating national wealth.

De Soto has been highly praised on the right, though I have a sense his friends haven’t read him very carefully.  He’s taken as praising capitalism, supporting property rights, and lauding small businessmen… stuff the right thinks it’s doing.  But he’s actually a severe critic of capitalism, and warns that globalization and capitalism are largely failures in the Third World, because nothing has been done to address the systems that exclude the poor.  “Capitalism” in the Third World all too often is limited to little bubbles in the capital where First World rules apply, and the elites aren’t even aware of the obstacles that prevent the bubbles from expanding to serve the whole nation.

On the left I think he’s largely ignored, or else assumed to be an apologist for the elites or for globalizing capitalism, which he certainly is not.  His main point is that the poor have enormous energy and want to be part of the system, and the system should make reforms to let them in.  Third World legal systems largely assume that the legal sector is a tiny, urban phenomenon; it did not anticipate and can’t handle the flood of millions of people who prefer the opportunities of urban life.

If you’ve never read him, I recommend either book– I really don’t think development in the Third World can be understood without confronting his ideas.  They’re not a program for utopia– we have property rights here and that doesn’t prevent us from being pretty messed up.  But much of the world would love to advance to our organizational level.  It’s just absurd to maintain the levels of corruption and red tape that he describes; they are certainly real obstacles to people building prosperous economies and should be fixed pronto.

On the whole, I think the first book was stronger.  The second adds more cases, plus some salutary lessons from US history, but it’s often repetitive and relies a little too much on exhortation and cutesy metaphors.  He’s been involved with actual legalization programs, and I wish there were more details on how those have gone and what lessons have been learned.

(The last ten years have maybe not been kind to the idea of building wealth through mortgaging.  So his estimations of the value of informal property may be exaggerated.  But again, his basic point about the informals being excluded from the financial and legal sector is hard to refute.)

Wow.  Sometimes for the most stinging critiques of capitalism, you need to look in a business magazine.  Such as Steve Denning’s article in Forbes on the catastrophe that is managing companies to maximize stockholder value.  (The article in turn is a review of Roger Martin’s Fixing the Game).

The culprit turns out to be Jensen & Meckling’s infamous 1976 paper which argued that CEOs should be incentivized to share the concerns of shareholders, which was to be done by giving them massive amounts of company stock.  The CEOs didn’t object, of course, since this meant obscene amounts of money. 

What this led to was an epidemic of short-term thinking, a shorter business cycle, corruption and business scandals, and an orientation toward gaming the system (e.g. looting the pension fund, or outsourcing, in order to meet quarterly targets).  And as a kicker, the system fails at its own intended purpose: stockholder value has grown slower than back when companies were managed to maximize real-world benefits for customers.  

These things can be fixed, though it will require legal changes.  E.g. MArtin favors repealigng the “safe harbor” provision and FASB 142, both of which require executives to make predictions about stock performance and penalize them for not making targets. 

In short, companies that focus on delighting the customer not only do better for those customers, and for their employees, but they make more money and thus keep the stockholders happier too.  The whole trend of overpaying the CEO isn’t merely a great injustice; it’s also bad business.

 

 

Since Yesterday is Frederick Lewis Allen’s sequel to Only Yesterday, and deals with the ’30s in the same way. 

It’s a better and a worse book, due to its subject matter.  The first book had a lightness of tone (even when dealing with scandals and gangsters) that had to be abandoned facing the enormity of the Depression.  A quarter to a third of the population out of work, the farms of the Great Plains blown away as dust, heads of corporations bewildered as to what to do next, fascism marching in Europe– it wasn’t a cheery time.  The events give the book greater depth than its predecessor; but then they refuse to provide a nice coda.  He concludes with Britain’s declaration of war; the problem is that his story is only half told. 

This is clearer on a chart.  Here’s US industrial production from the height of the stock boom (September 1929) to the end of the war (August 1945):

Allen ends at the red line.  No wonder things still looked bleak!  Though the overall trend was up, immediate memory was dominated by the 1937 recession, which had gobbled up 2/3 of the gain since the New Deal.  Production was barely at the 1929 level again; it was hard to imagine that in a few years it would double that number.  (And keep rising; the current value of the index is over 1200.)

As a history of the New Deal, I prefer Wiliam Leuchtenberg’s Franklin D. Roosevelt and the New Deal, which goes into more detail and with more historical perspective.  Still, it’s an amazing period and there’s always something new to learn about it.  I hadn’t realized, for instance, that on the day Roosevelt took office, the banking system had ceased to function.  To prevent bank runs, governors were declaring bank holidays, and that day the rot reached the biggest banks, in Illinois and New York.

On the other hand, perhaps the lack of hindsight isn’t a vice, as Allen can convey the full frustration felt at the time.  Allen thinks the economy had a structural problem: industrialization was reducing the need for workers on farms and in factories even as unemployment soared; at the same time, the concentration of industries into megacorporations made it hard to start up new enterprises.  (He points out that the banks were sitting on plenty of credit; there just didn’t seem to be much to lend to.  The megacorporations could fund their own research and expansion.)  There’s some truth to the idea of restructuring– e.g. the share of the population engaged in agriculture went from 21.5% to 16% from 1930-1945.  But the structure hypothesis doesn’t explain why the preceding and following periods were prosperous.  It looks much more like a demand crunch.  (Moral: don’t listen to businessmen about how to end a recession.  They have no idea, and their vague notions about “confidence” and “deficits” are plumb wrong.)

Again, one of the lessons of Allen’s books is how little has changed in America’s political structure.  Hoover was not as inactive as one might think– he had some small-scale stimulus going– but the business class had about the same program as today: prop up the banks, then just wait for things to get better, forever if necessary.  There was a good deal of horror over Roosevelt going off the gold standard, establishing relief programs, dividing commercial and investment banking, supporting unions, raising taxes on the rich, and above all regulating business.  On the other hand, when Roosevelt moved toward them in 1937– scaling back the New Deal and trying to balance the budget– he was rewarded with a resounding recession.  As Allen points out, of all the things Roosevelt tried, the only things that arguably worked were stimulus spending and devaluation. 

The most striking difference in our times is the near-absence of a radical left.  Roosevelt had to deal with substantial movements (Huey Long, the Townsendites, the unions, the socialists) who thought he was moving way too slowly and actually coddling business.  Not that this prevented his critics from calling him a dictator or a communist.  In general the middle and upper classes disliked him– but the country as a whole was all for the New Deal; he won re-election in the midst of of the Depression by a 61% landslide (with broad coattails: Congress was 3/4 Democratic). 

Also striking is the regional difference: the South was then a Democratic stronghold, and Republicans were strongest in the Northeast.  (It’s also worth noting that this was well before the Civil Rights era.  Though there were some victories for blacks, they’re all symbolic– e.g. Marian Anderson singing at FDR’s inauguration, Jesse Owens winning medals in Berlin.)

Everyone knows that the war ended the Depression; people often seem to think this was some kind of fluke with no contemporary application.  But economically, what the war did was make it politically acceptable to greatly multiply the size of government stimulus.  Roosevelt’s ’30s-era stimulus was too small, and had the same effect as Obama’s: improvement but no end to the economic doldrums. 

Allen once refers to Roosevelt as a “cripple”; I had thought his handicap wasn’t general knowledge.  But some Googling tells me I was wrong; it was well known that Roosevelt had polio and used a wheelchair, but the extent of it was downplayed.

Allen does his best to indicate the temper of the times, and makes a case that the ’30s in general were more sober (though not in the literal sense: we finally got rid of Prohibition) and that the mere rebelliousness and hedonism of the ’20s was largely gone– though there was no return to Puritanism.  (He quotes a survey that found that something like 70% of couples had sex before marriage.)  The intellectuals of the day did their best to focus attention on social problems– even as Hollywood pretended that there were none.  In wider histories of art, this makes the ’30s look like a strange blip: modernism was called off for a decade!

A sobering thought for bloggers: many of the cultural figures Allen names are still known… except for the opinion columns.  You can have a whole nation hanging on your analysis of politics, but no one will want to re-read them in fifty years.

Very interesting article on the evolution of money from David Graeber, an anthropologist.  Apparently economists since Adam Smith have been telling a story that before money there was “barter”.  You’d have a cow and somebody else had arrowheads and, having failed to invent money, you’d work out a direct trade. 

Problem is, anthropologists have been looking for such a system for two hundred years and there just isn’t one.  Individual barters exist, of course, but no barter systems (with the exception of protocols that have emerged in societies where money was already invented but is temporarily unavailable, such as prison).

Instead there’s a plethora of exchange systems, all tied inextricably to the rest of society.  Often the basis is generalized reciprocity.  You want those arrowheads, you praise them, and the other guy gives them to you.  He loudly declaims any desire for recompense, but of course you both know that you owe him one.  At a later point you have a cow and he needs one and you give it to him.  It all works out because you are part of a tiny community, know each other, and any injustices will cause trouble.

Also see this post, where he describes some protocols for trade between different primitive communities, where a trade involves the whole communities, threats of war, and wife-swapping.  Homo oeconomus, the purely rational trade envisioned by Smith, need not apply.

Where did money come from?  In the Middle East, at least, Graeber suggests two major sources for the idea of a unit of value:

  • The accounting systems of large non-state enterprises– namely, temple complexes.  These were complex institutions which had land, farmers, workshops… they started reckoning things in silver and grain just to keep track of things.  Note that money existed as a means of valuation long before it existed as a unit of exchange.
  • Legal systems.  In particular, there was a desire to establish set valuations for things that were damaged: physical goods, lives, body parts, even one’s honor.  He notes that medieval Welsh law codes included precise valuations for all the things found in a home, from cooking utensils to floorboards, at a time when no markets existed where these things could be bought.  You wanted these valuations not to buy the things, but to get recompense if someone destroyed them.

Anyway, much food for thought for conworlders, especially if you have a stage of development before the invention of markets.

An article in Foreign Affairs suggests that the cost of ending ‘absolute poverty’– defined as an income of less than $1.25 a day– is dropping, and it’s a bargain.  Six years ago it would have cost about $96 billion; today it’d be just $40 billion.  That’s the amount Paul Ryan shaves off millionaires’ taxes before breakfast.

There are a few caveats, such as the hassle of actually identifying the abysmally poor, but it’s doable.  Double the price if you like, it’s still a bargain.

Also see the amazing chart here.  In the last few years, thanks to the increasing prosperity of India and China, as well as successful anti-poverty programs in Brazil, global poverty is now mainly concentrated in Africa.

Now we’re talking here about poverty by global standards, not by US standards.  Still, it’s a remarkable thing, and we should go for it.

Venkatesh Rao has a fascinating, mind-blowing, and somewhat half-baked post on the history of the corporation from 1600 to 2100.  If you like Big Exciting Ideas you’ll like it.

I like his little diagram of, well, Things That Influence History:

Venk diagram

 He explains:

On the scale of days or weeks, culture, politics and war matter a lot more in shaping our daily lives. But those forces fundamentally cancel out over longer periods.  They are mostly noise, historically speaking. They don’t cause creative-destructive, unidirectional change (whether or not you think of that change as “progress” is a different matter).

Business though, as an expression of the force of unidirectional technological evolution, has a destabilizing unidirectional effect. It is technology, acting through business and Schumpeterian creative-destruction, that drives monotonic, historicist change, for good or bad. Business is the locus where the non-human force of technological change sneaks into the human sphere.

Which however suggests that there should really be an even smaller, harder circle called “Technology”.  Science and technology don’t always have to go through business to get things done.

He divides the history of the corportaion neatly into two periods: one in which corporations largely invested in the control of space, which largely meant getting direct and exclusive access to physical resources in a zero-sum mercantilist world; and one in which they sought to control time– i.e. what we usually call productivity, which involves that deep embrace of technology. 

I have some quibbles over some of his details.  I think he focuses on the East India Company too much, because he’s part of the Anglosphere.  He mentions the Dutch VOC but only barely; but the story he tells of a corporation taking over a key supply region (the EIC, Bengal, 1757) was foreshadowed a hundred years earlier by the VOC in the Spice Islands.  (Indeed, just as the EIC is largely why there was a British India, the VOC is largely why there is an Indonesia.)

He has an interesting idea, Peak Attention.  Time-mining, he says, has its limits.  The premodern lifestyle had huge sinks of wasted time which technology could save: think of all the time it took to chop down trees, wash clothes, cook meals.  This fits in with Yglesias’s point about surprising unproductivity in mid-20C America: insurance used to be done by door-to-door sales, backed up by hordes of pencil pushers and people who looked things up in printed tables.

But, says Rao, there are limits to how much more attention can be mined.  Corporations today are reduced to remining time already saved: e.g. convincing people to watch your new TV show on your computer instead of going to a movie theater.

I’m not so sure about this.  For one thing, it seems to be confusing productivity with leisure time.  So far as I can see, productivity in work can keep increasing for a very long time.  Whatever your job, there’s going to be something that can be done to speed it up; and if this process is repeated enough, entirely new job categories will be created. 

Productivity can increase leisure time, but only if that’s a social value… in the US, so far as I can see, it isn’t; if anything companies are demanding more from their workers.  

The article kind of falls apart when it comes to explaining what’s next.  Rao thinks the heyday of the corporation is over, but doesn’t really explain why, besides referencing Ronald Coase.  He starts to talk like this:

How do we measure Coasean growth? I have no idea. I am open to suggestions. All I know is that the metric will need to be hyper-personalized and relative to individuals rather than countries, corporations or the global economy. There will be a meaningful notion of Venkat’s rate of Coasean growth, but no equivalent for larger entities.

The fundamental scarce resource that Coasean growth discovers and colonizes is neither space, nor time. It is perspective.

Digging a bit deeper, this seems to refer to “cloudworking” and other blue-sky notions that the mid-20C corporate workforce is over.  I haven’t read enough to be sure what he’s talking about, but my initial reaction is that he’s mistaken an increase in corporate power for its opposite.  The cradle-to-grave job such as my father had is gone not because workers wanted to be free, but because labor is nearly powerless, and because job requirements are far less static.

Forgot about this when writing my review.  Glaeser has a way of making a point by assertion— e.g. he just asserts that Jane Jacobs was wrong about the value of low-height neighborhoods, and that Bloomberg was bold and businesslike to create open-plan offices both for his financial firm and at City Hall.   He doesn’t bother to make a case for either proposition.

As it happens I agree with him on the first point and not the second.  High-density construction is the best for the environment, encourages economic growth, and best leverages infrastructure.  (Though about the worst plan in the world is the high-rise-in-a-concrete-slab that architects used to create for public housing, which very likely is what Jacobs was trying to address.)

Open-plan workplaces— i.e. cubicles— are however just horrible.  They’re noisy, distracting, dehumanizing, and surprisingly expensive.  They offer the illusion of flexibility… come on, how often do people ever re-arrange the cubes? I think the only people who really like them are authoritarian managers who imagine that they can keep track of everything their underlings are doing at a glance.  I suspect Glaeser, a university professor, has never worked in one.

 I picked up Triumph of the City, by Ed Glaeser, who’s been coming up a lot lately.  I got about halfway through it, to page 127, where I read this paragraph

There is even a statistical reality behind the passion for shoes of the urbanites in Sex and the City.  Big-city households spend 25 percent more on footwear, again relative to their total budgets, than households outside of cities, presumably because they are buying fancier shoes, although it is possible that their shoe leather is wearing out faster pounding the city pavement.  As in Sex and the City, the urban desire to present an attractive appearance also reflects the fact that big-city density serves to connect people romantically, creating a market for mates that is, in its way, as important as the labor market.

And just kind of sighed and put the book away.  It’s not just this passage; it’s most of the book.  It reads like an overgrown magazine article, full of semi-pointless anecdotes and obvious facts.  I just don’t feel that it’s groundbreaking work to talk about footwear sales, or the origin of the word “restaurant”, or the fact that Bangalore is hopping, or the fact that the Harlem Renaissance “brought together a dizzying array of writers”.

That’s not to say there’s no meat.  He has an excellent point about city poverty: that it should be accounted a sign of success rather than failure; it’s better than rural poverty, and that a city attracts the poor means that it’s offering opportunities to move up.  He also has some good reflections on how First World cities overcame their 19th century problems– corruption and poor health, and how telecommunications paradoxically enhances the value of face-to-face interaction.

Glaeser is a conservative, which mostly comes out in some snark about government boondoggles and an unargued confidence in schools vouchers.  But for that very reason, I’d recommend the book to my conservative readers, if I still have any.  Conservatives could stand to hear one of their own explaining that cities are hotbeds of entrepreneurship and innovation, that they prosper when there’s heavy investment in education, that high-density development is good for people and for the environment, that immigration benefits the host country, that the government should stop supporting sprawl.  Just try to skip the anecdotes about shoes.

The aptly named blog Overthinking It considers whether it made any sense for the Empire to blow up Alderaan.  Isn’t destroying your own territory kind of a loser move, and likely to induce rather than prevent rebellion?

Some good points are made in the Empire’s defense:

  • State terror is a traditional tactic.  Savage enough reprisals will definitely make people think.  There’s an ongoing test right now in Syria: will Bashar Assad’s invasion of his own city of Daraa tamp down dissent?
  • Game theory suggests that acting batshit insane offers an edge in further negotiations.  Again, there’s an ongoing test: the Republican Party.  It sure worked for them in 2010. 

I’m more convinced, however, by the analysis of a dude named Fenzel, who suggests that the Death Star was a cost-cutting measure… a misguided one.  To really control the galaxy you need a galaxywide bureaucracy, and it has to be reasonably effective: Soviet level, not Somalia level.  Sheer destruction does not solve any problems, does not create any allies, and ultimately saves no money, as your empire will fall apart.  (As it does in the film: the Death Star strategy leaves the Emperor dead and rebellion breaking out in his capital.)

On the second page, the analysis is mooted (based on references to a Trade Federation in the prequels, which Palpatine is assumed to have co-opted) that the Star Wars galaxy, despite its high tech, barely has a capitalist economy at all.  So far as we can see it has a mercantilist economy: commerce is controlled by semi-official agencies; we don’t really see corporations or really any middle-class economic activity, only state actors, crime lords, bounty hunters, and smugglers.  So there is not really a private sector that might care about Alderaan, only the central state, for whom anything that is not a puppet is an enemy.

Given that the larger Star Wars canon shows the Sith always showing up, every generation or so, the real question is how any sort of prosperity develops at all.  States that rely entirely on terror, like Tamerlane’s, don’t last long and simply destroy productive resources.  Arguably the Empire only looks good because it’s a projection of the mid-20C threat of the Nazis and Soviets, which at certain times and in certain lights made democratic capitalism look endangered.  But it was all an illusion.  The Nazis just stimulated their economy before the West dared to, and the Soviets just had an industrial revolution, something you only get once.  Neither had any secret more effective economic powers.

In general, fantasy evil empires make no economic sense over the long run, except in the shallow sense that they might simply control more territory than their enemies.  That’s one reason I put a lot of thought into how ktuvok empires might work.  The ktuvoks run the empire for their own benefit, but they can’t even accomplish their own purposes without guaranteeing a certain level of comfort and security for their human subjects.  Once foreign technology really gets going, they even have to come up with some form of power-sharing– they may retain the upper claw, but they can’t simply rely on state terror to accomplish anything.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

A nice post from Joseph Stiglitz on the dominance of our society by the top 1%, and why it sucks for the rest of us.

The Ryan Ripoff, as Yglesias calls it, is just one example.  The rich now feel secure enough they can openly call for the pauperization of the elderly in order to pay even less taxes.

(As others have pointed out, it’s not even the rich in general who are the worst problem.  It’s the financial industry in particular.  That’s where you get the obscene CEO salaries, the insistence on the privatization of profit and the socialization of loss, and the inability to improve the greater society.  Finance these days doesn’t benefit anyone but finance.)

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