Sunday, August 2, 2015

The three ages of trade and the distorting retro-perspective of the modern

The history of long distance trade can be broadly divided into three periods: the globalisation or mass trade period (from the 1820s onwards), a transition period (in an integrating Atlantic economy, from the C16th onwards) and the pre-globalisation or network trade period (prior to the 1820s outside the Atlantic economy).

What drives the transition from one period to another is communication and transport costs. Prior to the development of steamships, railways and the telegraph, communication and transport costs were so high, one cannot talk with any seriousness of an economically globalised economy. There was simply no significant convergence of prices for commodities in different regions; so one cannot talk about global markets for, as economist Deirdre McCloskey points out:
The only relevant standard for "one market" is similarity of price.
Instead, there were series of trading networks linking local markets with divergent prices.

For example, as soon as significant trade connections were established between the Mediterranean world and China, the tendency was for silver to flow from the Mediterranean world to China, because there was no world price for silver; silver remained much more scarce compared to output in China than in the Mediterranean world, so silver flowed from where it was cheaper to where it was more expensive, and did that for roughly two millennia. 

A PSFM world
Where specie (gold or silver) was the dominant medium of exchange, if you were buying more goods and services than you were selling (a negative trade balance), specie would flow out. If you were selling more goods and services than you were buying (positive trade balance), specie would flow in. In such a world, David Hume's price-specie flow mechanism (PSFM) makes sense: indeed, describes what happened.

So PSFM describes the pattern of Eurasian trade from at least Roman times onwards. The pattern was particularly intense under the late Roman Republic and Early Empire, when the Roman state had access to major silver mines. A key driver of the Crisis of the Third Century (235-284) was the exhaustion of said silver mines which massively undermined the trade flows that many states relied upon.

Said crisis was much wider than just Rome's difficulties. In rapid succession the Han dynasty collapsed (220), the Parthian Empire was overthrown (224) by the House of Sasan, the Kushan empire declined (c.230),  and states around the Indian Ocean (the main conduit for trade between the edges of Eurasia) declined (such as the supplanting of the early Tamil dynasties by the Kalabhras dynasty c.250). Indeed, the remarkable thing was that the Roman Empire survived, albeit profoundly institutionally altered. (There was, however, some continuity between the Parthian and Sasanian empires.) 

The silver-for-goods pattern became intense again when the development of better pumps and silver-lead-copper smelting led to large increase in the output of Central European silver mines (pdf) from the late C15th to the early C16th followed by--with the looting of the Aztec and Incan empires and the discovery of the Potosi silver mountain in the C16th--a flood of American silver into what was now the Atlantic economy. The silver-output ratio in the Atlantic economy made Atlantic goods even more silver-dear, and Asian goods comparatively silver-cheap (and silver goods-cheap in the Atlantic ecomony and goods-expensive in the Asian economy). 

Silver was the main medium of exchange in the Eurasian trade networks and Atlantic economy, as it had been for centuries in the Eurasian trade networks, so goods flowed from Asia (particularly China) into the Atlantic economy and silver flowed from it to Asia (particularly China). That was the main driver of trade in (what were now) global trade networks up until the 1820s.

The one major exception was sub-Saharan Africa, which mainly used gold as a medium of exchange and mainly exported slaves--to Islam (as it had done for centuries) and across the Atlantic, to the Americas significantly emptied of local labour by the disease catastrophe of the Columbian exchange. (I.e. the importing of the entire Eurasian disease complex effectively all at once to populations with no immunity.) So, to the horrors of the trans-Saharan slave trade was added the horrors of the trans-Atlantic slave trade.

The Atlantic transition
There were only relatively minor improvement in transport and communication technology up until steamships, railways and the telegraph (i.e, the 1820s). But, as military folk say, quantity has a quality all of its own. The Atlantic economy saw a massive increase in the scale of water-borne transport, both via canal-building as well as coastal and oceanic sailing vessels. 

Such a massive increase in the supply of transport services, even without major improvements in technology, allowed significant convergence of prices within the Atlantic economy. Thus, as economists McCloskey & Zecker point out (pdf), wheat prices expressed in silver within the Atlantic economy narrowed from a range of 6.66:1 around 1400 to a range of 1.88:1 around 1750.

The world economy was still not globalised, was not in an era of mass trade: but the Atlantic economy came to be somewhat so. In such a situation, the price-specie-flow mechanism increasingly became irrelevant within the Atlantic economy--specie prices adjusted within what was effectively a common specie market rather than quantities shifted between distinct specie markets. That is, there came to be something close to common gold and silver prices in the Atlantic economy. It is striking that, as economist David Glasner notes in this comment (links added):
... it seems that Adam Smith, David Hume's very good friend, seems to have rejected PSFM even though in his Lectures delivered about a decade before the Wealth of Nations [1776] was published, he gave an accurate rendition of PSFM, but completely ignored PSFM in the Wealth of Nations. So even in Hume’s time, it may be questioned whether PSFM was the right theory.
I would say, PSFM was the right theory for the global trading networks (though that would stop being true from the 1820s onwards) but already the wrong theory for the Atlantic economy (or any mass trade system). This being a major indicator of why one can talk of a transition period before genuine economic globalisation because of the depth of trade interactions in the Atlantic economy.

Economic globalisation
Once steam technology starts driving down transport costs (on sea and and on land) and the telegraph drives down communication costs (ditto), then we are in the world of mass trade (i.e. globalisation). Including the politics of mass trade and so of globalisation. 

Trade in goods becomes sufficiently large, and prices sufficiently converging, that trade began to seriously affect general factor of production (land, labour, capital) incomes. Creating the politics of globalisation: specifically, mass politics of mass trade (pdf). Not the patronage politics of network trade one had had earlier, with its licences and monopolies.

With the scale of trade that economic globalisation entailed, scarce factors of production attempted to restrict in the inflow of goods in order to protect their scarcity premium. Plentiful factors of production sought access to global markets to broaden their income sources (i.e. reduce their plenty-penalty). 

How could one tell if a factor of production was scarce or not? If you imported it, it was scarce; if you exported it, it was plentiful. In the case of land the indicator was whether you exported (plentiful) or imported (scarce) its products. Thus, Britain exported labour and capital; hence labour and capital allied to force free trade on scarce land. Germany exported labour and imported capital; so scarce land and labour [capital] allied to force protection on plentiful labour. The settler societies (such as the US and the Antipodes) imported labour and capital; so labour and capital allied to force protection on plentiful land.

As modern economies became services-dominated economies, the above effects became increasingly muted, since participants in such (largely not internationally traded) industries benefited from access to cheaper goods from access to world markets without (usually) being threatened by imports from the same.

The period of globalisation had its own sub-periods in terms of the general barriers to trade (pre 1914, 1914-1945, post 1945) and wider patterns. The wider patterns being whether international trade was dominated by mass commodities following generalised comparative advantage, or by more narrow, specific goods and industries patterns due to economies of scale. To put that another way, shifts between production and trade reflecting generalised geography versus path-dependent, geographically much narrower, specialisation of production.

Such a shift splintered factor of production effects on income from expanded trade. That, along with the expansion of the importance of services in developed economies, encouraged the retreat of trade protection and expansion of free trade.

If you want to understand the patterns of trade in a globalised world, I recommend listening to Paul Krugman's 2008 Nobel memorial prize speech. (In fact, if you are interested at all in how to do social science research in general, I recommend listening to the speech here.)

Network trade versus mass trade
It is a great mistake to look back on the history of trade without grasping how very different pre-globalised trade is from trade in a globalised economy; how different network trade is from mass trade. With the partial exception of the Atlantic economy noted above, pre-globalised long-distance trade was a matter of networks. These networks ran through and between localised farming economies whose activities were only minimally affected by said trade networks. (Pastoralist economies were more deeply penetrated by trade, but they were also much smaller in population, much more dispersed, with lower transport costs.)

Trade mattered, however, a great deal to states, because revenue from trade was relatively easy to access (involving, as it did, foreigners and specific nodes and routes) and had positive economies of scale (that is, tended to go up faster than the expansion in territory controlled). So the scale (both extensively in their territorial extent and intensively in penetration of territory controlled) of agrarian states was strongly affected by levels of trade. Hence the mass collapse and decline of states when the Roman Empire's decline in silver production led to a major reduction in Eurasian trade networks in the early C3rd.

Trade mattered to states, state elites and (if the state forbore sufficiently from expropriation) non-state elites. It was not an engine of broad economic growth: as there essentially was no such thing before the Industrial Revolution (with the possible exceptions of early modern NW Europe, Yangtze River valley and Tokugawa Japan). Even in those cases, trade was not a driver of growth: it simply was not a big enough factor to be so. (Or, for that matter, the right sort of factor.)

Localised, not integrated
But that [importance for states and elites] is not to be confused with societies being deeply penetrated by long distance trade. Agrarian societies were overwhelmingly localised farming societies where most people never ventured beyond local areas. The larger the area considered, the more dubious is seeing the localised farming communities therein as constituting a single, coherent "society". Precisely because production was overwhelmingly so local (in production and consumption) and movement by people so limited, religion and language were the main connecting forces, not commerce.

The cycles of agrarian life and production were common across localities in the sense of being repeated in many localities, but were not common in the sense of connecting across localities. Religion encouraged convergence by providing framings and identities not bound by localities: particularly if it had strong institutional structure (the Catholic or Orthodox Churches) or strong social role (Islamic scholars with Sharia, Brahmins with Manusmrti).

States themselves were, at best, limited integrating agents because it was entirely possible to have states whose rulers and agents did not come from where they ruled while said rulers and agents dominated (or entirely monopolised) political decision-making. Islamic and Hindu states were particularly weak integrating agents as provision of law was dominated by clerics, not rulers.  Trade was even less of an integrating agent because it relied not at all on converging of said localised economies in some larger coherent society and, even during periods of heightened trade, was a small part of total economic activity regardless of how important it was to states and elites. 

Being a denizen of contemporary societies--highly urbanised societies with mass literacy, massive levels of international trade and pervasive communication with strongly integrating states--is to live in a very different social environment. The, largely unthinking, assumptions that come from living in such societies are a very poor guide to understanding the social realities of highly localised farming societies in the pre-globalised world of thin trade networks.

The Industrial Revolution, once it gets seriously underway from the 1820s onwards, is a transformative experience in so many ways. It takes considerable effort to not bring its profoundly different perspectives to the study of the past.

[Cross-posted at Skepticlawyer.]

Friday, July 17, 2015

Ethos and the welfare state.

The OECD Secretariat released recently (November 2014) a revealing summary (pdf) of public social expenditure by OECD countries. The database the study is based on is available online. (Private social expenditure--i.e. private charity--is not covered by this post.) Social expenditure being defined as:
Social expenditure comprises cash benefits, direct in-kind provision of goods and services, and tax breaks with social purposes. ... To be considered "social", programmes have to involve either redistribution of resources across households or compulsory participation. Social benefits are classified as public when general government (that is central, state, and local governments, including social security funds) controls the relevant financial flows.
I was struck by the graph adjacent, covering specifically paid-in-cash benefits, which indicates that Anglo, Dutch and Scandinavian welfare states are strongly downwardly redistributive (i.e. the bottom income quintile receives a larger share of social expenditure than the top income quintile; and the former can be reasonably assumed to pay less tax than the latter) while the Mediterranean states are strongly upwardly distributive (i.e. the top income quintile receives a larger share of social expenditure than the bottom income quintile: one cannot say upwardly re-distributive, because that requires look at share of tax revenues). And, regarding present debates over fiscal austerity in the Eurozone: cutting public expenditure in states with downwardly redistributive social expenditure is likely to mean something rather different than doing so in states with upwardly distributive social expenditure.

There seemed to be some patterns in the data, so I downloaded said social expenditure data, added in data on economic freedom and (via Wikipedia's useful lists) on religious adherence as % of population and was able to generate various, somewhat striking, correlations.

Using the bottom quintile's share of social expenditure less the top quintile's share of social expenditure (in % points of total such expenditure) as an indicator of how downwardly distributive social expenditure was, there was no significant correlation (0.18) between the total level of social expenditure (as a share of GDP) and how downwardly distributive total social expenditure was. So, the level of public social expenditure as a share of GDP tells us literally nothing about how focused on helping low income folk such expenditure is.

Regulation fairy stories
There was quite a strong positive correlation (0.59) between the level of economic freedom and how downwardly distributive social expenditure was. Now, if you believe in the state-as-regulation-good-fairy story (the state typically regulates to improve overall social and economic outcomes), this may be a surprise.

If, however, one accepts that a significant amount of regulation is to favour selected groups and that, generally speaking, the higher the level of regulation the more this can be expected to be so, then this result will be unsurprising. (Not least because, as mechanisms of transparency and accountability are not infinitely elastic, so the more they have to cover the weaker they can be expected to operate.) Especially as the better connected, resourced and organised an interest group is, the more it is likely to be able to bend regulatory policy in its favour.

So, taking economic freedom to be an indicator of "neoliberalism", then the more neoliberal (other things being equal) your economic regime, the more downwardly distributive public social expenditure it tends to be. Shocking only if you accept the "bad fairies" theory of neoliberalism: which so many academics do; but, then, much of what academics write about neoliberalism is crap.

The deserving poor
There was quite a strong positive correlation (0.60) between the Protestant share of population and how downwardly distributive social expenditure was and a stronger positive correlation (0.64) with the no-religion share of population.  (It was clear from the sources that, depending on context, people would nominate both a religious identity and as being of no religion: I took that to mean they were culturally Protestant, Catholic, etc.) So actual and cultural Protestants, and folk with no religious belief, apparently tend to believe in the deserving poor: i.e. that welfare expenditure should be downwardly re-distributive.

This was capturing something specific, because the correlations between between the Protestant share of population and the level of economic freedom (0.47) and between the no-religion share of population and the level of economic freedom (0.36), though positive, were not as strong. 

Protestantism I would characterise as "naked before God" religion, since one has direct access to the basic religious authority (Scripture) and is entitled to make one's own judgement about it. Folk with no religion can be expected to generally also believe in a strong sense of individual moral sovereignty.

So, my tentative hypothesis would be that a confidence in one's own moral judgements (and the sense of moral sovereignty that flows from that) apparently encourages social expenditure to be downwardly redistributive: what perhaps might be called a strong sense of the deserving poor. Perhaps because it encourages considering people by fairly direct, and directly identifiable, notions of worthiness (in this case, lack of income).

Preserving rank
A very different result was gained if the Catholic+Orthodox+Muslim share of population were added together, because then there was a strongly negative correlation (-0.70) between said share of population and how downwardly distributive social expenditure was.

Again, something specific is going on, as the correlation between the Catholic+Orthodox+Muslim share of population and economic freedom, though negative, was not as high (-0.48). In keeping with the level of social expenditure not being a key factor, there was no significant correlation (-0.08) between the Catholic+Orthodox+Muslim share of population and public social expenditure as a share of GDP.

Catholicism, Orthodoxy and Islam I would characterise as "priests and clerics give detailed instructions" forms of religion. They involve both hierarchical notions of moral authority and complex moral maps--since it is in the interest of gatekeepers of righteousness to promote moral complexity, as it inflates their role. You probably don't need a priest or cleric to tell you that murder is bad; you probably do need them to tell you whether you need to wash your hair every time after you have sex or how to expiate specific sins.  

The combination of moral complexity and moral hierarchy apparently leads to public social expenditure which reflects, even reinforces, existing social rankings. Thereby leading to much less policy weight being given to such a direct characteristic as (low) level of income. Remembering that complexity of any sort is a great way to obscure who is receiving what.

Ethos matters
So, ethos appears to matter, given that there is such a vast difference between the apparent connection between Protestantism (religious or cultural) (0.60) and no-religion (0.64) on one side, and Catholic+Orthodox+Muslim share of population on the other (-0.70), and how downwardly distributive public social expenditure tends to be.

One possible mechanism via which religious roots of cultural perspectives could matter is different perspectives on time. The work of psychologist Philip Zimbardo and others on time perspectives (pdf), suggests that higher self-trusting, future-oriented Protestants might be more likely to think that the state should concentrate on those who need help. Conversely, lower self-trusting Catholics, Orthodox and Muslims who are more past or present oriented may think the state should do more for everyone regardless of current situation.

The former will lead to more downwardly distributive social expenditure, the latter much less so. Especially as, once it is accepted everyone should receive, the better organised and connected are much better place to, well, so receive.

Whatever the actual mechanism by which the observed effects happen, the data does clearly suggest that policy, over time, reflects the choices of the voters. Choices that appear, in turn, to significantly reflect what moral ethos is dominant among voters.

[Cross-posted at Skepticlawyer.]

Wednesday, July 15, 2015

The Rotten Heart of Europe

Bernard Connolly's The Rotten Heart of Europe: Dirty War for Money is a jeremiad against European monetary union first published in 1995. Its publication led to the author's sacking from the European Commission, where he had been senior monetary and foreign exchange economist. This is not, as Connolly a matter of saying the "Emperor has no clothes" but that, in his words, the Emperor is "ugly and sickeningly malodorous".

It is entirely within keeping with the book's analysis that the European Court of Justice referred to the book as:
aggressive, derogatory and insulting.
Apparently the Court took, in the words of the above news report:
particular umbrage at the author's suggestion that Economic and Monetary Union was a threat to democracy, freedom and "ultimately peace".
While the Court did not ultimately go there, the Court had been invited to consider the book analogous to blasphemy. (No, I'm not making this up.) Europe, with a capital EU, really is a substitute religion, a secular Faith.

A new of edition of The Rotten Heart of Europe was issued in 2011, with a new introduction. The ongoing Eurozone crisis puts Connolly in the position of Robert Conquest (at least as suggested by Conquest's friend Kingsley Amis): I told you so, you fucking fools. The author notes in said introduction:
That no-one dared to attack the book's economic analysis but that the book's author was subjected to a concerted campaign of vilification says much about the nature and purpose of monetary union.
The book reads very much as an insider expose, because Connolly was very much an insider. It is fairly obvious he can describe various meetings and events so vividly because he was there (or worked with people who were: as a former policy bureaucrat, I can testify such folk are incurable gossips).

The book is an enlightening, if depressing, read. Depressing for an outsider living in an economy which has avoided so much of this nonsense; if you and yours actually had to live through the ill-effects, it might make you as angry as the author.

The book does lurch into hyperbole at points (particularly in the introduction written for the 2011 re-issue). But hyperbole is the vice of the impassioned, and the author has plenty to be angry about. Since it is about monetary policy and the effects thereof, the book could have done with an introductory primer--following the balance of payments, interest rates, etc interactions is a bit of an ask for a lay reader, even though Connolly is a clear writer and, if you persevere, explanations are generally forthcoming.

ERM as Euro precursor
The book covers the rise, operation and collapse of the European Exchange Rate Mechanism (ERM) and the use of the ERM as a springboard to Monetary Union--i.e. the Euro. It is a "how did we get here?" book, for the ERM, in its creation, reason for existence and operation was completely the precursor to the Euro: monetary union was always the aim. The ERM was the Euro, mark 1: the Euro is the ERM, mark 2. All the problems, failures and difficulties of the Euro were already on display with the ERM; but not as bad, because the Euro is far more constraining and the democratic deficit now bites even deeper.

The Euro is far more constraining because, while one could leave the ERM with a press release, leaving a common currency is much harder, as the Greeks are wrestling with. But that made the Euro more attractive to the Europeanising networks, not less, for it insulated their power-and-connection games against external disturbance.

A floating exchange rate is an economic shock absorber, a fixed exchange rate an economic shock transmitter. The stability of the Australian economy since the Reserve Bank of Australia (RBA) adopted a broad inflation target in 1992-93 has been based on the ability of (changes in) the exchange rate to absorb economic shocks, making it much easier for the RBA to keep total spending on goods and services in the economy on a fairly even path.

That is why Optimum Currency Area (OCA) theory considers what alternative shock absorbers economies have (specifically factor mobility and fiscal coverage) in examining how suitable territories are to share a common currency. That is why economist Paul Krugman entitled his paper on the Euro debacle Revenge of the Optimum Currency Area (and added financial integration to needed shock absorbers). As Connolly writes in his 2011 introduction:
The great ... mistake ... was that monetary union simply converted currency risk (the risk that a certain government's bonds might be devalued, in terms of another currency) into credit risk (the risk that a government might simply be unable to pay its creditors).
Hence the Greek tragedy.

The European Faith
The "coordinated" exchange rates of the ERM again and again magnified economic shocks, to the detriment of participating economies. Rather than the failure of the ERM leading to a rethinking of the project, the European elite "doubled down", going all the way to the Euro. Creating, if somewhat delayed, a much worse set of difficulties, problems and failures. Fairly clearly, they will not willingly abandon the Euro project, but want to "double down" again, using the ongoing crises to create an even higher level of policy, financial and political integration.

All of which is based on a deep interweaving of faith and interest. The faith is A Single Europe; the interest is the status, career paths, financial handouts and poorly (or simply un)accountable power the EU system provides. What Connolly refers to, in his 2011 Introduction, as:
a self-serving transnational nomenklatura made up of interlocking political, bureaucratic, business, financial, academic and media elites.
The book makes it clear, as it had long been to those with eyes to see, that the European Union's democratic deficit is not a bug, but a feature.

Connection uber alles
One of the perennial questions amongst folk who prefer their economic policy to be of the liberalising kind is how does France manage it? It seems to continually "break the rules" yet create a successful society and economy (well, mostly successful; let's ignore the suppurating social sores of the les banlieue). Reading The Rotten Heart provides useful basis for understanding how it is managed; through technical excellence, insider meritocracy, and corporate life operated as one vast insider trading exercise.
  • If the French builds something, it works.  This simple technical capacity provides a pervasive advantage and support for the broader system.
  • Their grande ecole system produces extremely well-trained, skilled and self-confident (indeed, somewhat ruthless) bureaucrats. Bureaucrats embued with a deep belief in, even reverence for, the State.  A reverence that easily translates into faith in Europe and the European superstate being built.
  • Networks and connections are keys to corporate life. The return to information (particularly regarding policy action) and certification comes from connection. As does ability to affect policy decisions in advance. 
Which is why the masters of the system tend to loath the "Anglo Saxons": not merely their success but their "casino markets" and excessive democracy.

It is not merely, as Connolly rather savagely puts it, that:
the French Establishment has never forgiven the Anglo-Saxon world for liberating the homeland from the Nazi occupation their incompetence and decadence had permitted (Ch.9).
(Just as, as their moral pretensions swell, the European elite cannot forgive Israel for the Holocaust.)

The 2005 riots: many local unpleasantnesses.
The combination of "Anglo-Saxon" economics (accepting the dynamism of open markets) and of "Anglo-Saxon" politics (governments as seriously responsible--British version--or accountable--Washington version--to their voters) is doubly subversive to the French elite's entire modus operandi. The "Anglo-Saxons" provide an identity to define oneself against and, in the case of the US, a counterpoint to seek to surpass. (One cannot really say "rival" because the US fails to feel threatened by European unity--indeed, actively promotes it; which is, if anything, even more infuriating.)

Open markets tend to dissipate the advantages of connection. Closed or restricted markets can accentuate it. For example, the difficulty in dismissing employees under French law raises the risks of employing new people and thus increases the advantage of certification and being in the correct networks. As Connolly writes of the French technocratic elite:
For them, economics is not only a subject invented and developed by Anglo-Saxons, it is a subject fit only for Anglo-Saxons and their decadent liberal democratic societies. The servants of the enarque state have no need of economics: they possess power instead (Ch.12).
I wonder if an Anglo-Saxon economist of working class origins found dealing with the such folk a bit wearing. On the other hand, he is talking of folk he dealt with professionally, for years. His is an informed antipathy.

Admirers of the Bundesbank might also profit from reading his informed, but jaundiced, view of its operations and performance. Having read Richard Hetzel's two (pdf) articles (pdf) on the history of German monetary policy in the C20th, I found Connolly's critique plausible but not surprising, though his observations on how much the Bundesbank relied on essentially managing (and stunting) the Frankfurt financial market were striking. (Which would make it somewhat similar to--but not, on Connolly's description, as bad as--the way the Japanese Finance Ministry does the same to the Tokyo financial market.)

Continental European corporations more generally have a level of state support and political cushioning that American corporations strive to achieve but ultimately fall short of. In Europe, particularly continental Europe, connection trumps, and generates, money. A game the French technocratic elite plays better than anyone else because they are so well trained to play it and believe in it so passionately.

EU as French state multiplier
The pattern of connection trumps, and generating money, is extended and reinforced by the EU; partly because said elite labours so mightily to make sure it does. As Connolly notes:
For France (as for Germany), a "level playing field" in the Single Market had always meant a slope steeply in their favour -- the result of the ERM and the Social Charter impositions, both intended to keep the 'peripheral' countries of the Community in a state of economic weakness and political dependency (Ch.13).
Flexible exchange rates allowed countries to evade the anti-competitive effects of the Social Charter and other EU regulations by devaluation. The ERM, and even better Monetary Union, cut that option off. As Connolly writes:
For the French elite, money is not the lubricant of the economy but the most important level of power (Ch.1).
Moreover, the less say the general public has over important matters of policy, the higher the return to connection and insider status is. So, elections are managed so both sides of politics (with the occasional backsliding) play the key games the same way.

(One of Syriza's fundamental flaws is that they actually want to play the same game too--that even more be done via state networks is not subversive, it is the pretence of it--yet the massive Greek indebtedness which brought them to power also casts them as supplicants; they get the attention of the Top Table folk, but not in a good way. Margaret Thatcher was more threateningly subversive of the EU than Alexis Tsipras could ever hope to be.)

Hence we get 'Corporatism in One Continent' as Connolly nicely labels it (Ch.2). Something which favours the established but provides no avenues for the up and coming (Ch.3). Hence also the attraction of monetary union:
Fix the exchange rate, neuter monetary policy, and then use the fear of macroeconomic instability as an excuse to stifle the dynamism of the capitalist process (Ch.3). 
Thus the effort invested in the ERM then and the Euro now. If reversion to independent floating currencies occurred:
... more than just 'monetary Europe' could be lost to France's corporatist, fonctionnaire, industrialist and financier class: 'Europe' itself, with its promise of 'Corporatism in One Continent' in which bureaucrats, indigenous multinationals and trade unions could hold at bay the tide of the Anglo-Saxon market economy could be at risk (Ch.9) 
The creation of a remarkably unaccountable central bank, as the European Central Bank (ECB) is, was very much not a defect of Monetary Union: despite differing conceptions of final outcomes between German and French EU-elites, they both found that highly desirable.

First the French manage the Germans (and vice versa) and then they manage everyone else, for:
The Franco-German axis is the Community, and the role of other members of the European Council is to give a ceremonial benediction to what the French and German leaders want to do (Ch1.).
One of the themes of the book is other countries trying to be "core" and not "periphery". But that is a status decided by the Franco-German connection, according to the interests thereof.

Accountability (or, rather, the lack of it) is at the heart of the problem. Particularly when one gives such power to an unaccountable central bank:
... politicians have at some point to confront the consequences of their mistakes; their unaccountable central bankers do not (Ch.10).
While the ECB embraced inflation targeting originally pioneered by New Zealand, the full New Zealand model of an explicit (indeed, performance-based) contract between central bank and elected government horrified European central bankers. Connolly warned:
... the trend toward greater interference by central bankers in explicitly political affairs, set in train by Maastricht, will be hard to arrest as long as the fools' paradise of EMU beckons (Ch.10, fn10).
The fools' paradise has arrived, and so has the predicted pattern. A pattern that has not fully run its course, and which Connolly feared, for:
an ECB would be a totally anti-democratic institution that hastened the decaying of political life in 'Europe' and a probably precursor to an authoritarian reaction to mounting chaos (Ch.13).
We are not there yet, but nor has the working out of the implications ended. Connolly summarises the ERM thusly:
The rules of the system were, from the outset, more important than its results, for the framing and interpretation of the rules determined the distribution of power between and within -- perhaps even over -- the Community countries (Ch.11).
As with the ERM, so also with the Euro.

Another theme of the book is that Britain can never really be at "the heart of Europe", in part because of a seriously divergent political culture:
For most people in Britain, politics is seen as providing a framework within which the constant balancing of the interests of different groups, or for that matter of different regions or countries, can proceed in legitimacy and reasonable harmony ... That idea of politics is, literally, foreign to French technocrats. What they are interested in is power -- first imposing their will on France and then imposing their conception of France's will on everyone else (Ch. 14).

The Church of EUrope
Reading this analysis of how the EU works, one is reminded of late medieval ("Renaissance") Catholic Europe and its interplay of doctrine and interest. Now the doctrine Is Ever Greater Union, and heretics (such as Connolly) are to be hunted down, denounced, and thrown into the outer darkness. (Actually, in Connolly's case, he seems to have had a nice post-Eurocrat career as a exchange rate analyst.) As Connolly puts it in his 2011 Introduction, the EU has no demos but
'Europe' has a right to arise because of its supposedly superior ethos and supposedly necessary telos.  
Nor has his righteous anger abated:
the absence of a European demos implies, given the strains produced by the efforts to create and maintain a monetary union, a ruthless, deceitful, malignant anarchy-imperial ethos reflecting a telos devoted to destroying law, democracy, accountability, legitimacy and to emerging victorious in a 'clash of civilisations'.
Go on, tell us what you really think.

Meanwhile, in counterpoint to the Church of EUrope, the Eurosceptics and enraged nationalists are the oikish Protestants, daring to want to decide things for themselves. Of course, those damned Protestants actually did rather well for themselves; as, in the long run, the combination of more open cognitive systems, nakedness before God and personal sovereignty created increasingly more dynamic societies.

It was a bit of a revelation to discover that "growth-positive fiscal austerity" was originally ERMonomics, just as it has now become Euronomics. As an aside, countries such as Australia, Norway, Denmark, the UK have unusually downwardly redistributive (pdf) welfare states: fiscal "austerity" implies something rather different in such societies than it does in the upwardly distributive Mediterranean states. (The share of GDP spent by government on welfare is actually a very poor measure of how redistributive a welfare system is.)

Though the blogosphere metaphor of Calvinism (i.e. rigid theologising) to describe those who insist that everyone is to blame, and everything is to be done, except examine the role of the ECB and the entire Euro project, comes across as even more appropriate. Connolly argues that an underlying notion of the ongoing General Will is used to trump mere elections. Hence the response to the (narrow) rejection of the Treaty of Maastricht by Danish voters in June 1992:
The Treaty of Rome be damned, they said in effect, a few thousand Danish votes one way or another could not be allowed to stop the March of History, to frustrate the General Will as decided by the political bosses in the countries that really mattered (Ch.6).
Framings for ignorance
Reading Connolly's book, I am struck by the power of Scott Sumner's point that so many people--including policy makers--simply do not understand monetary economics:
... monetary policy failures are not about special interest politics. There is an almost mindboggling lack of understanding of monetary theory at the top levels of government. The entire world economy is resting on the hope that a few sane people like Haruhiko Kuroda can keep their head and keep NGDP chugging along while the rest of the political establishment careens recklessly from one extreme to the other.
But policy makers do have framings through which they view the world, so they just apply the framing to matters of monetary policy that makes sense to them on other grounds. 

So, in the absence of genuine understanding, those who worship at the altar of the state apply those framings to monetary policy. Those who get wrapped up in signalling Virtue apply that framing to monetary policy. Supporting the ERM and Monetary Union was the way, par excellence, to signal what a Good European you were.

Hence also conservatives tend to instinctively go for hard money policies, because it fits in with their social order concerns--they naturally think that devaluing money (so undermining proper order) is the worst thing you can do to it. (Not even close to true, but then you would have to understand monetary economics to realise that hard money and sound money are very much not the same.) There is quite a history of economically liberalising (or at least liberal) right-of-centre governments being brought down by hard money obsessions.

Which is part of the story Connolly has to tell--how Thatcher's otherwise very able Chancellor of the Exchequer (1983-89) Nigel Lawson's obsession with having the Pound Sterling shadow the Deutschmark stoked the boom-and-bust that helped fatally weaken Thatcher's Premiership. Connolly clearly admires Lawson, who comes across as the tragic hero of the story.

Margaret Thatcher, who proved to be entirely correct about the problems of the ERM and of the proposed Monetary Union, is the book's fallen hero and martyr, since her fall made the path to disaster all but inevitable (and, Connolly argues, was at least partly engineered by Europeanising networks). Bundesbank President (1991-93) Helmut Schlesinger is admired for his commitment to German national interests, sense for German public opinion, and his strategic skill (particularly as he used it to effectively destroy the ERM).

The book has too many villains to count. Though Banque de France chief Jean-Claude Trichet is treated with thinly veiled contempt and Thatcher's successor John Major with open contempt.

As an Australian reader, the constant political and policy dramas, the twists, distortions (and at times outright lies) engaged in to "defend" some particular exchange rate just seems mad. Which, if your goal is good economic policy for people in your society, it is. But the combination of portentous ignorance, faith and self-interest operating in a milieu of sabotaged accountability produced this madness, fed on it, and spiralled it up to even grander madness. Leading to the Eurozone having to beware of Greeks bearing debts and forcing deals which not only won't work, but can't, even in theory. But what is elementary economic and fiscal logic to Faith in Europe?

Though some mordant humour is to be had:
The Bonn summit was a classic example of international economic 'coordination': one country agrees to something that is bad for it on condition that another country does something equally bad for it (Ch.2).
Or, on the Major Government's ultimately failed attempt to be in the ERM:
Instead, the government resorted to the tried, tested and failed methods of the 1960s and 1970s: bravado, declarations of undying and irrevocable commitment to the parity, insinuations that sterling would soon enter narrow bands, sneering denunciations of anyone who suggested a change in policy on the exchange rate (Ch.6).
Needless to say, the final outcome was--a change in policy on the exchange rate (ejection from the ERM and a floating exchange rate).

But, as Connolly notes of international coordination:
'The masters of the world' inevitably prefer 'coordination' to competition as a way of arriving at the desired result, simply because the processes of international 'coordination' increased their own influence, prestige and insulation from political accountability (Ch.7).
Not that Connolly was a perfect predictor. The ECB proved to be much tougher on inflation than he expected, and much more independent of the French politicians than he (or, for that matter, folk such as Mitterand) expected. But that was the outcome of French and German elites managing each other.

Cognitive closure
What comes across strongly in the book (and the history of the Euro since) is what a disastrous engine of cognitive closure signalling Virtue can be. Conservatism is prone to its own forms of cognitive closure: in recent decades, they have tended to matter much less since conservatives have so little role or influence over educational, academic, cultural, literary and intellectual life. In the case of the ERM and the Euro, many conservatives were very much wrapped up in signalling being Good Europeans, so ended up helping to build bricks in the wall of cognitive closure.

A wall of cognitive closure from which a constant public barrage was mounted, leading Connolly, in his introduction to the 1995 edition, to quote political scientist Leonard Schapiro's famous analysis of propaganda:
the true object of propaganda is neither to convince nor even to persuade, but to produce a uniform pattern of public utterance in which the first trace of unorthodox thought reveals itself as a jarring dissonance.
And dissent against Virtue is wicked, so need not be engaged with, merely denounced as signs of a deformity of moral character. As Connolly writes in the final sentences of his book:
On this question, as on every other question about the ERM and monetary union, the propaganda steamroller attempts to flatten analysis. For analysis can only mean dissent. And dissent cannot be tolerated.
Cognitive closure indeed. And yet, all those Virtuous Europeans were so wrong, and Margaret Thatcher was so right.

But only if you care about economic consequences; particularly the way mass unemployment blights lives.* But the Good Europeans clearly don't (or they care about others things a whole lot more). The have their Faith and their Connections and that is clearly more than enough for them.

If you want to see their ugly and shockingly malodorous world in operation, then The Rotten Heart of Europe is a guided tour therein.  The book is 20 years old, but still explains so much of what is happening in Europe now.

*A lot of which is caused by supply-side restrictions, but they are also part of the EU game, as played variously in different countries. And post-2008, by the policies of the ECB.

[Cross-posted at Skepticlawyer.]  

Sunday, July 12, 2015

When the three languages of US politics get in the way

Economist Arnold Kling, who blogs here, has provided a useful framing of American political debate as divided into three languages of politics. He discusses his framing with economist Russ Roberts here, and his analysis is usefully discussed here. The three languages are:
  • the conservative barbarism-civilisation axis, 
  • the progressive oppressors-oppressed axis, and 
  • the libertarian freedom-coercion axis.
None of them provide a useful way of thinking about the overall situation of African-Americans in the US. Certainly there are elements of the experiences and circumstances of African-Americans which the various languages can get some hold of; but that is actually a negative, because it invites conflation of that one element into becoming the entire perspective on the overall situation of African-Americans.

One-frame progressives
Starting with the typical progressive approach (since it tends to be the noisiest), the issue is racism--oppression of African-Americans, the oppressed--it is always racism and if you don't see that it is always racism then you are probably a closet (or not so closet) racist yourself. For if you are disagreeing with the analysis that it is all about racism--which it so "clearly" is--then you are condoning racism.

Since racism explains remarkably little about the current overall patterns and dilemmas of African-Americans (however much to do with how we got here--not the same thing) yelling "racism!" constantly is mostly enormously unhelpful for any other purpose than signalling Virtue. But since it is very, very useful for that, there is no sign it is going to stop any time soon.

I have previously argued that slavery and its legacies explain much more about the present situation of African-Americans than racism--especially as American racism itself is very much part of the legacy of slavery. And slavery is, of course, a system of (profound) oppression. That there is a long history of oppression of, and racism against, African-Americans does provide a clear oppressor-oppression narrative about African-Americans. Alas, it really does not actually explain nearly as much as its propounders believe. The legacy of past oppression can be, and is, a lot broader than the current, remarkably pale, shadows of the same. Nor is oppression the only theme or factor in African-American history: still less in their current circumstances.

There is a sub-version of the progressive position which adds in "culture of poverty"--African-Americans are oppressed by a culture of poverty which is a legacy of racism and slavery. This approach goes back at least to the (later Senator) Daniel Patrick Moynihan's 1965 report The Negro Family: the Case for National Action (pdf): though his report is rather more specific and empirically grounded.

Now, as I have previously posted, I am not keen on the culture of poverty explanation either as it appears to answer the question before asking and because, like racism, it is analytical "silly putty"--it can be shoved into any shape to cover the required analytical hole. Besides, it is largely rejected as an explanation among progressives in place of, you guessed it, racism.

One-frame conservatives
Conservatism have their own answer to the situation of African-Americans--more civilisation, less barbarism. Now, there is variance between those who think essentially all African-Americans are barbarians who have to be kept in line (a widespread view once upon a time, rather less so now: it was strongly part of the rhetoric justifying Jim Crow and segregation) and those who think the African-Americans community suffers from too many barbarians, which more civilisation would keep in line.

A sophisticated version of this would be that African-Americans have not fully been through sociologist Norbert Elias's civilising process. Which may well have something to it, particularly regarding the high levels of violence (and that it is much the same among African-Americans and jurisdictions of majority African slave descent as the African west coast source population). Especially so, given that African-Americans have hardly experienced American history and the American state as have other Americans--a point conservatives (and quite a few libertarians) tend to be very poor at grasping. As the (later Justice) Clarence Thomas pointed out to the Cato Institute: that freedom had been eroding since the Revolution was not how history had been experienced by African-Americans.

If we consider African-Americans as a particular ethnicity, shaped by common experiences--which is analytically much more fruitful than thinking of them as a racial group (especially given the rising migration of people of African descent who do not share those experiences)--then applying Elias's analysis is well worth considering. Especially as current African-American homicide rates are positively sedate by medieval European standards and unremarkable by C16th and C17th European or North American colonial standards.

Returning to current conservative views, a very clear manifestation of this civilisation-versus-barbarism outlook is this discussion (pdf) of what it is like to teach black kids. It is massively stereotypical in its language--full of whites do this and blacks do that--but it is pervaded by the language of civilisation (white) versus barbarism (blacks). (If one gets past it being far too black-and-white, it is also a rather depressing testimony.) Another former teacher reacts to the article by talking more neutrally of the difficulty in teaching black kids while a selection of comments to the original piece is here.

So, just as with the the problem is racism response, there are certainly things to point to give the civilisation versus barbarism response some legs. But not nearly as much as proponents think. Consider this example of successful reduction of gang violence in California. It is much more a process of broad civic engagement than imposing civilisation or "being tough" with the barbarians. (A version of which was previous LAPD policy, and a comprehensive failure it was too.)

The biggest single problem with this approach is the same as that with the oppression-oppressor axis; it excludes consideration of alternative factors. Such as, for example, that the African-American experience of American history and the American state has been very different from that of other Americans.

When there is yet another problematic incident with police in the US, the standard conservative response to the claims of racism! will be a "soft on crime" response: police have to impose order, you are getting in the way of that, you are being "soft on crime", risking the lives, person and property of the wider society. Having decided that racism is not a factor, then any invoking of the same will be labelled "race-baiting". The possibility that the US might have a broader problem with feral law enforcement gets excluded (as it also does, of course, with cries of "its racism!"). Which is surely the take-away point about those incidents which also involve black police officers or white civilians.

In both cases, the proponents cry their equivalent of "wolf!" way too often and way too loudly, which gets in the way of being more broadly persuasive when they do have a point: sometimes it really is racism, sometimes there really is a threat to civilised order.

The libertarian half-answer
One group who are more likely to approach the performance of law enforcement in the US with precisely such broad scepticism are libertarians. When they do pay attention to the situation of African-Americans (it is not exactly a hot topic among libertarians) their response is likely to be along the lines of too much state coercion: in particular, that the "war on drugs" is much of the problem.

Well, yes, the war on drugs has particularly adverse effects on the African-American community. But pointing to the war on drugs hardly explains why. Talking about African-Americans as living in more vulnerable communities just raises the question of why this is so: which the war on drugs point provides no basis for. Given that slavery was abolished by the Thirteenth Amendment (1865), and Jim Crow overturned by the Civil Rights Acts, talking about African-Americans as victims of past state coercion (while certainly true) is not much help in tackling present problems.

Indeed, as David Boaz points out, that history is often something of an embarrassment to US libertarians, who have their own heroic narrative of American history: though their's is typically one of decline from a more gloriously free past which, for African-Americans (and lots of other folk) just ain't so.

No way in
So, the preferred framings of progressives, conservatives and libertarians in the US are each quite poor at providing a full picture of the social patterns and dilemmas of African-Americans. Worse, they tend to be used to blot out what parts of other framings do have value and to wildly exaggerate the coverage of their own. No wonder public debate in the US is both so polarised and keeps "circling the drain" when it comes to the problems and prospects of African-Americans.
From here: uses median household income, not individual income.
African-Americans tend to have smaller households than Hispanics.

But it is worse than that, because African-Americans are not merely seriously badly served by public debate in the US, they are also seriously badly served by the political process in the US. Part of the problem is obvious: they essentially have a monopoly political provider--the Democratic Party. They overwhelmingly vote Democratic, and seem to be thoroughly "rusted on" Democrats: indeed, appear to be the most thoroughly "rusted on" group. (With Southern whites the next most "rusted on" group--but to the Republicans.) So Republicans have little or no incentive to seriously consider African-American issues.

But it is worse than that. Not only do African-Americans effectively have only one political provider, they tend to live in one-Party jurisdictions: that is, metropolitan areas where the Republicans are not competitive. Ironically, the decline in overall levels of crime have helped make the Republicans less competitive. So Democrats also do not have much incentive to seriously consider African-American issues--they get their votes anyway, with only concerns about turnout to provide some edge to that.

Republicans may be competitive (even dominant) at a State level, but have little incentive to apply themselves to urban issues of the large metropolises. Precisely the places where African-Americans tend to live. With teacher and other public service unions key providers of money and activists to the Democratic Party, there is even less incentive from the political class of large metropolises to look critically at the supply of public services to, and the effects of policy on, African-Americans. Especially as blaming racism at every opportunity provides splendid displacement and cover.

So, dominant frameworks of public debate which narrow what is considered and by whom; having an effective monopoly political provider across all levels of politics; and living in one-Party jurisdictions at a metropolitan level. There are not much grounds for optimism that public policy will start working better for African-Americans.

Wanted: a discovery process
Surely the most impressive political mobilisation in C20th US politics was the (overwhelmingly black-led and organised) civil rights movement. But it had a clear focus and plenty of entirely righteous passion to back it up.

What is needed now is not that single-minded focus, but a discovery process where different policies, efforts and means are experimented with, to see what works and what does not. There is always some of that going on--the US is a large and diverse country. But discovery cannot happen if choices are constrained by monopoly-interest politics and closed cognitive frameworks.

[Cross-posted at Skepticlawyer.]