Thursday, December 17, 2015

Moral sensibility and modernity

Religions have rituals and doctrines: mechanisms of participation and belief. They also engender moral sensibilities that provide ways of normatively framing the world regarding people, places, social arrangements. Most Swedes, for example, are not believing or actively participating Lutherans, yet centuries of Lutheranism being the overwhelmingly dominant flavour of religion has deeply influenced Swedish moral sensibility.

When folk try and divide human societies into civilisations, it is typically done so at least partly on the basis of religion (Islam, Buddhist, Hindu, Orthodox) or some other normative philosophy (Confucianism) or combination of such and geography (Latin American) or has such religion-derived sensibilities lying behind it (Shinto-Buddhist for Japan, Judaeo-Christian for the West).

The most famous recent example of this is the taxonomy of civilisations used by political scientist Samuel Huntingdon in his "Clash of Civilisations" thesis. As I have explained before, I do not agree with Huntingdon's overall analysis--in the international state system, cooperation and conflict are not symmetrical. But that religions generate moral sensibilities that can outlast adherence to their specific doctrines and rituals is clearly true. As is that shared religious histories can generated shared (or at least convergent) moral sensibilities.

Religions can also affect people's attitude to time, or temporal orientation: whether people tend to be future-focused or present-focused or past-focused. Being future-focused, for example, tends to make people both more reliable, and more willing, cooperators. Protestants, and those who have Protestant-derived moral sensibilities, tend to be future-focused, for example, while Catholic-derived moral sensibilities tend to be past or present-focused; hence Protestant-majority countries tend to have lower risk premiums on their public debt than Catholic-majority countries. These differences in moral sensibilities and typical temporal orientation extend to historically Protestant countries tending to have lower rates of corruption and higher rates of trust than Catholic ones.

So, religions do not only matter as generators of rituals and doctrines, they also matter in the way they deeply influence moral sensibilities, attitudes to time, ways of looking at the world; and do so even without regular attendance to the rituals or strong adherence to doctrines. The sensibilities, temporal orientations and other framings can remain after belief and participation has departed. Anglo-Indian economist Deepak Lal makes a useful distinction:
It is useful to distinguish between two major sorts of beliefs relating to different aspects of the environment. These relate to what in my recent Ohlin lectures I labeled the material and cosmological beliefs of a particular culture. The former relate to ways of making a living and concerns beliefs about the material world, in particular about the economy. The latter are related to understanding the world around us and mankind's place in it which determine how people view their lives-its purpose, meaning and relationship to others. There is considerable cross-cultural evidence that material beliefs are more malleable than cosmological ones. Material beliefs can alter rapidly with changes in the material environment. There is greater hysterisis in cosmological beliefs, on how, in Plato's words, "one should live". Moreover the cross-cultural evidence shows that rather than the environment it is the language group which influences these world-views.
What Lal calls cosmological beliefs are both persistent and derived from religion or other, deeply historically embedded, normative philosophy. Hence, for example, the World Values Survey can be used to usefully group countries.

Islam's modernity temper tantrum

Of the existing civilisations sharing this planet, only one is prominently having an extended temper tantrum about modernity; an extended temper tantrum with a distinctly homicidal edge.

The West essentially invented modernity, Japan has long since embraced it; China et al are very much up for it (the Beijing regime would just like to indigenise a congenial-to-it version); Russia et al ditto; Latin America is trying to get there (despite an unfortunate institutional legacy and outbreaks of really bad policy ideas); sub-Saharan Africa is struggling under bad boundaries and poor institutions but is also trying.

It is only Islam that is producing significant murderous insurgencies against modernity (and especially against the egalitarian cosmopolitanism which is such a strong strain within modernity--there is nothing like attacking schools, universities, cafes, soccer matches, rock concerts, along with beheadings, crucifixions and killing bloggers while re-introducing slavery to say "we hate modernity").

Which makes the jihadis the Islamic equivalent of the Nazis--a modernising (in technique) revolt against modernity that hates Jews, fetishises warriors and violence, invokes a past age of warrior conquest--as I have discussed before. (Indeed, all the totalitarianisms are somewhat atavistic.) Though the jihadis are adherents of a master belief rather than members of a would-be master race.

But Nazism was let loose by the disaster of the Great War followed by the Great Depression. In the case of Islam, it is modernity itself which is the problem; no great crisis was required to let loose the revolt-with-strong-homicidal edge against it from within Islam.

Salafism, the attempt to return to the origins of Islam by "purifying it" of subsequent accretions, is in large part a revolt against modernity by retreating further into Islam. Deobandi is the South Asian equivalent and dates back to the later C19th: Salafism outside Saudi Arabia arose in the C20th. Though the intellectual roots of both go deep into Islamic tradition and the response to the demographic and cultural disaster of the Mongol invasions, which itself reprised Mohammad's response to the Muslim defeat at the battle of Uhud.

One needs to be aware the Salafism comes in various flavours (quietist, activist, jihadi) which overlap with Saudi Wahhabism but are not identical (pdf). Moreover, its "quietist" tradition is quite hostile (pdf) to Islamism (especially its takfiri tendencies) and its prioritisation of political engagement. While Islamism--political Islam--has Salafist versions. Islamism also comes out of the later C19th but does not reach much in the way of organised form until the founding of the Muslim Brotherhood in 1928. This confusing welter of responses is itself a sign of the difficulties modernity poses for Islam as religion and as a source of normative framings.

Comparing revivalisms
Christianity also has a revivalist movement seeking to return to the origins of the religion. That is Pentecostalism which, in terms of gaining adherents, is notably more successful than Salafism. Salafism likely has around 50m adherents, and there are over 70m Deobandis, while Pentecostalism has around 270m adherents. Add in Charismatics, and Christian revivalism, attempting to re-enchant the world, has over 580m adherents.

A reasonable estimate for Islamists is about 10-15% of Muslims. There are about 1.6bn Muslims, so that suggests 160m to 240m Islamists (most of whom are Salafis, Wahhabis or Deobandis). Thus, Christian revivalist movements have considerably more adherents than Muslim revivalist movements (revivalism whether as purification or as political activism). But the Christian revivalism goes largely unremarked and un-newsworthy because Christian revivalism does not have remotely the homicidal edge Islamic revivalism does. For what one is attempting to return to, makes a difference.

The ongoing Christian revivalism has not generated any equivalent to the specifically religious political engagement of Islamism or the homicidal activism of the jihadis, both because early Christianity is very different from early Islam and because the moral sensibilities that Islam generates are very different from the moral sensibilities derived from Christianity; differences that go back to doctrine.

Christianity as it has evolved, that is. Evolution being something which is easier for Christianity to do than Islam; for, as a friend noted in conversation:
Islam has a complete, literal and authoritative source to bootstrap the original religion from. [Christianity and Judaism] don't.
Quite. The Gospels don't give anywhere the detailed rules and doctrines that the Quran, hadith and life of the Prophet do. There is no Christian equivalent of Sharia.

Not merely because Christianity accepts the legitimacy of human law--even canon law is acknowledged to be law-making by human authority, albeit one seeking guidance from revelation--though that is a huge difference in itself. But because the defeat of Aristotelianism within Islam, with the triumph of al-Ghazali and the intellectual tradition he represented, meant rejection within mainstream Islam of the notion that there was any grounding for moral judgement apart from revelation.

This rejection continues to have force. It led Islamic states to issue their own version of the UN 1948 Universal Declaration of Human Rights, the 1990 Cairo Declaration of Human Rights in Islam--not something states from any other civilisation have felt the need to do. A declaration with, as Wikipedia puts it:
provides an overview on the Islamic perspective on human rights, and affirms Islamic sharia as its sole source.
Because there is no grounding for moral judgement beyond revelation. Which creates serious difficulties if one wants to "update" Islam, for there is no widely accepted place to rest the lever to "move" the religion and civilisation other than revelation. A problem that Christianity has not had to grapple with. Thus, when Pope Paul III, in his 1537 papal bull Sublimus Dei, banned the enslaving of the inhabitants of the Americas, he was grounding the claim as much in natural law thinking as in Scripture (indeed, arguably more). Two centuries later, the Enlightenment attempt to put religious authority in a box could argue on grounds outside revelation, and look to pre-Christian (classical) thought, and not have the entire effort ruled as automatically illegitimate.

When considering how to treat non-believers, Islam presents its followers with the following words of Muhammad:
When you meet your enemies who are polytheists, invite them to three courses of action. If they respond to any one of these, you also accept it and withold yourself from doing them any harm. Invite them to (accept) Islam; if they respond to you, accept it from them and desist from fighting against them. Then invite them to migrate from their lands to the land of Muhairs and inform them that, if they do so, they shall have all the privileges and obligations of the Muhajirs. If they refuse to migrate, tell them that they will have the status of Bedouin Muslims and will be subjected to the Commands of Allah like other Muslims, but they will not get any share from the spoils of war or Fai' except when they actually fight with the Muslims (against the disbelievers). If they refuse to accept Islam, demand from them the Jizya. If they agree to pay, accept it from them and hold off your hands. If they refuse to pay the tax, seek Allah's help and fight them (Sahih Muslim  4924).
Christians are people of the book, but are often taken to be polytheists because of the Trinity. The contrast with Sublimus Dei is profound. Especially on the matter of slavery, taking first the words of Allah in the QuranSura 4:24:
And [also prohibited to you are all] married women except those your right hands possess. [This is] the decree of Allah upon you. And lawful to you are [all others] beyond these, [provided] that you seek them [in marriage] with [gifts from] your property, desiring chastity, not unlawful sexual intercourse. So for whatever you enjoy [of marriage] from them, give them their due compensation as an obligation. And there is no blame upon you for what you mutually agree to beyond the obligation. Indeed, Allah is ever Knowing and Wise.
The phrase "what your right hand possess" is about what the sword hand takes. There is explanatory hadith (i.e. words of Muhammad) clarifying the point:
Having overcome them and taken them captives, the Companions of Allah's Messenger (may peace te upon him) seemed to refrain from having intercourse with captive women because of their husbands being polytheists. Then Allah, Most High, sent down regarding that:" And women already married, except those whom your right hands possess (iv. 24)" (i. e. they were lawful for them when their 'Idda period came to an end) (Sahih Muslim 3432).
It is particularly ridiculous for non-believers to go on about Islam as a "religion of peace" because, to the extent it has any meaning in orthodox Islamic usage, it only applied to those who had accepted Sharia rule: Islam is "the religion of peace" for territory where Islam, (specifically) Sharia, rules--including the subordinating restrictions of the Conditions of Umar for non-Muslim "people of the Book".

Sharia is the law of Allah, the sovereign of the universe, sought by the process of fiqh undertaken by considering the Quran, the hadiths and the life of the Prophet, plus attention to other scholars' grappling with the same. Which means the moral and social judgements of Islam are grounded in the notion that the peak of human understanding of social order was reached in C7th Arabia: a society of slavery, raiding and conquest. Again, there is no equivalent in Christianity: while the Gospels may represent the peak of moral behaviour, no Christian is going to think that the C1st Roman Empire reached the peak of social understanding, as the most significant-in-Christian-terms it did was to crucify Christ. These differences go "all the way down", as Christianity is a religion of individual salvation, whereas is Islam about building a righteous community, correct participation in which is the path to Paradise.

All of which also means that the further modernity moves away from C7th Arabia (in every dimension, social and technological) the greater the tension with Islam-derived moral sensibilities and framings. Hence modernity creates a deep problem for Islam in a way that has no equivalent for any other civilisation. Hence the temper tantrum with serious homicidal edge that Islam is having with modernity.

Made worse by the fact that many folk of Muslim heritage have no particular problem with many aspects of modernity: it is no accident that most of the victims of the jihadis have been fellow Muslims--they are both the closest targets and those whose compromising "treachery" from their obligations to follow the laws of Allah (as defined by the jihadis: which is very much contested within Islam) is most egregious.

Zealots rather than radicals
There is also a problem with the language of "radicalisation", as the jihadis have very little in common with the radicals of any Western tradition. They are far more like the religious "enthusiasts" of the C16th and C17th that C18th Enlightenment folk so strongly reacted against. They have even more in common with the original Jewish Zealots: true believers homicidally enraged that human law is permitted to trump God's law and whose murderous ire falls particularly intensely on "wickedly compromising" fellow believers. As Australian political scientist David Martin Jones puts it:
Rather than being radicalised, young Western Muslims are attracted to what a more religious age than our own recognised as enthusiasm, zealotry or fanaticism.
... any analysis of jihadism’s self-confirming zealotry suggests that those labelled “radicalised” are not really radicals at all. Ideological radicalism, properly understood, requires a clear break from traditional religion, of whatever form, in order to achieve a pluralist, secular modernity.
By contrast, a scriptural literalism based on the message of the Prophet Mohammad and the hadith of his rightly guided seventh-century successors, the Rashidun, fuels Islamic State’s thought and practice. They look to past models purified by purificatory violence today to build tomorrow’s religious utopia. ... Today’s jihadi is an enthusiast as defined by the Oxford Shorter English Dictionary, namely, one who is “possessed by a god” or in “receipt of divine communication”. No matter how deluded their actions appear to modern secular sensibilities, in their minds they are directly engaged in a divine mission to re-create the caliphate.
The revelation gap
The jihadis are the most dramatic manifestation of the tension between Islam and modernity, yet they are far from the only manifestation thereof. The grounding of morality so thoroughly in revelation creates a profound gulf between believers and non-believers; between those who accept the revelations which are the only true grounding of moral judgement and those who do not. This is the basis of an Islamic supremacism or triumphalism that has seeped into the moral sensibilities of Muslims over the centuries. It is why, for example, there is so much persecution of religious minorities across the Muslim world; persecution which follows recurring patterns.

Attitudes that do not magically disappear simply by migrating to the West. Particularly when migration to the West cuts people off from the various evolved mechanisms for softening the harsher elements of Islam. One woman of Muslim heritage, doctor Suraiya Simi Rahman, expresses that quite vividly:
What in the world were we doing? We were training our children to kowtow without questioning an authority that we believed would keep them safe from evil western ways. And so the community’s children went to Sunday school, wore hijab, prayed and fasted. They were enveloped in a Muslim identity that was unlike any that I had experienced before.
I was raised in a Muslim country in the Middle East and religion was something we kept in its place, somewhere after school, soccer and cartoons. Here was a more distilled, pure and, most dangerously, a context-free Islam. There were no grandmothers here to sagely tell us which parts of the Quran to turn a blind eye to. There were no older cousins here who skipped Friday prayers and goofed off with their friends instead. Oh no. This was Islam simmered in a sauce of Midwestern sincerity, and boiled down to its dark, concentrated core. This was dangerous.
This centring of all moral judgement in revelation, reducing the role of reason to supporting revelation, creates huge dilemmas. Suraiya Simi Rahman experienced that also:
I attended ISNA [Islamic Society of North America] gatherings, met with educated, professional people like myself who were also asking the same questions. They were looking to their faith for answers. And sure, there were efforts made to modernize Islam, but they were only superficial. We couldn’t do it. We couldn’t do it because there is a logical dilemma at the core of Islam. And that is, that the Quran is the last word of God, that it is perfect and unchangeable. And to even suggest such a thing is blasphemy and apostasy.
And so, to understand the moderate mind, you have to envision it on a continuum from radical to middle, but the closer you get to liberal, there is a wall. It creeps up on you, in the condemnation of homosexuality, in the unequal treatment and subjugation of women, but it’s there. Beyond that wall that they are afraid to look over, for fear of eternal hell fire and damnation, is where the answer lies though. So being a Muslim moderate these days is like running a race with a ball and chain attached to your feet. A handicap. Unless you can imagine what the world beyond that wall looks like, you can’t really navigate it. If you’re so terrified of blasphemy that you refuse to look over, you’re forever stuck. Right here. And behind you is the jihadi horde, laying claim to real Islam, practicing it to perfection, as it is laid out in the Quran. A veritable rock and a hard place.
The combination of Sharia as a civilisational legal system that does not need a state to enforce it, yet claims trumping authority over any mere human law, along with deeply embedded attitudes of Islamic supremacism, generate potential enclave problems which have no parallel for any other migrant group. Hence reports from current and former UK police officers about Islamified areas where police operations are significantly inhibited; areas which have parallels in France, Sweden and Belgium.

The US and Australia are unlikely to experience similar problems because their Muslim minorities are less than 2% of the population: at that level, it is rational for Muslim communities to cooperate with local security forces. There are still the problem of "lone wolf" attacks, as there is significant jihadi social media activity aimed as recruiting and grooming such. But, as the US in particular already has a home-grown mass shooter problem, that is a comparatively minor law-and-order issue.

Once Muslim minorities start heading towards 10% of the population, then enclave problems are much more likely to develop and cooperation with security forces is likely to be much patchier and resistance to the agents of the state is likely to develop. Accepting a Muslim minority of that sort of size is also, effectively, a decision to export one's Jews.

Significant Muslim migration is also somewhat distressing for Middle Eastern Christian migrants, who came to the West to escape Muslim persecution and find their persecutors following them; in the case of the current refugees waves into Europe, quite literally, as there has seen a series of anti-Christian incidents by Muslim refugees, including two cases of mass drownings at sea. (There has also been a series of comments by folk from religious minorities of now Muslim majority countries of the "you will be sorry" variety.) Muslim (male) migrants are also the only migrants with any tendency to become less integrated in their host society over time.

The notion that there are no issues specific to Muslim migration is nonsense on stilts. Of course there are: it is very different, religiously-defined civilisation with very different presumptions and framings. Yelling "racism" does not change that, although it does close down debate: so is precisely the sort of shouting polarising that is not in any way helpful.

No, it is not merely a matter of Islamic doctrine, though that has plenty of problematic aspects. It is also the effects of centuries (indeed, over a millennium) of Islamic doctrine, ritual and teaching on the moral sensibilities and framings, the cosmological outlook, of Muslims, of people of Muslim heritage: the notion that their religious identity is at once terribly important to people of Muslim heritage yet has no problematic content is nonsense--it is turning people into abstractions for moral points-scoring between Westerners.

As the experiences of Europe in its various difficulties with Muslim migrants and migrant communities demonstrate, you cannot just wish that heritage away and shouting at people because you don't wish it to be so may be satisfyingly childish but does not change anything except to make the development of intelligent, well-grounded responses that much harder and leave far more ground for political entrepreneurs to garner support from frustrated, concerned and angry voters left with nowhere else to go.

[Cross-posted at Skepticlawyer.]

Sunday, December 6, 2015

So, you want to reduce inequality ... (some modest, and some practical, proposals)

Concern over rising inequality has certainly been a significant feature of recent intellectual and political discourse, particularly in the US (for example here). Let us suppose we were serious about reducing inequality, what would we do?

One thing you would not do is significantly raise top income tax rates, that would not have much effect at all. Besides, at a certain point, one runs into significant Laffer Curve effects, which is why income tax rates have remained much lower across the Western world than they were in the immediate postwar decades--governments don't want to reduce their revenue by having tax rates too high.

Since folk who worry about inequality tend to be nostalgic for the low-inequality postwar era up to around 1970, we an easily identify a range of policies which will reduce income inequality.

(1) Massively cut back on higher education. Since higher education generates low income students in their 20s who tend to become high income professionals in their 40s, the higher the use of higher education, the greater is life cycle inequality. Also, since higher education is more expensive than primary or secondary education, and with very few positive social spillover effects (though we can identify some negative spillover effects), government support for higher education tends to be subsidising those with higher future incomes. Moreover, the higher the level of education, the higher the gap between male and female earnings and, the higher level of education, the more differentiated by ethnicity incomes are.

(2) Reverse female participation in the workforce. Surging female labour force participation reduces the scarcity of labour compared to capital, putting downward pressure on labour incomes. Moreover, high income men marrying high income women and low income men marrying low income women greatly increases household inequality. As econblogger Arnold Kling noted recently:
the period of the 1970s was a transition from marriage as production complementarity (I’ll bring home the bacon, you fry it) to consumption complementarity (let’s make sure that our leisure interests coincide). This form of marriage turns out to be much more class-selective.
Putting women back in the home would reduce household income inequality significantly while the increased general labour scarcity premium would make it easier to support families on a single income.

(3) Massively cut back on immigration except for those with high levels of compatible human and social capital. As Sweden is finding, immigration can be a great generator of income inequality. Importing low skill migrants reduces the return to labour, especially amongst low skill residents (pdf), and, as increasing the median return to labour is central to reducing income inequality, any immigration that decreases labour scarcity will tend to increase income inequality.

(4) Abolish residential zoning. Housing capital is a major source of wealth, and residential zoning increases the scarcity of land available for housing, driving up housing costs. Low rents and cheap housing reduces income inequality.

(5) Eliminate occupational licensing. Occupational licensing increases labour scarcity in a very selective (and unequal) way. Indeed, a lot of regulatory approval systems have very unequal effects on income prospects.

(6) More mass conscription wars. The broader the section of the population needed to fight, the higher the incentive to engage in broad social bargaining and the easier such bargaining becomes through a sense of urgent common purpose. Of course, there has to be that sense of urgent common purpose for the effect to operate, otherwise one just gets increased internal social division, which is not good for income inequality.

Econblogger Scott Sumner has some suggestions which overlap with mine (though he is not about invoking Jonathan Swift, unlike some of my above suggestions):
My preference would be to address the inequality issue in four ways:
1. Have a lower proportion of low skilled immigrants and a higher percentage of high skilled immigrants---there are plenty in India and China who wish to come here, but also more than you might expect from Africa, the Middle East and Latin America.
2. Weaken intellectual property rights. I don't favor eliminating them, but I'd prefer to keep them only for entirely new inventions, not improvements of existing products. Copyrights need to be made much shorter.
3. Change zoning laws to encourage more building. This will be really hard to do; indeed I think things are likely to get worse, not better.
4. Replace income taxes with progressive consumption taxes and low wage subsidies. Eliminate cigarette taxes. Legalize drugs.
All sensible and worthy proposals.
In reality, those most inclined to complain about income inequality would be those who would be outraged by any attempt to implement any of the above policy agenda(s). Yet their preferred agenda of increased tax-and-spend would be very unlikely to have any equivalent effect.

First, it requires even more urgent attention to economic efficiency to pay for the increased government activity (which is why the Scandinavian states tend to rate so high on economic freedom), which tends to be antipathetic to income-flattening agendas. While wholesale adoption of the full Scandinavian package in geographically and ethnically diverse societies such as the US or Australia has other problems and is not likely to have the intended effect.

Second, a tax-and-spend agenda is precisely what has driven California into becoming ever more unequal in income, as the middle are driven out by high taxes and regulatory complexity and the welfare dependant are attracted by high spending.

Russian-American population biologist Peter Turchin has developed a sophisticated analysis of swings in equality and inequality based on levels of cooperation and inter-elite competition which he has applied to US history in particular (see here for a Salon article on the same). The model very much has a "good swings and bad swings" approach, where increasing cooperation and falling inequality are good and the decreasing cooperation and rising inequality are bad. So, the shift towards less income equality and less cooperation Turchin identifies as happening from the 1970s on is bad. Which naturally leads to dismissing of the entire shift in Western policy since the 1970s as a mistake.

If we take a more nuanced view of social phenomenon, we might wonder if broad movements in public policy might always be at least somewhat mixed in their characteristics. Particularly in democratic polities, where policies are subject to scrutiny and debate.

The 1970s were not a good period for Western public policy. Productivity growth fell (for reasons which are still unclear) and stagflation blighted economies. The shift towards economic liberalisation occurred for good reasons and has a broad range of clear successes. The connection between economic freedom and prosperity is very clear, empirically.

To characterise the shift in public policy as an attempt to wind back the welfare state is to characterise it as a clear failure--there was very little reduction in welfare spending or coverage. It is much more sensibly seen as policy coalitions attempting to create a sustainable welfare state (i.e. enough economic growth and efficiency to support welfare spending): at which it has been rather more successful. Particularly during the Great Moderation.

Per capita GDP and World Bank indicator
of ease of doing business.
It is also important not to exaggerate how much economic liberalisation there has been. Governments are much less likely to own firms and have become much less likely to regulate quantities (except in land and taxi markets) or regulate prices (except in labour markets). But the wider regulatory burden has continued to increase (pdf); a cost which falls disproportionately on new businesses, small and medium-size businesses and other economic entrants.

Casualisation of employment is often seen as a negative development. But if more and more regulatory (and contract) complexity is loaded onto full-time employment, alternative means of employment become more attractive (for both employers and workers). Casualisation is often an indicator of the level of labour market regulation.

Then one gets interaction effects. Increased regulatory complexity increases economic rents (income not based on productive activity). Yet casualisation makes it harder for workers to capture such economic rents, which may help shift incomes within firms from labour to capital.

What has undoubtedly intensified are the culture wars. Which is the other problem with focusing on specifically income inequality; as the period since the 1970s has also seen very significant social liberalisation. Building on the 1960s ferment to be sure, but going considerably further. Whatever the virtues of that social liberalisation, it is likely harder to garner social cooperation when basic assumptions about the framework of cooperation fray--even more if they fray for very understandable reasons.

It is also analytically dubious to concentrate quite so much on the US. EU politics, for example, are showing much more signs of voter distress, anger and alienation. And doing so in countries whose economies are (generally) rather more regulated than the US economy.

The folk not in the room
Academics, journalists and IT professionals have become very narrow in their ideological range which also shows up in their pattern of political donations. This gravely handicaps their ability to promote broad social bargaining and cooperation. In fact, it tends strongly to have the opposite effect--to preach and alienate; to comprehensively not understand the concerns of people with views they almost never socialise with or have to grapple with seriously.

US political donations by industry.
Moral psychologist Jonathan Haidt's attempt to foster intellectual diversity in the US academy is a much more hopeful attempt to increase social cooperation than buying into "the entire shift in global shift in policy since 1970s, it's all bad!". Particularly given that very same global shift has seen the most massive exit from mass poverty in human history.

US Academic political donations.
Broad trends in public policy, particularly in democratic polities, likely have strengths and weaknesses. Over time, the strengths can get exhausted and the weaknesses multiply. Which tends leads to a swing in a different direction, where the same thing happens. And so it goes.

Conversely, an ideologically narrow academy is very naturally inclined to see public policy trends as "bad" or "good" and point to folk not in any of their rooms and say "it's all their fault". Nor is merely being cross-disciplinary going to fix the problem, if it is essentially the same ideological range repeating itself across disciplines.

And yes, the US Republican Party is having a bit of a meltdown; but both US Parties have become more ideological. While conservatives in the US have been on the losing side of a series of cultural battles and, in public policy, what wins have conservative Republicans had since welfare reform after the 1994 midterm elections? If the answer is "not much", then their anger and alienation become much more understandable.

Especially given the cultural assault goes on--attempts to control speech, clothing, regulate leisure activities, attacking careers, reputations and livelihoods, and so on. After all, basic to Turchin's theory is over-production of elites, and an excess of over-credentialed (and under-educated) university graduates is very much part of that--and given the ideological narrowness of the modern academy--their frustrations can obviously drive a highly socially combative approach. [A central difficulty with how Turchin applies his demographic analysis to the contemporary US--and, by extension, other Western democracies--is that he presumes that the corporate/business elite is "the" elite when modern mixed economies also have a public-sector/nonprofit nomenklatura who are in a much better position to systematically block social cooperation by stigmatising alternative perspectives and concerns.]

Social cooperation means precisely that, cooperation. It does not mean "you are evil, malicious and wrongheaded unless you agree with us": demanding surrender is not cooperating. Buying into "those folk over there, they're all wrong" is not fostering cooperation. No matter how sophisticated your underlying analysis.

ADDENDA The age-cohort demographics are also not helpful to reducing inequality.

AND ALSO  Paul Graham has a useful essay on economic inequality and another on why 1945-1973 was so different to what followed.  Dean Baker examines economic rents as a factor in increased income inequality.

[Cross-posted at Skepticlawyer.]

Saturday, December 5, 2015

Why gold/currency ratios mattered in the interwar period

This is based on a comment I made here.

I have been enjoying Scott Sumner's history of the Great Depression, The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression. Sumner provides a key ideas summary for the book here. The book is an examination of dramatic macroeconomic instability under a gold standard.

In The Midas Paradox, Sumner gives the gold/currency ratio (the ratio of gold reserve to currency) central place in his analysis.

 A gold standard sets a value in gold to the unit of account, making gold the medium of account. So, no matter how many (for instance) currency dollars are in circulation, the value of gold sets their value. If gold rises in value (relative to output of goods and services, hereafter just output), the value of money rises relative to a given level of output (so there is deflation or a falling price level). If gold falls in value (relative to output), the value of money falls relative to a given level of output (so there is inflation or a rising price level).

Hence prominent interwar Swedish monetary economist Gustav Cassel's post-WWI concern about the future path of gold supply not keeping up with the future path of output, for if output growth systematically outstripped gold production, that would systematically raise the output-value of gold, having a deflationary effect, i.e. driving down the price level, driving down expenditure, and so incomes, and increasing the burden of debts.

For deflation comes in three varieties; the good (falling prices due to increased productivity, such as in the IT industry), the bad (a fall in spending, relative to output, pushing down incomes, and raising debt burdens) and the ugly (such sharp shifts to holding money that expenditure collapses, so do incomes, massively increasing debt burdens, leading to a surge in bankruptcies and bad debts and so to financial crisis).

Insufficient gold production turned out not to be a problem and, while fluctuations in the relative paths of gold and output did produce inflationary and deflationary swings in the C19th, they were relatively minor. Indeed, the upsurge in demand for gold from the French/German/US switch to the gold standard in the 1870s was more important. (The French/German switch is discussed here [pdf], the US switch here [pdf].) Over the course of the C19th, the inflationary and deflationary swings from shifts in the relative path of output and gold production cancelled out.

So, while the currency in circulation can fluctuate according to the "needs of trade", gold provides the anchor for the output-value of money. (Hence, the plausibility of the "real bills" doctrine.)

Hard money man on horseback.
Why would the gold/currency ratio matter?

(1) The plausibility of the gold-peg. If currency in circulation becomes sufficiently large that the guarantee to redeem in gold is in doubt, that could be seriously de-stabilising. Hence the gold standard constrains currency issue, hence states abandon the gold standard when they go to war. (Unless you are Napoleon; an autocrat who does not want to invoke recent dire memories of French Revolutionary hyperinflation, so you run a strict bullion--gold & silver--standard financed by looting Europe while your Parliamentary opponent--Britain--goes off the gold standard for the duration because it does not have the same credibility problems.)

(2) The output-value of gold. Having more gold in the vaults than is needed to ensure the plausibility of the peg tends to raise the value of gold relative to a given level of output. And the more so, the more so. Since the central banks so dominated gold holdings in the interwar period, they dominated the output-price of gold, with the gold/currency ratio being an indicator of their "gold stance". A factor enhanced if private folk began to also hoard gold.

Scott Sumner responded to my original description in the comment section of his blog, and the question whether it was a fair description, as follows:
Yes, central banks had a big effect on the real demand for gold, and hence the value of gold. They held a large proportion of all gold mined since the beginning of time (I think over 50%.) The real demand for gold is equal to the gold ratio times the real demand for currency. So if the public’s real demand for currency is stable, and the gold ratio rises by 9%, then the real demand for gold rises by 9%. This reduces the global price level by 9%, ceteris paribus. It’s roughly what happened between October 1929 and October 1930. After that, big rises in the real demand for currency created a higher derived demand for gold.
Which pushed the gold-standard price level down further.

Wikipedia tells us that:
The real demand for money is defined as the nominal [face value] amount of money demanded divided by the price level.
In other words, real demand is demand in terms of output, as the nominal value of total production is output x the price level, so dividing the money value of production by the price level leaves us with output. This is what statistical authorities such as the ABS do to calculate real GDP and so economic growth.  They assemble statistics on money value of production and use various price deflators to calculate shifts in actual output of goods and services.

In The Midas Paradox, Scott Sumner uses as simple model to analyse the operations of the gold standard. The nominal value of the gold stock (Gs) = the Price level (P) x the real demand for monetary gold (g).

Gs = Pg

Since, if you divide by prices, you are left with output or output-value.

Re-arranging that,

P = Gs/g

So, as Sumner points out, under a gold standard, monetary policy mainly operates through the demand side, not the supply of currency. Real demand for monetary gold (g) can be segmented into the gold reserve ratio (r)--the ratio of gold reserves to currency--and the real demand for currency (md). Giving us,

P = Gs x (1/r) x (1/md)

To quote from The Midas Paradox:
an increase in the price level [P] can be generated by one of three factors: an increase in the monetary gold stock, a decrease in the gold reserve ratio, and/or a decrease in the real demand for currency. The rate of inflation [i.e. rate of change of P] is the percentage increase in the gold stock [Gs], minus the percentage increase in the gold reserve ratio [r], minus the percentage increase in the real demand for currency [md]. At this level of abstraction the term "gold standard" simply refers to a monetary regime where the nominal price of gold is fixed. As long as the nominal price of gold is constant and the real value of gold is set in free [i.e. competitive] markets, then we can apply the gold standard model without making any further assumptions about policymakers following "the rules of the game"; that is, we do not need to assume a stable gold reserve ratio, or in fact any relationship between the monetary gold stock and the currency stock (Pp28-9).
Which does simplify analysis greatly. So the model Sumner provides does what good models are supposed to do--make analysis of the phenomenon more tractable.

As central to having a gold standard is to create a stable value for money--and so a stable price level--by setting a gold value to the unit of account, shifts in the price level will reflect directly shifts in the output-value of gold. In his specific response to my original comment, Sumner is being more explicit about the mechanics and invoking the above equations and explanations from The Midas Paradox.

Chart courtesy of Marcus Nunes.
In The Midas Paradox, Scott Sumner elucidates the central story of the Great Depression as it has been developing in the economic literature. That is, a story of disastrous central bank monetary policies, particularly by the Federal Reserve (the Fed) and the Bank of France. In the case of the US, FDR actually pulled the US out of the Depression with his unconventional monetary policy and then put the US right back into economic stagnation with his National Industrial Recovery Act (NIRA), a strong negative supply-side policy shock to the economy. When the US Supreme Court struck down NIRA as unconstitutional, economic recovery picked up again, until further destructive monetary policies (pdf) created the severe 1937-38 downturn.

So, it was all about bad public policy, not some inherent problems with capitalism or market economies. And in The Midas Paradox, Scott Sumner takes us through the twists and turns of that.

[Cross-posted at Skepticlawyer.]