Saturday, February 28, 2009

Why Societies Need Dissent

"A fanatic is a person who cannot change their mind and will not change the subject."
(Winston Churchill, attr.)

"… they cannot change it, because they have no other subject. That is the nature of their crippled epistemology, without which they would not be fanatics.
Russell Hardin, elaborating.

There are books which give one a profound Aha! experience. Cass Sunstein’s splendid book Why Societies Need Dissent combined with a concept used in the book but taken from an article (The Crippled Epistemology of Extremism [pdf]) provided me which such an experience.

Inklings of what Sunstein covers I had already worked out for myself in general terms, but he provides a much more precise vocabulary and backing from a sleigh of empirical studies I had no idea existed.

Hardin’s concept of crippled epistemology is used by Sunstein to good effect. What Hardin is concerned to provide is an explanation of fanaticism, Sunstein with the mechanisms (and dangers) of conformity.
Hardin sees fanaticism as generally a group phenomenon. He starts with a theory of the acquisition of knowledge. One’s belief in the truth of X can depend on the rewards of counting X as true. Acquiring some knowledge can have considerable costs. Much of our knowledge is ‘happenstance’ or ‘byproduct’ knowledge that comes to us essentially free. Some knowledge is a ‘consumption good’ – its acquisition is pleasurable. We tend to rely greatly on others for knowledge.

Suppose you are always a big loser from normal politics. Loyalty (which is self-denying), voice (which has already failed) or exit are your options. If you choose exit, you may find a like-minded group. Over time, those with weaker commitment will tend to leave such a group, intensifying identification with particular beliefs and practices within the group. If the group becomes more isolated, both paranoid cognition (supposing the worst of those you are not in communication with) and sinister attribution (exaggerating the degree to which members are the target of attention) are likely to grow. Both these aid group loyalty while damaging the knowledge-acquisition of members. A crippled epistemology can then greatly aid group cohesion.

Prosperity and democracy undermine extremism – by increasing the stake people have in the current situation, de-legitimising coercive politics and increasing the range of information available (particularly about alternative perspectives). Illiberal politics are required to sustain the crippled epistemology of extremism. Suppressing knowledge is the route to power, strangely even the power of an idea, albeit a crippled and crippling one.

Sunstein summarises Hardin’s characterisation of fanatics as being people relying on a small subset of information mainly derived from fellow extremists.

Hardin’s account would be improved with the addition of some economics of communication and the power of commitment to a particular identity. (As would Robert Putnam’s enlightening discussion of the reduction of social trust costs of ethnic diversity [pdf].)

If you are committed to a particular view of yourself, there are large costs involved in acquiring knowledge that undermines that view. Refusal to pay those costs is understandable, but damages your knowledge acquisition. A group of like-minded people will tend to reinforce each other in such judgements. Sticking with the like-minded is inherently congenial, it being much less costly to communicate with each other on such matters than with outsiders (communication meaning two-way exchange: monologues and diatribes have no such costs, except in so far as they cut one off from information).

So, the group provides mutual authority and recognition while aiding and abetting the shared epistemological crippling.

Clearly, this is a model that applies rather more broadly than simple fanaticism.

Sunstein is interested in the remarkable human tendency to conform. Unchecked by dissent, conformity can have major negative consequences. Some empirical results he cites include:
♦ highly contentious corporate boards tend to work better than consensual ones,
♦ investor clubs which are not socially-bonded work better.
(In both these cases, conformity lowers earnings.)
♦ The "Bay of Pigs" disaster, a classic case of bright people being consensual in stupidity,
♦ Judges vote differently depending on who else in on a judicial panel with them,
♦ Conforming juries head towards extreme results.

Conformity – going along with what others apparently know – provides a good rule-of-thumb in the absence of personal knowledge or expertise but can deny public important information – so conformity carries group risks. In personal terms, it’s the other way around – conformity is a form of free-riding, dissent carries personal risks. Hence the problem – society benefits from behaviour which carries significant personal risks. Dissent is not always good (Hitler was a dissenter), but societies and institutions work better if dissent can operate.

Studies show that overt self-confidence and firmness is highly persuasive and that unanimity is very powerfully persuasive. (One dissenting voice can have a very strong effect simply by breaking unanimity.) Also, out-group membership decreases information flows. Dissent counts a lot less, or information generally, if it comes from someone identified as an out-group member. (So, a differing propensity to identify members of one group – e.g. the left – than another – e.g. the right or ‘conservatives’ – does actually matter.)

(All this being the case, it is particularly damaging for professions or milieus allegedly involved in the pursuit or dissemination of knowledge to de-legitimise alternate points of view, regularly use group denigration or punish divergent views as showing some moral aberration or lack of personal worth.)

In explaining the behaviour patterns revealed by research and observed more generally, Sunstein uses two causal tendencies. First, we rely on others for information. Second, we want to have a good reputation.

Apart from conformity, Sunstein is particularly interested in group cascades – increasing waves of common belief or behaviour – and group polarisation – intensification of belief or attitudes via mutual reinforcement. He is ecumenical in his examples – one of the things I like about the book is the way he moves back and forth from ‘left’ to ‘right’ for his examples.

The various behavioural studies he cites produce some notable results. Such as the tendency towards collective conservatism – groups will remain committed to certain judgements or decisions even when members turn over. Or that many people will assent to propositions opposite to that which they apparently believe if confronted with a series of opinions that support the reversed view.

Persons of high social status or high confidence in their own views are less likely to conform. People who are frightened or confronted with a difficult judgement are more likely to conform. If there are financial rewards for getting it right, conformity decreases for easy judgements, increases for difficult ones (which is important for market behaviour). Conforming also tends to increase confidence in the conforming judgement. The number of public supporters for dominant opinion tends to increase conformity, though a single ‘voice of sanity’ has considerable power to reduce errors. Publicly-voiced and privately-held opinion can move in different directions (often to the majority in the former, to the minority in the latter, if the minority opinions are confidently put and not isolated voices). In ambiguous situations, expert opinion is much more likely to be followed if not openly questioned. It is also surprisingly easy to induce false confessions.

Sunstein discusses patterns of legal compliance and non-compliance, including a few striking examples – such as the 1988 US Toxic Release Act which led to a 45% decline in toxic releases from 1988 to 1995 by the simple expedient of requiring companies to publish their type & level of toxic releases.

Informed people can stop cascades. Cascades are less likely if people are rewarded for correct group decision. When conformity is rewarded, cascades and mistakes are more likely. Cascades can be informational (following what other people believe to be true) or reputational (following what other people believe to be right). Reputational rewards for conformity greatly increase the likelihood of cascades and errors.

(Aside: which means, of course, a milieu which deems some opinions as a sign of virtue, and others as a sign of wickedness, is highly likely to be conformist, produce cascades and be in error.)

If conformity is rewarded, early dissenters are particularly likely to be penalised, having a chilling effect on dissent in the future. Conformity and cascades reduce the procedural cost of decision-making but increase the risk of error.

Dissenters can be disclosers (people releasing into the public arena privately held information) or contrarians (a mixed blessing). It is not dissent per se but useful dissent that is of value: senseless, hysterical, paranoid, hateful or dehumanising comment is not giving false virtue by being dissent. Freedom of speech is the best corrective to erroneous conformity and cascades.

Unlike many cascades, group polarisation operates through deliberation. But one can have polarisation entrepreneurs who mobilise people through polarisation (history is full of them; Milosevic in Serbia and Osama are classic contemporary examples, as is Al Sharpton).

Where groups are like-minded, they tend to polarise towards a more extreme manifestation of their like-mindedness. Like-minded people have a natural tendency to dwell on shared or common information. That sets up resonances, which increase confidence in common positions, encourage a shift towards more intensity (of belief and of content). The polarisation effect is magnified if both informational and reputational cascades are set up. It is further intensified if rhetorical advantage lies towards increased extremism (as it tends to, due to its greater ‘purity’).

Antecedent extremism and a sense of common group membership both increase the tendency to group polarisation. The easier group exit is, the more likely polarisation is as moderates will tend to leave. Opposed sub-groups tend to discourage polarisation.

Group information diversity strongly tends to aid better decisions, value diversity is more mixed as it can get in the way of group decision-making. (Which only matters if the group has a high need for common decision-making.)

Which is all very interesting, but why was I so impressed? Because it gives a basis for understanding issues I have been worrying at for some years.

I don’t like the term political correctness much. It runs together two different phenomena – proselytizing niceness and opinion-bigotry – and, as a term, is a little too obviously a weapon in the culture wars. I coined the term moral vanity to try and pin down a certain type of behaviour and Club Virtue to identify an opinion hegemony. But neither comes with a useful heuristic, even though Club Virtue came from thinking of the economics of clubs, given the clear attempts to exclude moral legitimacy from dissenting opinion while mutually endorsing and displaying shared status as being of the virtuous. (A club is a public good – one that provides shared benefits – from which people can be excluded.)

Add in Hardin’s notion of a crippled epistemology – which, for example, clearly bedevils many academics, such as those discussed by Haynes and Klehr in In Denial, and I have frequently observed among academic commenting on ‘economic rationalism’, ‘globalisation’ and ‘neo-liberalism’ – and the dynamics of conformity as outlined by Sunstein, and it all becomes much clearer.

One can see similar patterns of conformity, as critics have noted, in sections of the media. But anywhere where the pressure is to believe X or Y to show you are a "good" or "sound" person is at risk of these problems.

Friday, February 27, 2009

Belief and the text

Different religions have very different attitudes to Scripture: what it is and what its authority is. These differences have consequences.

Within Christianity there are two quite different attitudes to the authority of Scripture. One is that the Church (understood at the community of believers) creates Scripture. That is, Scripture is the particularly authoritative texts showing the interaction between inspired members of the Chosen People and God. Since the whole of Creation is God’s work—and Scripture is humanly mediated—then, in any contradiction between the facts of Creation and Scripture, the facts win.

This is essentially the Catholic/Orthodox view, most famously set out by St Augustine in his On Christian Doctrine. Conservative, Reform and Progressive Judaism take similar views.

Where the Jews understood the Chosen People to be them (and conversion, though possible, is very difficult), the Christian view is that anyone who accepts Jesus becomes one of the Chosen People since the life and death of Jesus constitute a New Covenant with God. Evangelicals talk of being “born again” (into the community of Christ) because they see the need to make a deliberate decision to adhere to this New Covenant, but this is a particular variation on a basic Christian belief.

The second view is that Scripture creates the Church. The authority of the texts is absolute and final. This is the view of various Protestant denominations and of rabbinical-cum-Orthodox Judaism. At its most complete form, it takes Scripture to be inerrant (never false or contradictory within itself or to the facts of the Created world) and infallible (never misleading on matters of faith).
It is fairly obvious which view will find science and its discoveries to be more problematic, if there is any conflict with Scripture. It is hard to find any religion that is more doctrinally open to the study of the natural world than Catholicism, given this willingness to give provable facts about the natural world precedence. (Given wildly disproportionate Jewish success in science, Judaism is an obvious nominee—even though many prominent Jewish scientists, such as Nobel laureates, have not been particularly religious—on the grounds that the presumptions of Jewish culture are derived from Judaism: though one can reasonably argue the disproportionate Jewish success in science is more a matter of selection processes in the Jewish community(pdf) interacting with the surrounding civilisation.)

The institutional structures of Catholicism have been a somewhat different matter, however. In post-Reformation Europe, printers and printing tended to move from Catholic Europe to Protestant Europe since the regulation of what printers printed tended to be much less intrusive than in Catholic Europe with its Index of Forbidden Books. (Indeed, Protestant printers would use the Index as a PR device: "banned in Catholic Europe" was a selling point; something which ironically had a somewhat libertine and heterodox effect on what was published in Protestant Europe.) Especially after the 1616 edict against the Copernican system and the 1633 edict against Galileo, there was a distinct chilling effect on scientific endeavour in Catholic Europe. Descartes, for example, stopped work on his cosmological system when he heard of the verdict against Galileo. It was much easier to get scientific journals and books published in Protestant Europe. Moreover, the Protestant notion of the value of lay knowledge of Scripture encouraged mass literacy. The notion of the paterfamilias being responsible for the religious instruction of family and employees encouraged a (albeit masculine) notion of self-government while giving a sense of dignity and self-worth to the Godly tradesman or man of business.

Doctrinally, Gallileo’s problem was not that he insisted on the truth of his discoveries, it is that he demanded Scripture be set aside in advance of sufficient evidence—he could not explain why, if the Earth goes around the Sun, the stars do not appear to move. (The answer—they do, but they are so unimaginably far away we cannot see them do so without quite advanced instruments—not yet being established and accepted.) To say that in any conflict between the facts of how the Created universe is and Scripture, the facts about the world win does not mean doing so capriciously. It was that the Church had the power to enforce its theological strictures according to the concerns of priests (who are typically much concerned about preserving their authority and their role as gatekeepers between the Godly "Us" and the Ungodly "Them") that led to the deadening effect.

But, even in the most literalist of Protestant Churches, Scripture is still humanely mediated. It is the work of divinely inspired people, but people nevertheless.

Sunni Islam, on the other hand, takes the Scripture-creates-the-community-of-believers view to the nth degree. The Qur’an is the direct, eternal, word of God. It is, in fact, outside the rest of Creation and has authority over it. That it has a single, original language (Arabic) providing a definitive version (unlike the polyglot Scriptures of Christianity) probably increases the effect.

The Caliph al-Ma’mun attempted to have it accepted that the Qur’an was a created object subject to re-interpretation (by him, naturally, as the Commander of the Faithful). Shia Islam, with its concept of the absolutely authoritative Iman, takes a somewhat similar view. Al-Ma’mun was using Mu'tazili thought to support his claim. He also used a somewhat Stalin-like approach to theological dispute (i.e. kill the people who disagree and thereby win the argument).

The contrary view—that the Qur’an was outside Creation—supported the authority of the community of Muslim scholars, the ulema, as the interpreters of the absolutely authoritative text. They had the numbers, so to speak, and won the argument.

So, in Sunni Islam, the hadith function more like Christian or Jewish Scripture. Divinely inspired but humanly mediated.

Consider the implication for science of establishing a text as absolutely authoritative. Creationism has a similar appeal in Islam as it does among evangelical Protestants, though—since in each case Creationism is based on the primacy of scriptural revelation—how Creationism manifests varies according to the details of the Scriptures deemed to be absolutely authoritative.

For and against Aristotle
One of the ironies of history is that Islam was crucial in transmitting Greek philosophy—particularly the work of Aristotle—to Latin Christendom, but Aristotle was far more influential in Latin Christendom than in Islam.

In the words of noted scholar Adelard of Bath (c.1080-c.1152):
I do not detract from the power of God, for all that exists does so from him and by means of His power. However, this is not to say that nature itself is chaotic, irrational, or made up of discrete elements. Therefore it is possible for men to achieve an understanding of this rational order inherent in nature, an understanding as complete as the extent to which human knowledge progresses.

Compare this very natural law view of the universe with the words of Adelard’s Islamic contemporary Muslim theologian Abū Ḥāmid Muḥammad ibn Muḥammad al-Ghazālī (1058-1111), perhaps the most important figure in Islam after the Prophet, in his deeply influential The Incoherence of the Philosophers:
… our opponent claims that the agent of the burning is the fire exclusively; this is a natural, not a voluntary agent, and cannot abstain from what is in its nature when it is brought into contact with a receptive substratum. This we deny, saying: The agent of the burning is God, through His creating the black in the cotton and the disconnexion of its parts, and it is God who made the cotton burn and made it ashes either through the intermediation of angels or without intermediation. For fire is a dead body which has no action, and what is the proof that it is the agent? Indeed, the philosophers have no other proof than the observation of the occurrence of the burning, when there is contact with fire, but observation proves only a simultaneity, not a causation, and, in reality, there is no other cause but God.

Not a conception of causality, the structure of the universe or the capacity for human knowledge that has been favourable to the development of science. (Philosophers might note the appearance of David Hume’s argument on causation centuries before Hume.)

The Aristotelianism of the Islamic thinker Abu al-Walid Muhammad ibn Ahmad ibn Rushd al-Qurtubi (‘Averroes’, 1126-1198) was far more influential in Latin Christendom, where it was resonant, than in Islam, where it was not. In Christendom, God as rational Creator of a structured universe (and so not an arbitrary tyrant) fitted in with deep institutional and cultural traditions: in Islam, al-Ghazali’s notion that to put any hint of any bounds on Allah impugned His honour and authority fitted in with the notions of honour and authority dominant among the honour-driven pastoralist tribalism and river-valley autocracies (themselves a product of prior pastoralist conquest) that, between them, dominated the Middle East.

It is worth nothing that, while Jews (at 14 million people 0.02% of the world’s population) have won 32% of Nobel Prizes (9 Peace, 44 Medicine, 16 Chemistry, 10 Literature, 51 Physics, 13 Economics for a total of 143), Muslims (at over 1 billion people about 20% of the world’s population) have won precisely 6 Nobel prizes (2 Peace, 1 Medicine, 1 Physics, 1 Chemistry, 1 Literature: people of Lebanese Christian background have also won 1 Medicine and 1 Chemistry Nobel prize).

While there is a range of reasons for this startling Muslim under-achievement, religious factors are clearly part of the explanation. If one has possession of the absolutely authoritative text and that belief is the basis of one’s religion and sense of identity (as it is particularly for Arabs, as the original people of the Prophet) then that discourages intellectual curiosity in general. As Pakistani physicist Pervez Amirali Hoodbhoy has observed:
With the exceptions of Iran and Turkey, translation rates are small. According to a 2002 United Nations report written by Arab intellectuals and released in Cairo, Egypt, "The entire Arab world translates about 330 books annually, one-fifth the number that Greece translates." The report adds that in the 1000 years since the reign of the caliph Maa'moun, the Arabs have translated as many books as Spain translates in just one year.

A naturally territorial religion
In the modern world, if Muslims cut off from more traditional Islam seek refuge in an Islamic identity, then that identity comes from an absolutely authoritative text. One, moreover, which is not the easiest thing to interpret. In the words of one professor of religion:
The Koran is a notoriously difficult text to understand in some ways. For one thing, it lacks almost any sense of context: Verses are addressed to mysterious Yous and Theys from an equally mysterious We. Moreover, the subject of the verses follow no discernible pattern, moving from questions of jurisprudence to theological and mythological concerns and back again, sometimes without any apparent pattern. For this reason, the Quran has inspired an extensive body of exegetical texts that purport to explain the original meaning of the text. Nevertheless, untangling the original meaning, or creating a distinct context in which to interpret the verses, is a nightmarish problem.

Islam does, however, have a logic. Islam is Submission to God, God is conceived as a sovereign, territorial legislator, so any good Muslim should spread Submission to God. Within him or herself, within his or her community, around the world. It is a very easy series of steps to jihadi ideology.

Christianity and Diaspora Judaism ultimately have an accidentalist view of political authority. They are religions of moral order (in the first case) and of moral and community order (in the second) that can accommodate to almost any political authority. This was the original Christian view—founded and spreading in the very ordered, law-bound Roman Empire, it was a religion of moral order since the Romans took care of social order. Rabbinical Judaism was forced to become a religion of moral and community order since Jews were never going to be a majority. Ismaili Islam has evolved in the same way for the same reason. Buddhism, as a religion of personal enlightenment, is very like Christianity in its political accidentalism. Christianity and Buddhism patently can both be the politicised ideologies and sources of political legitimacy. But such is part of the range of political authorities they can accommodate to, it is not inherent in either religion. Zionism being a secular ideology, Israel is a Jewish state rather than a Judaic state, however much political pressure from religious Jews have affected aspects of law and policy.

Islam, particularly Sunni Islam, is not in that position. If the Qur’an is the eternal, uncreated Word of God that sits outside and over Creation, it certainly has authority over what a bunch of infidels vote on. Particularly given it supports a legal, moral and social order that requires partial submitters (the People of the Book) to submit to the greater authority of full submitters (Muslims) and those who are not even partial submitters to do full submission or die. Indeed, it was a debated theological question whether Muslims should even continue to reside in a land that was not under Muslim rule.

It would be nice if all we in the West wanted from Muslim immigrants was for them to be good Muslims. Our difficulty is deeper: we want them to be compromising Muslims. Or, at least, discount the “Medinan” suras in favour of the “Meccan” ones thereby reversing the standard Islamic exegesis of later suras taking precedence over earlier ones.

The logic of belief is not necessarily the logic of believers (who have other considerations which can rise and fall in importance), but difficulties are much more likely when the underlying logic of belief is so unhelpful. So that relations between Muslims and non-Muslims in a society might depend significantly on what proportion of the society is Muslim is hardly implausible. Not merely because a larger Muslim population means even a small proportion attracted by the territorial logic of Islam becomes larger in number but—a compounding factor—the goal of territorial Islam becomes progressively more plausible. And it is particularly a bad idea to, in the name of “multiculturalism”, encourage Muslims in the West to identity themselves as Muslims as a social-political identity as this both elevates the authority of the text and decouples them from broader cultural identities.

A recent poll of British Muslims found that Muslims aged 16-24 tended to be more religious, and less likely to conform to more general patterns of British belief, than those over 55. The latter typically know why they came to the West and Britain in the first place. The former are more likely seek a distinguishing identity as Muslims, and look to the authoritative texts of Islam for that identity.

In its first 1,000 years of history, Islam aggressed against every culture it came up against according to fairly standard raid-attack-occupy patterns. That was not accidental and was most certainly not in contradiction to its founding texts. It stopped (to the extent it has: it is fair to say there is still within Islam something of a getting along with the neighbours problem) because Islam-the-civilisation came up against better predators. We may not be bound by that history, but it is utterly foolish to deny its reality.

The Closed Circle

One of the more brilliant and depressing books I have read is David Pryce-Jones’s The Closed Circle: An Interpretation of the Arabs. I had previously read and enjoyed his The War that Never Was: the Fall of the Soviet Empire 1985-1991 (also published as The Strange Death of the Soviet Union). In the latter book, Pryce-Jones observed, interviewed and listened. You heard the voices of those involved in a way that was very powerful. Particularly as he had a very good question: how come the fall of the Soviet Empire took place with so little violence?

The Closed Circle is similar in that the voices come across very clearly and he has a very good question: what has gone so grievously wrong with Arab societies? Why the despotism, the poverty, the failure to genuinely advance?

Having read a lot of Middle Eastern history over the years, The Closed Circle continually rang true. I am generally sceptical of cultural explanations – too often they are the resort of the analytically bereft. (If I read another piece of guff about chivalry, knighthood, feudalism, guilds et al as Germanic survivals, I may do something violent: haven’t such medievalists ever bothered reading a bit of Japanese history?) But in Pryce-Jones’ case, he grounds his explanation in living experience, incentives and belief structures in a way that is very effective.
Like many observers over the years, Pryce-Jones considers the oppression of women and the structure of family life as a basic factor in the Arab dilemma. He is very keen to get the reader to see things from an Arab, rather than a Euro-centric, perspective. To make one aware of the often profound differences in outlook:
Some of the lasting themes of Western literature – courtship, the gradual realisation of mutual love, the development of these intimate feelings, their trials and fulfilments – are, of course, excluded from Arab literature, as from Arab society, with its segregation of the sexes and arranged marriages (p.397).

Arab society works on a shame-honour dialectic, a world of power-challenges, power-careerism and money-favouring.
The Arab world has no institutions evolved by common consent for common purposes, under guarantee of law, and consequently there is nothing that can be agreed as the general good (p.402).

What in the West would be seen as reasonableness and pragmatic accommodation, in Arab society is weakness. The role of rulership is domination, to predate on the society: ideologies are just convenient masks, power-structure barrackings. The analysis in The Closed Circle is congruent with Salzman’s more recent Culture and Conflict in the Middle East (which I reviewed here and discussed some implications of Salzman’s analysis here).

It is also a society that feels itself to be under massive assault. Western empires may have receded territorially, but the products, power and (worst of all) shaming success of Western society is omnipresent, both deeply attractive and shamingly unendurable. That the Jews have managed to create a state and defeat the Arabs again and again is another shame unbearable. A shame only victory and blood can wipe away – hence a Saudi newspaper 1961 headline: Capture of Eichmann, who had the honour of killing five million Jews (p.194). But the Arab conversation about why Israel kept winning, why Israelis without oil have a higher living standard than Arabs with it, cannot even begin, because self-critique outside the shame-honour dialectic is too offensive to be permitted and too dangerous to be risked.

The standard mode of politics is conspiracy (all current Arab leaders came to power from conspiracies or as the fortunate heir of past conspiracies), and conspiratorism becomes the standard mode of analysis. Israel’s success is "obviously" a result of conspiracy. Dominance is the point of politics, so the desire for dominance is assumed to apply to all. Accusations that the West seeks to destroy Islam have been the stock-in-trade of analysis for well over a century.

Given the endless failures of Palestinian politics, reading Pryce-Jones’s discussion of the destructive barrenness of the shame-honour and power-challenge dialectics for Palestinians is particularly revealing. He shows how Haj Amin al-Husseini’s violent response to Zionism in the 1920s and 1930s was all about power within the Palestinian community and, in a continuing pattern of Palestinian politics, killed more Palestinians than Jews, and far more Palestinians than did the Jews. Husseini’s enthusiastic collaboration with Hitler (including cheerleading the Holocaust) was a convenient fit – he saw Hitler as a challenger to the British and fellow enemy of Jews. That Nazism also saw Arabs as untermenschen was unimportant or unnoticeable.

Pryce-Jones delineates the destruction the PLO unleashed in Southern Lebanon after being violently expelled from Jordan (pp 292ff), a social desolation it has since proceeded to replicate in the West Bank and Gaza (Hamas has since taken over the role in the latter). The utter bankruptcy of the policy of supporting Arafat (Haj Husseini’s nephew: Arafat was still alive when The Closed Circle was published) and the PLO in its corruption, oppression and murders (including of fellow Palestinians) is revealed in all its horror: but hey, there is always that old standby of blame the Jews.

The book was originally published in 1989. There have been some hopeful recent straws in the wind since, notably the Arab-authored UN report (though it was perhaps a sign that the cover of the UN was required) and even the cancellation of an Arab League summit because the Tunisian hosts and (strangely) the Egyptians thought human rights and democracy were worth seriously talking about. Both the Moroccan and Jordanian monarchies have been moving to a more parliamentary form of politics. While the traditional monarchies of the Gulf (which does not include Saudi Arabia, a rather different beast) are, by any standard, successful societies.

Still, much of the insurgency in Iraq seems to have been a pretty standard power-challenge, just as Osama’s strangely subdued videotape compared to previous histrionics looked like a response to the US power-holder exerting its power. Yet, there are also signs that many Iraqis (admittedly more obviously and quickly the Kurds and the Shia—the perennial victims of power-holding oppression—rather than the Sunni former power-holders, though the experience of al-Qaeda up close and personal seems to have shifted opinion among the Sunnis as well) are keen to try something new, even if it comes via the infidels. We shall see.

Thursday, February 26, 2009

About money

FURTHER UPDATE I now think this post is embarrassingly bad. But, in its own way, it is indicative of how someone with an economics degree and considerable historical knowledge can also be very muddled on money. Which, I now realise, is a very common state among even highly educated people.

(This blog is called ‘thinking out aloud”. So here is some points about what I understand about the economics of money, and related matters, from my reading over the years. UPDATE This post was written before I started reading Scott Sumner's excellent monetary economics blog which has improved my understanding considerably.)

Money is a medium of exchange. Which is a fancy phrase meaning we use it to buy things. Barter is exchange without money, and is a clumsy and awkward way of trading, since both parties have to have some specific thing the other wants. Money can be swapped for any good or service offered for sale, so provides a generic trade item. Thereby making trade a lot easier. Money is surely the greatest single way to reduce transaction costs. (Making transactions easier by moving to a common, reliable currency has regularly produced economic booms.)

As a medium of exchange (i.e. a generic trade item), money flows from person to person. Economists talk of the velocity of money, which is an odd concept. Wikipedia™ defines it as:
the average frequency with which a unit of money is spent in a specific period of time.
Like many terms in economics, it has been taken from the physical sciences, specifically physics. Wikipedia™ defines velocity in physics as:
the rate of change of position.
In the case of physics, there is a thing that moves. There are also things moving in the monetary economics use of ‘velocity’, but with some striking differences. To talk of the velocity of money is much more like talking about the velocity of water rather than of a solid object, such as a bullet. Money flows, and flows in varying amounts, from transaction to transaction. To talk of a “unit” of money makes it seem more like a solid object but at the expense of distracting attention away from the way money flows in a series of joinings and partings rather than ricochets or bounces.

But even water is a distracting metaphor, because those transactions are wilful acts. People are choosing to buy or not. The size and number of transactions in a given time are the result of what people choose to do. If people choose to make more and/or bigger transactions, the velocity of money increases. If they choose to make fewer and/or smaller transactions, the velocity of money decreases. The transacting drives the moving: that is, the demand for money as the generic trade item is driving the moving.
Since it is the transacting which drives the demand for money, the issue is the scale of transactions (the number and size): or at least the scale of monetary transactions. Self-sufficiency does not count.

Aside: self-sufficiency also does not count for measuring GDP. Which, in terms of human productive activity to satisfy wants is a bit odd, but self-sufficiency is notoriously hard to measure. (Though how easy measuring human productive activity to satisfy wants which does involve money really is, is a controversy in itself.) Besides, the point of self-sufficiency is that it involves minimal productive interaction with others, and it is interaction with others we are generally interested in.

Back to money and scale of transactions. It might appear that increasing the supply of money would increase the velocity of money. More units mean more activity. Or does it? Surely it would just mean more money per transaction. Any given unit of money would circulate just as often.

Unless, of course, the increased supply made people more likely to engage in transactions. Which makes sense, up to a point. If people think the value of money as the generic trade item is falling, it is better spent than hung on to. Conversely, decreasing supply of money would make people less likely to engage in transactions, since they can get more for a given amount of money the longer they wait. Hence the expansionary effects (encouraging more transactions) of inflation and the contractionary effects (discouraging transactions) of deflation.

But neither effect is the whole story. In the deflationary circumstance, there are some things we just have to buy. Or want sufficiently that we cannot be bothered waiting. That is, the supply of money is not the only issue. There remains the matter of the demand for it. Money is a supply and demand phenomenon. As for limits in the inflationary case, money is just a medium of exchange: an extremely useful medium of exchange, but still a medium of exchange. We cannot buy what has not been offered for exchange. Money represents claims on goods and services: but we cannot spend what we do not have.

It may be possible to (temporarily) fool people about how much income they have. Any change in the value of money may have some time lag before people realise what is happening. But—once they have adjusted to such change—the spurious income effect will dissipate.

Playing games with money supply to “fool” people is not a long-term winning game. Uncertainty about the future value pf money discourages longer-term transactions. “Bazaar” transactions (immediate swaps) are encouraged, deferred transactions (do or buy now, be paid or get later: creating capital is a deferred transaction) are discouraged. Since deferred transactions (specifically those which create capital or buy assets) are the basis of future income, driving people to the economy of the bazaar is not a good long-term policy. (Though general uncertainty in property rights is likely much more of a problem for poor countries.)

It is easy to run a bazaar economy. Any poor country can, and does, do that (except complete disaster areas such as North Korea, which does not even have a proper bazaar economy). It is deferred income transactions (most important, the ones that produce capital) that are the tricky ones: it is how easy, effective and on what scale such deferred income transactions occur that divides rich countries from poor ones. Citizens in rich countries have lots of capital (physical, human, social) backing their income, that is what makes them rich. People in poor countries do not, that is what makes them poor. But such capital is not “manna from heaven”, it is all about patterns of transactions. As the perennial failures of foreign aid have so amply, and expensively, demonstrated.

Unfortunately, it is very tempting to officials to “pump prime” the economy by expanding the money supply in excess of demand for it to thereby gain kudos for the expansionary effects. It is even easier to pay for activity by and through officials by printing money in excess of the demand for it. Such overproduction of money is a form of tax—a tax on the holding of money. But one that does not require an intrusive bureaucracy, or much of a bureaucracy at all. Nor does it register with those paying it as a tax: a very tempting combination of “virtues” to some power-holders. Zimbabwe has been giving us a prime example of hyperinflation from such use of the “inflation tax”. (Even at Zimbabwe’s stratospheric rate of inflation, people still use the local currency as a medium of exchange, indicating just how preferable even a profoundly degraded currency is to barter.) One solution for a political class that cannot be trusted with the national currency is to “dollarize”, to use a currency they do not control: as Ecuador has done, for example.

Nor is playing games with prices and wages to “maintain” income in the face of a serious slump a winning game. Any price (or wage) is so much money for some quantity of something. If the economy is contracting, but wages and prices are held constant, then each individual transaction involves the same amount of money, but there will be fewer of them, since the blocking of price adjustments forces all change (in this case contraction) to be quantity adjustments (so the fall in production and employment will be, in quantity terms, greater). President Hoover’s notion of convincing employers not to cut wages or prices after the 1929 asset-price-crash was precisely the wrong policy. Conversely, in an expansion, if money wages are held constant then all adjustment (in this case expansion) will be quantity adjustments, so employment growth will be faster for a given level of demand of goods and services. (Whether overall demand would rise faster if wages also rose is another question.)

Hoover’s wage-and-price rigidity policy, plus the Smoot-Hawley tariffs—which raised the price of foreign goods in the American market, leading other countries to do the same to American goods in their markets, thereby massively contracting international trade as prices rose and quantities plummeted—and the US Federal Reserve pulling money out of a financial system in collapse, turned an asset-price crash recession into The Great Depression.

As former colleague with a PhD in monetary economics emailed to me:
money is probably the most poorly understood aspect of economics, not least because most modern texts fail to discuss its most important property: it has no market of its own, so excess demand/supply needs to be cleared through other markets (goods, services, assets). This is what makes money potentially so potent in destabilising an economy.
Money can be earned from current efforts or assets or it can come from a loan—money gained now on the basis of paying it back with interest later. Interest being the payment for the foregoing other use of the money, plus a component for expectations about how the value of money as the generic trade item will change plus a component for the assessed risk of not being repaid.

Lots of businesses rely on lines of credit to operate. If credit dries up, then those businesses may reduce activity or fold. Which will in turn further reduce the number of transactions people engage in (also known as reducing economic activity: the US Federal Reserve reducing the money available to the financial system after the 1929 asset-price-crash was spectacularly bad policy). Governments spending money to stimulate the economy (if they do not just print money) is borrowing money against future income to spend now: a form of credit against future taxpaying. The intended effect in encouraging economic activity in part presumes that the government spending will produce more economic activity (transactions) than what the buyers of government bonds would have otherwise done with their money. If the bond-selling brings in money that would have been otherwise spent in another economy, this is a fairly safe bet. As for domestic buyers of bonds, that is why there are controversies about crowding out effects.

As the manifold failures of public policy in the 1929-32 period indicated, one of the greater foolishnesses is to see markets as naturally chaotic and government policy as naturally productive of order. While markets obviously can display sudden, dramatic shifts, to see them as naturally or inherently chaotic is to miss the phenomenon of spontaneous order. Conversely, while certain sorts of laws can help make markets more orderly (it seems Australian prudential financial regulation works rather better than the US variety, perhaps because we were more pragmatic and less ideological about it)—particularly if the regulations have the effect of reducing transaction costs—official discretions are great sources of social chaos. There are few systems more chaotic in their patterns than command economies, with their perennial shortages and sudden gluts. The housing price bubbles of the “Zoned Zone” occurred because official control over land use suppressed the ability to build houses in response to increased demand, driving prices up (or, to put it another way, restricting the quantity response increases the price response), thereby creating a “one-way” bet in those housing markets and turning houses into apparently sure-fire inflation-beating assets. Adding the demand for inflation-beating assets to the demand for houses further inflated demand for such housing, creating asset-bubbles. Since people can (and have) move from the “Zoned Zone” to “Flatland” (where house construction could respond directly to supply)—reducing demand for housing-as-such—the value of such houses as inflation-beating-assets collapsed, leading to collapses in prices known as the “bursting” of the housing bubble.

Official discretions are sources of chaos because officials lack sufficient information, have poor feedbacks, wield coercive power which itself suppresses information and creates particular demands (such as home-owning voters wanting their house values to increase) and can be subject to all sorts of strange fads and beliefs. (Of course, if you think that people like you “know” the truth, the whole truth and nothing but the truth, the possibility of serious error may not even strike you: that is only what happens to other folk who do not know The Truth.) President Hoover’s policy of wage and price rigidity was based on “new economic thinking” that had a fetish about the magic of demand and deprecated the information role of prices (and wages): indeed, it actively sabotaged their information role. It turned out to be very bad economic thinking.

So, to conclude, money is something we use in interactions with others. Being a generic trade item, it is subject to demand and supply. There can be economic interactions without money: production, barter, tribute paying, gift giving, theft. What money does is make exchanges (two-sided or one-sided) much, much easier. If we want something we do not have to find a specific thing the seller wants in order to purchase, we just offer them money, which they can then use themselves. It is thus a medium of exchange and a store of value: the latter being a consequence of the former since the store of value effect is just future expectations about its value as a generic trade item. (Similarly for its role as a unit of account.) Indeed, current value and expected future value are intimately connected. If money’s future value is expected to decline, then that creates an incentive to spend now. If its future value is expected to rise, that creates an incentive not to spend now. (In both cases, the more so, the more so.) But its uses are always wilful acts by the holders of money. They are purposive acts of exchange that both respond to the supply of money and create the demand for it.

So, the notion of the velocity of money is an odd one: and has a certain naturally misleading quality to it.

ADDENDA: This post makes it clear that more than one form of money can be circulating, so there may be several "generic trade items" circulating but one is preferred as a unit of account. Indeed, the agreed unit of account may not match any actually circulating currency, but be an agreed derivation from one or more of them.

In Denial

In Denial: Historians, Communism and Espionage by historians John Earl Haynes and Harvey Klehr is a prolonged examination of some of the more ripe pathologies of contemporary academe. The concern of the authors is with the ignoring, distorting, and denial of clear evidence by scions of American historical academe about the history of the Communist Party of the USA, the Soviet regime and connections between the two.

What they reveal are strong patterns of academics being driven, not by concern for the evidence, but by ideology in defiance of the evidence. Indeed, the attempt to establish an orthodoxy by various means; including using the word ‘scholarship’ to mean ‘politically acceptable’, labelling to delegitimise and marginalise dissent, use of positions as gatekeepers to exclude dissenting views from mainstream journals (pp98ff).

Sometimes, what they expose has a certain wry amusement to it. For example, the way the first wave of revisionists stressed the insignificance of the CPUSA to discredit liberal anti-communism and the next wave then stressed the positive role of the CPUSA to discredit conservative anti-communism, despite the inconsistency of the two ‘party lines’ (pp27ff).
Then there is the way that CIA or other ‘conservative’ funding discredits those it touches, but Soviet funding does not (pp66ff). Or that writing about winning the Cold War is abused as ‘triumphalist’ – as the authors point out, no-one talks about writing about winning World War Two as ‘triumphalist’ (pp62ff). The focus on McCarthyism, to the extent that a federally-funded guide for American history teachers mentioned McCarthy 20 times but Edison and the Wright brothers not at all (p.36) (if McCarthy hadn’t existed, it clearly would have been necessary to invent him). The epitome, though, is the way the opening of the Soviet archives – a vast treasure trove of evidence that one would think historians would be delighted to have access to – has so often been treated with fear and loathing (pp59ff).

That the effect of the archives has been to confirm the, much derided, ‘traditionalist’ view (the Soviet regime was a murderous tyranny, Stalin did give orders for mass executions, the regime did massively subsidise the CPUSA, the CPUSA was subservient to Moscow, it was a conduit for espionage, the Rosenbergs and Hiss, and others, were guilty) both explains the hostility and demonstrates how profoundly hostile to genuine scholarship so many prominent academics in this field are. (It can be surprisingly easy to forget quite how bad such pathologies can get.)

Much of it, however, is far from amusing. Such as the perversion of entries of the American National Biography and The Encyclopedia of the American Left to distort standard references for ideological purposes in ways reminiscent of Soviet academe (pp104ff), what amounts to the Left-equivalent of Holocaust denial over the victims of Leninism (pp11ff), the silence over Stalin’s killing of somewhere between 500 and 1000 American communists and radicals (pp115ff) – Stalin was a far greater threat to American communists than all the anti-communists of the US combined. Then again, Stalinism was simply the extension of Lenin’s modes of political operation to fellow-Leninists.

The authors expose a persistent pattern of distortion, denial of evidence, fabrication, foot-shifting and generally unscholarly conduct by academics – full professors from major universities, not academic bit-players. The purpose is clearly to keep hold a sense of being part of a moral and intellecual elite (if those dreadful anti-communists were right, it blows their sense of status) but also keep hold of a myth of a glorious future that they find a much better buttress to their sense of self than defending a messy reality (even though a much more vile Soviet reality gets any number of free passes).

These are examples of a profoundly corrupt moral and intellectual perspective at the heart of contemporary academe. Equivalent behaviour about Nazi Germany would elicit a storm of denunciation that would drive the perpetrators from academic life. Modern academe tolerates the betrayal of scholarship in the service of apologism for mass murder and tyranny – provided, it is ‘well-intentioned’ mass murder and tyranny.

The problem, in essence, is a simple one. What is the key quality control device in academe? Comment by fellow academics. But what happens if academics are offered markers to establish their status as members of an intellectual and moral elite coupled with penalties (such as abuse, denial of publishing access and jobs) if they do not accord with such markers? The potential for corruption of intellectual activity – either though active or passive connivance – is clearly considerable. Indeed, one will get the academic equivalent of Gresham’s law (bad currency driving out good), which works when people are impelled to accept face value.

In Denial provides a warning example of how that can pervert scholarly endeavour.

Wednesday, February 25, 2009

Using Marx’s analysis against Marxist critique

Marxian economic analysis and Marxist critique of capitalism—the value judgments Marx's followers have typically made about capitalists and capitalist enterprises—do not sit together as well as is often thought.

Marx's labour theory of value says value is created by socially necessary abstract labour time. Any particular worker working on any particular thing may, in fact, not successfully create value. But, if something has value, that value is equal to the socially necessary abstract labour time embodied in that thing.

Thus labour as-it-is-in-the-world (“crude labour”) is distinct from labour-that-creates-value. A distinction necessary to give the labour theory of value any chance of working, since it is perfectly obvious that labour can be misapplied to varying degrees, that not everything with exchange value is the product of labour, not everything produced by labour has value and the exchange value of something can shift dramatically after it has been produced

The problem with this distinction between “crude” labour and socially necessary abstract labour time (apart from difficulties with it as a theory of value) is that it destroys the moral judgement that is derived from the labour theory of value—that is, that surplus value is exploitative because only workers create value.

If crude labour =/= value, then we do not know, until it is validated by exchange, whether any particular labour effort has created value or not (and how much). So, clearly there is a role in organising labour to attempt to create value. There is also the matter of covering risks involved in producing value. This not a matter of risk per se – any form of income in the production process involves risk: hence, for example, the risk premium for particular jobs. It is a matter of providing a guarantee for income variability from the uncertainty about whether exchange-value will be created or not sufficient to cover the costs of production.

Hence profit is not exploitation, it is the return on a necessary economic role given that output of crude labour =/= value.

Moreover, wider returns to capital are also justified, since the level of capital determines how much socially necessary abstract labour time is needed to create value. The more effectively applied the capital, the more value is created and the higher the return to labour.

So, while the analytical form of the labour theory of value separates the socially necessary abstract labour time that creates value from “crude labour”, it does so at the cost of demolishing the basis for the normative conclusions of Marxism embodied in the theory of surplus value-as-exploitation.

Economics and Its Enemies

William Coleman’s Economics and Its Enemies: Two Centuries of Anti-Economics is an amazingly comprehensive intellectual history of over two centuries of anti-economics. (It is online at Questia.)

Coleman is careful to define what he means, both in terms of what is being opposed in anti-economics and in what constitutes anti-economics. The target of anti-economics is what he calls, following Leon Walras, le Grande Tradition of economics – a set of ideas (not people) which have had influence within the tradition (not merely the currently accepted ones) and which are not an ideology or doctrinal conformity because
it includes debates without any resolution, and inquiries without conclusion (p.9).

What constitutes anti-economics is criticism, not of details, but that attempts to repudiate key constituents of the Tradition:
Economic theories, anti-economics holds, are valueless either to seekers of knowledge, or improvers of society (p.12)

So, anti-economics covers objections to the doctrine, practice and subject (matter) of economics.
Coleman divides Right and Left according to two axis (p.47): Right
defined as attraction to ‘order’. Order amounts, in the first place, to calm and stability, then shades off into structure and pattern, which shades off finally into inequality and hierarchy

and Left
defined as an aversion to order; and amounts at bottom to attraction to motion, change, and turbulence, that shades into fluidity and formlessness which shades finally into indistinctiveness and therefore equality.

The second axis is liberalism to anti-liberalism:
Liberalism is defined as an attraction to the prerogatives of the individual, freedom and ‘plurality’. The anti-liberal, by contrast, is attracted to the prerogative of the collective, ‘unity’.

So we have (p.47) the liberal Right attracted to order and plurality (e.g. F. A. Hayek), the anti-liberal Right attracted to order and unity (e.g. Auguste Comte), the liberal Left to turbulence and plurality (e.g. John Stuart Mill) and the anti-liberal Left to turbulence and unity (e.g. Karl Marx).

The anti-liberal thinkers constantly lead to analytical dead-ends. The problem being that attempts to base analytical methodology on collective entities (nation, class, culture, etc) all fail, often fairly quickly. We may be individuals embedded into social contexts of various forms, but we remain individuals. The more one probes analytically, the more we see that people do not act as if one single collectivity is always dominant, but belong to many different collectivities whose salience varies from context to context (and from person to person even in the same context): collectivities, moreover, which are subject to change, division, exit and entry.

Methodological individualism has to be the base of any successful social science. This certainly does not preclude interest in social collectivities. But successful analysis must be grounded in the reality of humans as individual agents.

The same ideas come up again and again in anti-economics. The criticisms also come in reversing pairs. Thus, there are those who damned political economy (as it was originally known) as being subversive of established order (‘The Wretched Procurers of Sedition’ as Chapter 2 is entitled), blaming it and its adherents particularly for the French Revolution. Then there are those who have damned economics for upholding the social order (being The ‘Apostles of the Rich’ as Chapter 3 is entitled).

Having dealt with the pairing over economics and social order, Coleman moves on to those who attacked the universalism of economics in the name of the particularities of nation (The Dream of Nationhood, Chapter 4), then to the murderous persecution of economists by Stalin (Chapter 5) in the name of a rival universal analysis. Nazi Germany was indifferent to economics and German economists tended to be less than enamoured of the regime (p.99ff). But Marxism had pretensions to being an economic science while Nazism was more concerned with other things.

Part I having defined the subject matter and Part II having dealt with anti-economics based on political ideologies, Part III looks at anti-economics based on broader concerns, starting with irrationalist attacks on economics (Chapter 6) then moralistic attacks on economics (Chapter 7). Coleman identifies values that are embedded in the Tradition – reason, human well-being and freedom (understood as choice) (p.133). This value triad provides the basis for conflict – either with traditions based on fewer values (e.g. libertarianism) or different values or which flatly deny those values (p.134). It also leads to a distinct tendency to be opposed to coercion and cruelty – political economists, almost without exception, were opposed to slavery while slavery apologists tended to be anti-economists (pp 155ff).

Coleman then moves on to attacks on economics as encouraging selfishness (Chapter 8) and attacks that take offence at the (alleged) selfishness of humanity (Chapter 9), environmentalism being an obvious, though far from only, manifestation of the latter critique. Coleman notes that environmentalism has tended to grow as Christianity has lost status (pp 169ff).

In line with the “mirroring” nature of anti-economics, having examined attacks based on economics as being beholden to wealth creation, Chapter 10 (Rival Gospels of Wealth) looks at anti-economics based on economics as not being beholden enough (or correctly) to wealth creation. Including, I am glad to see, engineers’ tendency to become attached to energy fetishism (pp 181ff).

In Part IV, Coleman examines anti-economics based on a sense of harm done to oneself by economics. That is, the anti-economics of interest (Chapter 11). Coleman argues that the anti-economics of interest and ‘ideal’ anti-economics feed off each other (p.191).

He then mounts an elegant argument for the unpopularity of economically liberal reform on the grounds that everyone has an interest for which free trade is not optimal:
the free market is never the optimal policy regimen for any interest. What every interest cherishes is preference and privilege, not the free market’s cold equality before the law. There is no vested interest to support the free market. Whatever friends the free market has are false friends, and its true enemies are all-embracing. The vocation of the free market advocate is a universally unpopular one (p.195).

A thesis with a lot of evidence to back it up.

Thus labour markets tend to be highly regulated because such a high percentage of the adult citizenry has – directly or indirectly – an interest in regulation that protects job incumbents. Similarly with housing markets and housing incumbents.

In Chapter 12, Coleman examines anti-economics that attacks economics and economists as evidencing an unwarranted authority and definiteness. In Chapter 13, he carefully looks at the conjunction between anti-economics and anti-Semitism, noting it used to be quite strong – since various forms of anti-economics attacked the market attachment, universalism, self-interest, rationalism and materialism of economics: all features frequently associated with Jews and Jewishness (p.213). But the conjunction collapsed with the collapse of the respectability of anti-Semitism.

In the final Chapter (The Not-so-Puzzlin Failure of Anti-Economics) he considers how little effect the barrages of anti-economics has had. He notes the repeated failures to accurately represent economics, to adequately examine economics, to adequately evaluate it (pp 220ff). This he subscribes to ignorance, to psychological inadequacies (an amazing number of prominent anti-economists had physical or mental health problems) and being grounded, not in perplexity, but frustration, affront and humiliation (p.230).

Coleman concludes by examining how criticism is properly done and how the Tradition has responded to such. His point that economics integrates and homogenises, in stark contrast with other social sciences (specifically psychology and anthropology, though much the same point can be made about sociology), is a very good one (p.232ff).

Thus the flaws of Marxism were noted by economists very early on. With the consequence that Marxism became very little about the study of economics, instead fracturing into many different tendencies and conjunctions (pp 233ff).

I found Economics and Its Enemies to be an enlightening and stimulating read. It should make the various species and manifestations of anti-economics much easier to spot, categorise and demolish.

Tuesday, February 24, 2009

What is ownership?

The owner of the firm is the person who receives the profit, or carries the loss, a firm makes. That is, the owner is the receiver of the residuum, the net income of the firm after all expenses have been paid for. So, any explanation of what profit is has to be also an explanation of what loss is and any explanation of ownership has to explain why the owner is the receiver of said residuum, the net income of the firm.

There are various things profit (or loss) is not.

It is not simply return to risk. All incomes have an element of return to risk. Interest on loans, most obviously, but also rents of land, various forms of wages. One reason why males earn more than females on average even for full-time work is males tend to do more dangerous jobs (hence their markedly higher rate of death and serious injury at work) and so earn a risk premium.

It is not simply return to capital. Providing capital to a firm does not make one an owner. Bondholders are not shareholders. There are other forms of return to capital (most obviously interest on loans) than ownership.

It is not return to coordination. That is what managers (and other employees) do. Many owners are also managers of their business but many more are not. Indeed, it is notorious in modern corporate governance that there is a principal-agent problem in hiring, firing and paying managers. But that extends all the way down a corporation. Corporations typically pay better than small firms because, in a large corporation, it is hard (or even impossible) to ascertain the connection of the efforts of any particular employee to net income. So—given corporations can spread risk more easily than small firms—they pay a premium to employees to encourage their employees to self-police in order to keep those extra benefits. In effect, this premium is a hostage for good behaviour. Of course, how well this “hostage-premium” is managed will vary from corporation to corporation or part thereof.

Returning to ownership and net income, let us consider that “bearing the loss” part again. What sort of person covers losses? A guarantor.
A firm has various expenses in production, distribution and sales. It hopes that its revenue will more than cover its expenses. But, if they do not, someone has to be the guarantor of that income shortfall. That is the owner. So, as Yoram Barzel explains in his Economic Analysis of Property Rights, the owner of a firm is the guarantor of such income variability: hence the boundaries of the firm are determined by the scope of the guarantee by the equity capital. (This post is a working through of Barzel’s analysis, as I understand it.)

Why is said ownership purchased? Because the owner is the guarantor of income variability and such a guarantee requires capital. The capital put up is the size of the guarantee. So the share of the ownership is the share of the guarantee purchased.

In the case of "sweat equity", one is foregoing full return on one’s labour in order to build up the value of the firm. But that value is then the basis for the guarantee against income variability.

The owner, as the guarantor against income variability, thus receives the residuum – the variable net income of the firm: the profit or loss made by the firm after all other claimants on the firm’s income have been paid. Hence the residuum being the return to ownership, given not all capital is owner-capital. Profit is what one gets for covering the risk of loss.*

Folk obviously prefer to get as much profit as possible for as little risk of loss as possible. Hence any belief that there is a "one-way bet" in asset values—for example, because officials restrict the use of land for housing, a restricting of quantity response to demand leading to a bigger price response due to regulation increasing scarcity—naturally leads to asset bubbles by adding the demand for an inflation-beating asset to the demand for the normal use of the asset.

If profit is what one gets for covering the risk of loss, then profit comes from uncertainty overarching risk. From providing an income guarantee to the process of discovering (or not) which bringings-together of land, labour and capital produce more value than they consume.

Since the owner is providing the final guarantee, they are also the final authority in the company. Thereby connecting guarantee with control. To provide a guarantee without any control is clearly a highly risky action. (Ask US taxpayers after the Savings & Loans and Freddie Mac/Fannie Mae debacles where they did not even have the indirect control that government ownership offers.) Hence companies provide dividends, offer capital growth—forms of return on the guarantee—and give shareholders the right to elect the directors and the ability to exit as owners—forms of control over what is being guaranteed. It is in this—somewhat removed or indirect—sense that the share market is the market for managerial control.

Conversely, having control without owning the capital at stake provides poor incentives to protect the value of the capital or to use it efficiently. The notorious tendency of government-owned enterprises towards declining productivity can largely be traced to this. (The rest of said tendency comes from the conflict of interest in the same authority being regulator and producer, a conflict that is particularly intense if not ameliorated by democratic accountability—hence the appalling environmental protection record of the command economies: the rulers-as-regulators having somewhat limited interest in restricting their own behaviour as producers.**)

So, purchasing ownership is purchasing that final authority (whether a tiny bit, a more substantial bit or all of it). And matching final authority with being guarantor means aligning final say with final risk with final return. Hence that authority having the final responsibility for who ultimately coordinates. Hence ownership is purchased and receiver of the net income of the firm.

* Return to scarcity—particularly scarcity due to regulatory privilege (statutory monopolies and other barriers to entry) or regulatory barriers (smuggling, black markets)—can be earned as supernormal profit. Not that either is without risks.

** Even if there is democratic accountability (an instrument of highly erratic and variable effectiveness), that does not abolish the problem. The persistent problems of school performance are a natural outcome of the main regulator being the producer. Everyone can see it would be obviously a stupid way to run a sporting code to have the most powerful club also appoint the umpires and set the rules. That is, however, apparently a fine way to educate children: apparently on the grounds that education ministers and bureaucrats are magically immune to the obvious conflict of interest. Democratic accountability has value, but it is not so effective that it wipes out the conflict of interest involved in having a producer (in the case of schools, the biggest producer, so with the most to be embarrassed/constrained by) set and enforce the rules.

The Lost Literature of Socialism

Like most of the sins of materialist politics, killing people by category had religious precursors. The Islamic injunction that polytheists and animists had to become Muslim or die and Christian endorsement of extermination of "sodomites", not to mention of "witches" and the odd heretic, obviously well pre-date the secular versions of killing by category.

Nevertheless, genocide in secular politics—including extermination of people by race, ethnic or class category—is a socialist idea whose only significant public advocates from the 1840s to the 1940s all called themselves socialists. So George Watson tells us in his slim but revealing volume The Lost Literature of Socialism. It starts with Marx and Engels writing in the Neue Rheinsiche Zeitung in January 1849:
The next world war will result in the disappearance from the face of the earth not only of reactionary classes and dynasties, but also of entire reactionary peoples. And that, too, is a step forward,

includes H. G. Wells concluding his 1902 Anticipations with a programme of socialist genocide, George Bernard Shaw welcoming the Soviet adoption of the exterminatory principle in a 1933 preface to On the Rocks, a principle thoroughly endorsed by Lenin in his 1908 essay Lessons of the Commune:
there are times when the interests of the proletariat call for ruthless extermination of its enemies in open armed clashes.

Plus less public support—Jack London supporting it in private correspondence, Virginia Woolf complaining in her diary on 9 January 1915 about meeting a distressing line of imbeciles "It was perfectly horrible. They should certainly be killed", Beatrice Webb complaining at a 1932 tea party about the "very bad stage management" which allowed British visitors to the Ukraine to see cattle-trucks of starving “enemies of the state”
Ridiculous to let you see them … The English are always so sentimental. You cannot make an omelette without breaking eggs.

Shaw writing to Webb on 6 February 1938 that it was perfectly reasonable for the state to weed out “undesirable” strains:
We ought to tackle the Jewish question by admitting the right of States to make eugenic experiments by weeding out any strains they think undesirable, but insisting they do so humanely as they can afford to, and not to shock civilization by such misdemeanours as the expulsion and robbery of Einstein.

All culminating in Lenin and Stalin putting theory into practice, as did that most embarrassing of all socialists, Adolf Hitler.

Of course, it was far from true that all socialists endorsed genocide (Orwell being one of very many examples of very much not doing so). But if all endorsers of genocide for a century called themselves socialists, and if socialists introduced the notion as a systematic program into secular political thought, then something is going on.
But the socialist provenance of genocide has gone down the memory hole. As has quite a lot of ideas from socialism’s history, a forgetting that is also the subject of George Watson’s The Lost Literature of Socialism. A volume which deserved somewhat better of its publisher—there are missing spaces between words, one sudden lurch into a different typeface and a few editing errors (Marx and Engels did not publish in the Neue Rheinsiche Zeitung of 1949).

Despite the failings of the publisher, Watson’s book is highly readable. It is a book about (and against) forgetting (Watson quotes Milan Kundera’s dictum that
the struggle of man against power is the struggle of memory against forgetting

on the first page of the first chapter). About how ideas, critiques and arguments can flourish and then be forgotten: sometimes to be re-invented and sometimes to remain in obscurity.

Something else that has gone down the memory hole is the association of socialism with imperialism. All the above were proponents of European imperialism and, from Jack London on, of specifically white imperialism. Again, practice followed theory. Socialist states have been systematically far more militarised than capitalist ones, including engaging in old-fashioned territorial imperialism (the Soviet occupations of Georgia, the Baltic States, parts of Poland, Romania and Prussia; imposition of controlled regimes under occupation on Mongolia, Eastern Europe and Afghanistan; China’s occupation of Tibet). Lenin may have denounced “capitalist” imperialism, but he was an ardent practitioner of the “proletarian” variety.

Then there was National Socialist imperialism. Nazism was a socialist ideology though Nazi Germany was no more a socialist state than Sweden is: in both societies, productive capital being mostly privately owned and exchangeable in markets. (So, if Sweden is a socialist state, then so was Nazi Germany; if Nazi Germany was a capitalist state, then so is Sweden.)

But Watson concentrates on socialist writings far more than their practical realisations (although such clearly gives grim context to said writings). His preface explains that the book is about writings by socialists and about socialism, it is not a history of socialism. In the first chapter, he notes that socialism starts in about the 1840s but has late C18th precursors, and that there is a tendency to have a somewhat reverent attitude to its founding fathers. So much so, that how much perspectives have changed has been greatly obscured.

His first chapter cites John Millar’s forgotten 1771 book The Origin of the Distinction of Ranks, for
there are still social historians who take it for granted, for example, that comprehensive theories of social difference began with Marx, although Marx himself did not think so (p.8)

to examine what was a commonplace at one time becomes forgotten or obscured later. Millar’s book is the first theoretical book on social difference in all Europe and has entirely passed out of mind.

But Watson shows that people often became socialists prior to reading any of the key texts. Indeed, Louis Althusser managed to make an academic and intellectual career as an interpreter of Marx without bothering to read much of Marx at all: and not a word of Aristotle or Kant, despite lecturing on both (p.13).

Watson brings to light a series of prescient critiques of socialism published in the C19th and early C20th that predicted (accurately) the tyrannical tendency inherent in the socialist project. So Max Hirsch, a radical and disciple of Henry George, published in Australia in 1901 his Democracy versus Socialism warning of socialism creating an “all-pervading despotism” under the rule of a new managerial class (as, of course, happened in all the Leninist states). But Hirsch was also confident that his warnings would not be heeded; because socialists were deaf, confident in their conviction that social reform could only mean socialism (p.14).

Watson delineates false convictions about socialism that have become orthodoxy—that socialism is always left-wing and can never be conservative; that it was always about class and never about race (so can never have advocated genocide). And related convictions—that Left means radical, that revolution means radical change.

In his second chapter, Watson examines Millar’s book in its context, starting with Montesquieu’s Esprit des lois (1748) and later writings by Adam Ferguson and Adam Smith all of whom, like Millar, were interested in social differentiation and none of whom used the modern concept of class, which they had never heard of. For them, social differentiation was about subordination of ranks: rank being a much more differentiated concept that the crudity of class and one far more in tune with common understandings of how things are. They also saw human societies as displaying an underlying constancy of human nature in the midst of flux, wealth as an agency of change and economic structures as underlying historical movement.

Watson is at pains to make two points here: as Marx and Engels themselves rightly said, Marx was not original in seeing economics and social differentiation as drivers of history. So claims that comprehensive social analysis was born in the 1840s are false and based on ignorance of both Marx and of intellectual history. Second, what made the previous tradition (which in various forms stretches back to Aristotle) unappealing (and Marx appealing) is that the earlier tradition saw social differentiation as desirable.

The third chapter is on the idea of conservative revolution. Watson establishes the idea that a “real” revolution was one of radical change very much dates from the French Revolution. It was not an idea that had struck earlier times. For them, revolutions were part of a cycle of history and could easily be preservative: such as the Glorious Revolution of 1688. Indeed, as he points out, the Iranian Revolution of 1979 was a conservative revolution (against the modernising secularism of the Shah). Watson does, however, overreach in this chapter. He wants to define revolution as any violent seizure of power and he tries to maintain that revolution was only conceived of in conservative terms. The first strikes me as too broad a definition and the second goes beyond his evidence. Indeed, against the notion of the recurring cycles of history that people typically operated under.

Chapter four is on the Tory tradition of socialism. That socialism was a conservative idea was a commonplace of early C19th thought. Liberal capitalism was transforming society and overturning old social norms and arrangements. Socialism—by its hostility to markets and private property—was seen as a natural way to stop such transformations and preserve a more static, status-bound order. As, indeed, it has proved to be. China, after all, abandoned socialist economics not because it promoted too much change but because it permitted too little—as Bertold Brecht would remark
communism is not radical: capitalism is radical (p.44).

While, as Watson points out, all the Leninist states promptly became very hierarchical societies. The Tory socialist John Ruskin, particularly his book Unto this last, was cited by many British Labour figures as deeply influencing their own political thought.

And the answer to question of why socialists declaring themselves to be Tory, or Tory influenced, was not denounced by liberal and radical opinion was: they were, the debate has just been forgotten. The binaries and simplicities of Left v Right, socialist=Left, Left=change have proven too powerful.

The next chapter examines de Tocqueville (and other liberal thinkers and writers) prescient discussion of the burden of liberty. There were and are psychic and social burdens to liberty and autonomy, and liberals such as de Tocqueville, Dickens, Turgenev, Ibsen, Henry James, John Stuart Mill were well aware of it and wrote about it perceptively. They did not turn against freedom but, particularly de Tocqueville and Mill (indeed, Mill from de Tocqueville) saw limited and representative government as the way to deal with such pressures.

Watson then moves on to two forgotten French critiques of socialism by Adolphe Thiers (De la propriete) and Alfred Sudre (Histoire du Communisme) writing in the context of the 1848 revolution that overthrew the Orleanist monarchy, briefly led to the Second Republic and then the Second Empire under Napoleon III (who regarded himself as a socialist). Sudre’s book was the first history of socialism (or communism) in any language. It was a critique of the idea that the abolition of property will help the poor—from the other side of the dead of the collectivisation famines and the grinding poverty of Leninist states, hardly an outrageous argument. But one mounted decades before 1917 and just as The Communist Manifesto was being published. Sudre held socialism to be a conservative, hierarchical and, indeed, naturally tyrannical idea, as the powerful will just use the state for their purposes. Thiers mounted a similar, but more narrowly economic, argument. Sudre’s book is apparently not mentioned in any history of socialism.

Mill does not refer to either book in his (published posthumously) point-by-point critique of Louis Blanc’s 1839 Organisation du Travail. Mill attacks socialists for their recklessness:
Those who would play this game on the strength of their private opinion, unconfirmed as yet by any experimental verification … must have a serene confidence in their own wisdom, on the one hand, and a recklessness of other people’s sufferings on the other (pp69-70).

Again, from the other side of the mountain of corpses piled up from 1917 to now in socialist “experiments”, Mill was clearly spot on.

Watson devotes a chapter to Hitler’s citing of Marxism as the key source for National Socialism, Hitler’s repeated private and public declarations of being a socialist and how such has been fairly systematically ignored since 1945. (Hitler's claims seem much less strange if socialism is seen as creating a static and hierarchical society.) Another chapter examines the genocidal theme within socialist writings from Marx to the Holocaust. A chapter on Orwell follows, which is well worth reading on its own: a deeply perspicacious discussion of what Orwell was about as a writer. Though it is somewhat disconnected from the rest of the book: the connections being that Orwell was very much not a person for forgetting—struggling revealingly with how to have truthful experiences, and then how to evoke them in ways that were both truthful and persuasive—was deeply humanitarian and (along with Koestler) revisited themes (the hierarchical, status-driven, static nature of socialism) that they seem to have independently rediscovered, in ignorance of previous writers.

I am not entirely convinced by Watson’s use of the word conservative. He seems to mean it in the sense of preservative or static or even returning to, but they are not the same. Abolishing or hugely restricting legal private property seems a fairly dramatic change: in a capitalist society, full socialism is not conservative. But that it will then create a static (and, indeed, hierarchical and controlled) order is also true. As is that socialism was often seen as a way of preserving traditional morality (again, not without reason). Still, one can agree with his underlying thesis while not entirely agreeing with how he expresses it.

Watson concludes with a final, brief, chapter on The Great Amnesia summarising how ideas, arguments and critiques have arisen and been forgotten. The preference for simple binaries (particularly Left-versus-Right) he regards as a prime culprit for the
successive series of suppressions, a repeated refusal to look (p.105).

That and the sheer embarrassment (for both conservatives and socialists) of finding socialism has often been seen as conservative, the embarrassment that genocide was born on the Left and within socialism, that Hitler was avowedly a socialist, that there were capitalists who profited from Lenin’s rule. As Watson says, there are more comfortable things to believe in.

But that truth may not be comfortable does not make it any less the truth. Watson’s slim volume is a worthy blow against forgetting. One suspects, however, that the forces for forgetting are too strong, even as socialism slides into the detritus of history.