Saturday, December 31, 2011

Don’t reason from a trade balance

This is based on a comment I made here.

The idea of the Euro was simple—a Deutschmark for everyone who signed up. With Deutschmark interest rates for everyone. And it worked, for a while.

But it married together different political economies. The PIGS countries relied on competitive devaluations to compensate for their institutional failings. Germany had long accepted the institutional demands of a "hard" currency (think Ludwig Erhard's "bonfire of the regulations").

Germany and co are net exporters because they have the institutional back-up to be competitive given the value of the Euro (especially within the Eurozone): the PIGS countries are net importers because they do not. Which is fine if you have the future productive capacity (and current debt-servicing income) to back up the required importing of capital. But they don't because of the ECB's tight money/low income growth policy's effect on their current income and their institutional failings on their future productive capacity. It comes back to institutional differences (common currency bad) and current income (ECB monetary policy bad). The sovereign debt/financial crisis (lender of last resort needed) is a product of the interaction of ECB policy with institutional differences and failings. With different countries suffering different levels of intersection of these problems.

Scott Sumner warns to not reason from a price change: perhaps people should not reason from a trade balance either.

Tuesday, December 27, 2011

The atavism of totalitarianism

The term ‘totalitarian’ was originally coined by Mussolini: ironic, since Fascist Italy was not a totalitarian state. Most land, industry and commerce was privately owned; the monarchy persisted; the army remained very much the Royal Army; the Catholic Church retained its schools: the alleged totalitarianism was, like so much of Fascist Italy, surface bravado with considerably less substance behind it. The Fascist project was ultimately a limited one of Italian “national greatness”, however usefully defined. Without a truly transformational project to direct it, the Fascist Party-State ruled what it surveyed but its control extended only as far as the project required, which was not all that far into the enduring structures of society.

The Nazi project—of a racially-purified Greater Deutschland ruling, as the Reich of the master race, over a vast lebensraum empire—was far more transformational, so the Nazi Party-State was far more totalitarian than its Italian Fascist precursor. The title of Thousand Year Reich was itself millenarian. Even so, German capitalism was dominated and directed, but not abolished. The Nazi project did not require the complete transformation of society, so the totalitarian urge did not go all the way.

The Leninist project of an absolutely “equal” society free of “exploitation” did require the complete transformation of society. The more absolute the commitment to equality of outcome, the more thorough the social transformation required, the more totalitarian was the result: hence North Korea under the Kim Family Regime and Enver Hoxha’s Albania being the most totalitarian of societies.

Italian Fascism and Nazism both used Lenin’s model of total politics: politics that acknowledged no limits in ambit and means. Mussolini’s great operational insight was to so quickly perceive that Lenin’s model of politics could be harnessed to other political projects: though Lenin's own project was a failure:
Lenin is an artist who has worked men, as other artists have worked marble or metals. But men are harder than stone and less malleable than iron. There is no masterpiece. The artist has failed. The task was superior to his capacities.
Mussolini's strategic insight was that the collectivism of nation was much more socially resonant than that of class. As he stated:
We deny the existence of two classes, because there are many more than two classes. We deny that human history can be explained in terms of economics. We deny your internationalism. That is a luxury article which only the elevated can practise, because peoples are passionately bound to their native soil.
As Lenin’s model of total politics was politics acknowledging no limits, the only limit was set by the nature of the project it was harnessed to. Hence, the animating project determined the level of totalitarianism of the various regimes.

What is striking is the atavism of all three projects. The atavism of Fascism and (even more so) Nazism was obvious. Both extolled heroic virtues in revolt against the bourgeois virtues of capitalist modernity, so looked back to previous ages—the Roman Empire in the case of Fascism; mythic Teutonic history in the case of Nazism. Ironically, both were modernising revolts against modernity. Both used cutting edge political and propaganda techniques for their atavistic projects.* Since the Nazi project was so much grander, it was far more modernising in its effects than Fascism.

But the equalitarian urge is also an atavistic one. It is a revolt against the dynamism, the complexity, the uncertainty of modernity. A society of equality of outcome is a much simpler society than one where the discovery processes of commerce—seeking new things to sell, seeking new people to sell them to—operate far more freely. This simplicity is no accident. Given the multi-dimensional nature of equality, the more thorough the equality sought, the more social dimensions have to controlled or blocked. This is a process of eliminating complexity; so freedom, dynamism and other drivers of modernity.

But it is also a process of massive centralisation of power, so a process of profound inequality. Not merely the massive power inequality between those being equalised and those doing the equalising but also the profound status inequality between those with the moral and cognitive insight to determine the supreme purpose, and to know how to carry it out, and those upon whom that insight is inflicted.

Which creates an elite whose profound insight sets it apart from the ordinary run of humanity. (The ardent partisans of “equality” in other societies often have a profound sense of their own moral and cognitive superiority.) The logic of greater insight and profound centralisation of power inherently tends to anointing a Great Leader of more than ordinary human insight: the Great Intermediary between society and the underlying true drivers of History and Society. Which is profoundly atavistic: a ruler who directs and controls the social surplus while acting on behalf of (a substitute for) the divine. The over-the-top praise offered up to Pharaoh, or a Khmer Universal King or similar has its exact analogue to that offered up to the Great Leader of Leninist (and particularly Stalinist) societies. In the case of the Hereditary Stalinism of North Korea under the Kim Family Regime, this extends to hagiographic stories of their supernatural birth.

It is an indicator of the power of such atavisms, of the appeal of a sense of profoundly greater moral and cognitive perspicacity and how intellectuals often understand so much less than they think, that such profoundly atavistic projects have been so often passed off (though, thankfully, much less as time goes on as their failure becomes ever more obvious) as the cutting edge of history.

* The similar atavism of the jihadis, with their violent extolling of C7th Arabia as the pinnacle of human social and political understanding is equally obvious. The term 'Islamofascism' captures some important similarities between Nazism, Fascism and the salafists--such as the atavism, the extolling of violence and heroic virtues, the unlimited ambit of politics, being a modernising revolt against modernity.

[Cross-posted at Critical Thinking Applied.]

ADDENDA: This post has been adjusted somewhat for style without any change in the argument. I also added the footnote about the jihadis.

FURTHER The "human shield" rhetoric of the North Korean regime reinforces its atavism.

Monday, December 26, 2011

The Civilization of Angkor (2)

This is the second part of my review of Charles Higham’s The Civilization of Angkor. The first part is in my previous post.

"Sun Kings"
Jayavarman IV, the son of Indravarman’s daughter Mahendradevi who married his aunt, Jayadevi, half-sister of Yashovarman, took power. He built a rival centre at Chok Gargyar/Lingapura from whence he ruled. Higham provides statistics that illustrate the enormous scale of construction under these various rulers. Jayavarman IV was succeeded by his son Harshavarman II, whose brief rule was marked by conflict. He was succeeded by Rajendravarman, his uncle and first cousin, who moved the capital back to Yashodharapura (Pp70ff).

Inscriptions tell of the power and authority of provincial leaders, preceded by eulogies to the king. Acts of merit were delineated. Land boundaries and taxes in kind are set out: the latter usually rice, but also other goods of use to the court. Temple foundations included having assigned workers (Pp76ff). That this was a form of bondage is expressed by an inscription stating that a worker born in such temple lands had escaped and, when caught, had his eyes gouged out and his tongue removed, his family being exclusively assigned to the temple (p.79). In the aristocratic families, headship would pass down to sister’s son (p.84).

This was system based on a court with central officials, regional officers and aristocratic landholding families, often descended from supporters of founding ruler Jayavarman II and who intermarried with the royal dynasty. The administrative hierarchy tended to get more complex over time. The king stood at the apex of a legal system that was used by the elite to resolve disputes (typically over land). The service of “slaves” (those with various levels of bonded service) was sold or exchanged. Reservoirs, channels and canals were constructed. Temple foundations, with assigned land and workers, were a major part of the surplus extraction-and-use system. The last king in the first dynasty of Angkor, Jayavarman V, came to the throne as a 10 year old boy: after a period of regency arrangements, he took the throne in his own right. At his death, there was a prolonged civil war that brought a new dynasty to power (Pp79 ff).

Weaving through inscriptions setting out the (contradictory) stated histories of aristocratic families provides some glimpse into a period of civil war and competing kingships which was brought to an emphatic ritual end in 1011 when Suryavarman I held a great ceremony of allegiance where a large number of officials swore undying allegiance and service. The period of civil war seems to have been highly destructive and disruptive and be followed by much re-building (including starting the largest of the baray at Angkor) and widespread assertion of rights over land. His successor Udayadityavarman II was also an extensive builder, though his reign was marked by insurrections. In 1066, Udayadityavarman II was succeeded by his brother Harshavarman III, before another dynasty took the throne (Pp91ff).

A new dynasty
In 1080, Jayavarman VI was ritually enthroned, first of a new dynasty of rulers (ancestors of the current royal family) who seems to have come from the upper Mun valley (in modern Thailand). Inscriptions continue to record land grants and other favours to supporting families and donations to temple foundations. One such inscription records that the land purchased and donated was purchased with cattle, silver, bronze and tin vessels, gold rings, cloth, elephants, vehicles, salt, rice and goats. The donor also gifted workers and built a reservoir (Pp110-2).

Jayavarman VI was succeeded by his brother Dharanindravarman I c.1108, who appears to have been a somewhat ineffectual ruler. He was overthrown and killed by his grand-nephew Suryavarman II who was ritually consecrated in 1113 and set about re-uniting the empire, accepting submissions and building on a monumental. He was the builder of Angkor Wat, which makes him one of the great builder-rulers of history. Higham takes us through the enormous scale of the construction and the labour resources it must have taken (Pp107ff).

Suryavarman II’s reign was followed by a series of short reigns, internal strife and a devastating Cham invasion that included a sack of Angkor. The ruler who defeated the Cham and re-unified the Khmer empire was Jayavarman VII, the greatest of the Khmer ruler-builders, the builder of Angkor Thom and the Bayon. His massive building effort was a particular boon for scholars since he covered his buildings with carved battle and life scenes rather than mythological ones. From the pinnacle of his success he also showered his guru with extensive gifts. The inscriptions reveal the scale of some of the temple foundations (Pp120ff). One had:
Eighteen high priests and 2740 officials lived and worked there, together with 2202 assistants, which included 615 female dancers. In total, 12,640 people had the right to lodge within. Feeding and clothing this multitude involved the provision of rice, honey, molasses, oil, fruit, sesame, millet, beans, butter, milk, salt and vegetables, all these quantities being scrupulously listed for appropriation from the royal foundations and warehouses. Clothing was also required, and even the number of mosquito nets is set down. Assigned to supply the temple were 66,265 men and women, a figure rising to 79,365 if you include Burmese and Chams. The inscription then provides an inventory of the foundation’s assets: gold and silver vessels; 35 diamonds; 40,620 pearls; 4540 precious stones such a beryl; copper goblets; tin; lead; 512 silk beds; 876 veils from China; cushions; and 523 sunshades. There were musical instruments to ‘charm the spirit’ and, with nightfall or for rituals, there were 165,744 wax torches (Pp126-7).
All sustained by an empire built on a barter economy, without any coinage.

An empire that provided healthcare. The foundation was responsible for 102 hospitals (each of which had two doctors and their assistants, two dispensary workers, two cooks, water heaters, specialists in preparing medicines and other attendants, including those who prepared offerings to the Buddha) across the kingdom, to which 81,640 men and women from 838 villages were assigned to supply with rice, clothing, honey, wax and fruit: supplies which included 1960 boxes of salve to ease haemorrhoids (p.127). Another temple had 5324 villages housing 97,840 people assigned to its services (including 1000 dancers). Jayavarman VII was also recorded to have constructed 121 rest houses for travellers (p.129). How much his building program was continued by his successor Indravarman II is unclear. Like his father, he did display a preference for Buddhism. His successor, Jayavarman VIII, whose reign began in 1243, was an ardent Shivaite who destroyed or transformed “every image of the Buddha he could lay his hands on”. He was replaced in a palace coup by his son-in-law Indravarman III in 1295-6(p.133).

In 1296, the Chinese commercial attaché Zhou Daguan visited the Khmer realm. The surviving volumes of his journals are the only surviving contemporary description of the Khmer Empire, which Higham summarises. His descriptions included reference to female palace guards. Higham points out that his description of a royal procession in 1296 was very similar to that from 1901 (Pp134ff).

Diminishing evidence
After Zhou Daguan archaeologists rely on a small and diminishing number of inscriptions. Various rulers ascended the throne, of whom we know little. The last Sanskrit inscription dates from 1327: the high quality of the verse suggests that scholarship was still thriving (p.139). Warfare became endemic as the power of the Thai kingdom of Ayutthaya increased in power—to the extent of sacking Angkor in 1430-1 after a long siege. Many statues of Buddha were moved to Ayutthaya. When it was sacked by the Burmese in 1569, they were taken to Pegu and then, in 1734, to Mandalay, where they can still be seen. The capital of Cambodia moved back to the Mekong valley, from whence it had moved seven centuries earlier, and Angkor Thom reverted to jungle (p.140).

Around 1600, the Portugese began to report legends of a rediscovered city, which was discovered by Europeans over the next few centuries: a process interrupted by war and Cambodia’s appalling late C20th history (Pp140ff).

The civilisation in summary
Higham concludes with a summary chapter on the civilisation of Angkor. He reprises the sequence by which the civilisation arose: the prehistoric Iron Age; the Delta state (150-550); state formation in the Mekong Valley (550-800); the capital at Angkor (800-1432). Higham notes that:
It is very difficult to pin down the status of the workers. Some could be bought and sold, some were war captives, while others may well have been in service to members of a noble family for generations and were assigned to develop a new foundation. Tied labour was not unusual in South-East Asia. As recently as the Ayutthaya period in Thailand, which ended in the eighteenth century, workers were tattooed to record their assigned place of work and to maintain a stable workforce (p.152).
His summary is an excellent consideration, showing a fine sense of what is, and is not, in the evidence (Pp 143ff).

High concludes with a comparison of Angkor with other “archaic states” (Pp162-6). Particularly in revealing the processes of state formation:
Robert Carniero, for example, has advanced six conditions for the emergence of a state from preceding chiefdoms. They revolve round the power to defeat neighbours and incorporate them in a larger polity; the power to enslave prisoners; the power to take tribute; the ability to provide a corps of fighting men; and ability to place supporters in control over conquered territory. There is considerable support for these propositions in recent instances of state formation assembled by Kent Flannery. The ritual and physical control of trade is a further variable, which recurs in many cases, while Henry Wright has noted how early stages in state formation are characterised by ‘chiefly recycling’: the ebb and flow of social complexity before the transition to the state has occurred. (Pp162-3).
There are also questions of patterns of expansion and contraction in state power.

Higham notes that rice, strong draught animals and iron technology are obvious differences with the jungle civilisations of Mesoamerica, but that there were considerable other similarities. There is also the issue of what role irrigation and water control played in state formation:
A further widespread feature of early trends towards state formation is the existence of drainage and agricultural improvement to maintain the loyalty of followers (p.164).
As trade, and so the Delta, declined, the shift in power towards the riverine flood plains saw:
two diametrically opposing forces at work. The first involved high chiefs, overlords or kings attempting to control land and labour through force and the projection of a sacred persona. This was offset by other local leaders pursuing independence and their own push for regional hegemony (p.164).
That looks like the same process to me—the struggle to control surplus (production beyond subsistence). Hence the cyclic rise and fall of overlords: a process that, as Higham notes, was also seen in the Near East the Americas.

As part of this process:
One does not need to look far to find evidence for growing social inequality. The very names are sufficient evidence; on the one hand, the Sanskrit title of the king meaning protégé of the great Indra, and on the other hand, workers with Khmer names meaning dog, stinker, black monkey and arse (p.164).
Which raises the question of what role successful kings played, what was their authority based on? He notes one scholar’s recent analysis that Mayan rulers were not much concerned with intensifying agriculture or trade beyond that which supported what they did care about—playing out and demonstrating their role as intermediaries with the divine. Higham holds there is insufficient evidence to support royal control of irrigation as being central to royal power and authority, which suggests more the role of divine intermediary: a suggestion that the scale and form of architecture, and the content of many inscriptions, support. None of which abolished the need to control distant provinces and protect borders: something the rulers of Angkor did with varying success.

But with enough success to produce seven centuries of rulership and dramatic construction which continues to be deeply symbolic to modern Cambodia.

Approaching an unfamiliar civilisation
The Khmer Empire, the civilisation of Angkor, is unfamiliar to most Western readers. In considering an unfamiliar civilisation, there are helpful questions to consider. For example, what is like, or unlike, other civilisations? For example, I am struck by the lack of fortifications: there were a few walled cities, but there seems to have been very limited use of fortification. This is in stark contrast to the Buddhist lands of the Tibetan cultural region, where fortified dzongs, palaces and monasteries are the dominant form of architecture.

But in the dry and cold Himalayan highlands, it is easy to store food for long periods and very hard to either “live off the land” or otherwise supply forces to sustain a siege. The geography also generates strategic “choke points”. Fortification is a very cost-effective strategy. In the hot, humid, teeming-with-life plains of Khmer civilisation, storing food for lengthy periods would be more difficult, sustaining a siege, or even just avoiding fortified points, much easier. Fortification is a much less cost-effective strategy. Walling one’s capital is about as far as it would be worth going.

Nor did it develop a self-aware horse-mounted warrior class such as the azadan of Zoroastrian Iran, the knights of Latin Christendom, or the samurai of Japan. This was in no useful sense a “medieval” society. On the contrary, it was a classical autocracy.

The centralised control, the monumental architecture, the importance of temples and religious institutions, the lack of coinage, means the civilisation of Angkor has a lot of overlap with Pharonic Egypt. Which also works in reverse: the similarities and differences then reflect back on one’s understanding of the civilisations that are more familiar.

Ironically, there is one aspect of medieval Latin Christendom which does seem to have an analogue in the Khmer Empire, the institution of serfdom. Scholars of Khmer history seem to have difficulty understanding how many graduations in forms of human bondage there can be between outright chattel slavery and freedom: something medieval scholars could explain quite readily.

The civilisation of Angkor was one capable of enormous and sustained building projects, with complex economic activity, including trade in assets, that had no coins. It was a barter economy. It had various mediums of exchange, various stores of value but, as far as we can see, no single unit of account. Certainly no medium of account: so no money in any useful sense of the term. A useful corrective example to presumptions and congenial “just so” stories about money: only one way in which studying Khmer civilisation is enlightening. Particularly in such a comprehensive and useful text as Higham’s The Civilisation of Angkor provides.

Saturday, December 24, 2011

The Civilization of Angkor (1)

Charles Higham’s The Civilization of Angkor is very much focussed on the rise, achievement and decline of the civilisation of Angkor: of what led to the creation of the amazing constructions of Angkor. As Higham writes, the book:
sets the supreme architectural achievement of the civilization of Angkor in its historic context (p.4).
Higham precedes his narrative with a timeline interposing events from Anglo history with Khmer history from 2300BC to 1600AD—so 410, the year of the Roman abandonment of Britain, becomes “the fall of the Western Roman Empire” (Pp xiii ff).

We start with the European discovery of the ruins of Angkor, their amazement on the scale, the lack of belief that they were created by the local Khmer people and the contemporary (1296) report of the Chinese visitor Zhou Daguan (Pp1ff). Higham then provides a general description of Angkor:
Angkor is the name conventionally given to the cities and the associated monuments that lie between the Tonle Sap and the associated monuments that lie between the Tonle Sap and the Kulen Hills. The name derives from the Sanskrit nagara, meaning ‘holy city’ (p.4).
New temples were built there for seven centuries or more from about AD 700 (and included a reservoir 8km x 2.5km).

As Higham notes:
Illuminating an extinct civilization is a demanding and challenging endeavour … This is particularly the case for the Western scholar where the civilizatioin of Angkor is concerned, because the people, the religion, the environment, indeed virtually all aspects of its life and culture are alien (Pp4,6).
The sequence leading up to the establishment of Angkor Higham sets out as being Iron Age (starting 500BC), the formation of the earliest state around AD 150 in the Mekong Delta which declined “due largely to changing trade patterns” (p.6), then several rulerships competing for power AD 550-800 culminating in the establishment of the Angkor royal centre.

Rulership in context
To put this process in wider context, Higham examines three key questions:
What is a state, how does it come into being, and how is it maintained (p.6)?
Higham provides a brief summary of anthropological understanding of chiefdoms:
in which leaders dominate a social web where individuals are related by kinshipo [which]… usually involve a central settlement in which the chief resides, and one or two categories of smaller, dependent settlements. The chief is usually distinguished by symbols of status, and will often be accorded elaborate mortuary rites (p.6).
From these evolve states in which:
although kinship ties remain, people are also identified by their class within a complex social network … one comprising the ruling elite. The royal tier will usually be accorded a divine origin and the ability to communicate with the gods. There are four levels of settlement hierarchy from the capital down through provincial settlements to villages. The king will live in a palace, and play an important role in rituals. His court absorbs surplus production from a much larger sustaining area than in a chiefdom, and high-ranking members of the court are recognized by special titles, offices and symbols of status. The regulation of labour and the appropriation of surplus production is essential in the support of the administrative machinery for an enforceable legal system, an army, full-time priests and state temples (Pp6-7).
In other words, a state is a chiefdom on steroids, while a chiefdom is a proto-state. Both are about rulership and control of surplus, but a state operates on a greater scale that involves considerably greater social complexity.

To illustrate the processes by which a state can evolve from chiefdoms, Higham goes through the C18th-C19th history of the Yao people of Malawi as:
the recorded course of their development is so similar to what we think might have occurred in the Mekong Delta (p.7).
The Yao started off in villages where a group of sisters appointed their oldest living brother as village headmen. These villages rarely exceeded 50-60 people as:
this social system encouraged young aspiring leaders to leave and found their own settlement (p.7).
Contact with Arab traders seeking ivory and slaves in exchange for beads, cloth and metal wire radically changed this. As the headman traditionally managed trade and distributed its benefits, an upsurge in trade increased their standing while the demand for slaves “engendered much tension among the Yao and their neighbours”. Male slaves were sold, female slaves increased the headman’s retinue:
The transition from village headman to great chief was swift, happening in the space of half a life span. As the emerging chiefs expanded their domains and increased their power through trading for guns, so they adopted the exotic manners and customs of the Arab traders. This enhanced their prestige in the eyes of their followers. Some accepted Islam, and changed their names … They began to use Arab writing to keep their records. As towns developed from villages, it became necessary to grow more food, and irrigation was brought to their fields (p.8).
Swap Islam for Hinduism and Mahayana Buddhism, swap Arabic for Sanskrit, and this looks remarkably what happened in the Mekong Delta: including that the process was chosen by the headmen, not imposed from outside.

Higham examines the process of Indianisation, and the key ideas of Hinduism (Pp9-11). Followed by the role of rice (Pp11-12). As he notes:
States are fuelled by the energy supplied by agricultural surpluses (p.11).
Having summarised the key issues, Higham moves onto the prehistoric periods in South-East Asia (2300BC-AD 400) (Pp13ff).

Archaeology is beginning to greatly expand our understanding of prehistoric South-East Asia. These societies:
were vigorous and powerful. They engaged in distant maritime exchange, and their leaders organized large-scale water control measures. They maintained specialized bronze and iron workshops, and were recognized in death with rich burials, which would include gold and silver jewellery and hundreds of bronze ornaments (p.13).
Rice farmers and farming arrived in the region about 4300 years ago, setting in train the normal supplanting of foragers and foraging. As Higham notes:
The pathway to civilization required the energy provided by rice agriculture … the adaptability of this marsh grass, its nutritional value especially when it is consumed with fish, the degree to which the landscape can be modified to expand it production, and the relative ease with which it can be stored. Rice is the solid rock on which South-East Asian civilizations were founded (p.14).
Higham takes us through the interaction between human society and geography (including the importance of the monsoon), the development of the local Bronze Age (1500-500BC), helped by good local supplies of tin, and then the Iron Age:
the Iron Age ancestors of Angkor lived in large communities in which some individuals, both men and women, were interred with opulent grave goods and much ritual. Iron was employed not only to increase agricultural efficiency but to forge weapons of war. Salt processing reached an industrial scale; specialists were able to produce for their leaders outstanding ceramic vessels and ornaments of bronze, glass, gold, silver, carnelian and agate. There was increased competition and conflict, as skilled and intrepid navigators engaged in international trade. Iron Age chiefdoms were now poised for the transition to the state (p.22).
Evidence of trade between the Iron Age communities of central Thailand and India dates back to at least 380BC (p.23). Chinese sources claim South-East Asian ocean-going ships 50m in length and weighing over 600 tons by the C5th. Chinese dynastic records include a report from emissaries Kang Tai and Zhu Ying to the Wu emperor about a state they call Funan operating in the Mekong Delta in the C3rd. Archaeology at a site named Oc Eo confirmed many of the activities in the Chinese reports and a local coinage (which does not seem to have persisted). Oc Eo was linked by a canal with Angkor Borei, a walled city of about 300ha, 90km to the north. The city wall is 2.4m wide and 4.5m high, with a moat of 22m in width—so a considerable construction. There were also water reservoirs—or baray—whose function remains the subject of much scholarly debate (Pp24ff).

Rising complexity
Higham takes us through the archaeological evidence, including early Sanskrit inscriptions. He observes that no prehistoric sites have been found in the Delta, presumably because of the regular flooding. With the development of flood retreat rice farming (where water is stored and released during the dry season) it became able to support substantial populations (including urban centres). Nevertheless, the social and political structures that grew up (including significant specialisation) were clearly dependant on the benefits of maritime trade. How centralised political structures were is unclear (the large canals suggest political centralisation). The rise of Java from the C5th as the maritime connector between China and India massively undermined the Delta, leading to the shrinking and abandoning of urban centres due to loss of trade (Pp29ff).

A C13th Chinese compilation includes description of a C7th Khmer ruler of some power and magnificence. This period seems to be one of competing rulerships, where inland rulers may have achieved varying levels of dominance. Inscriptions reveal various dynasties (one of which seems to have three generations of ruling queens) with fluctuating areas of control. Inscriptions also reveal a mixture of appointed and hereditary (pon) titles with a court-centred social hierarchy. Management of temple foundations, including what appears to have been significant levels of trade (including of assets), seems to have been a path to wealth. This was a barter economy:
there was no system of coinage. Goods were valued by reference to the weight of silver, or quantity of rice or the length or quality of cloth (p.48).
This did not preclude sophisticated economic transactions:
There are records of assets being exchanged through individuals through the aegis of the temple management. On occasion, we find that land was mortgaged, as it were, to a temple in return for silver or cloth, and the product of the land was assigned as a form of interest payment (p.49).
Inheritance was indirectly matrilineal (through sister’s son), though one major dynasty shifted to patrilineal succession along with its assumption of the style of gods while another, for three generations, had direct matrilineal (mother-daughter) succession. Higham argues that direct succession better promoted intergenerational asset accumulation. Jayavarman I was the first king recorded to have divine honours in his own lifetime, an act which went with royal authority superseding those of pon in control of assets. Now the king, not temples, would be the final arbiter of assets and land use. The centralisation of authority from 720-770 coincides with a drastic reduction in the number of inscriptions, limiting our knowledge. Higham summarises the period 550-800 as one where states emerged, conflict was recurrent and a “thin veneer” of Indianisation was adopted over local patterns and worship (Pp50ff).

From about 800 to about 1000, the aforementioned patrilineal dynasty with divine honours ruled a substantial empire as universal kings. This kingdom, Kambujadesa, was a agrarian surplus rulership which controlled the Delta, the lowlands around the Great Lake and the agricultural lands to the west. It engaged in increasingly substantial temple and baray construction.

The first king of this universal rulership, Jayavarman II, established the tradition of having himself consecrated king-of-kings in an elaborate ritual:
The court was projected at the centre of the kingdom and a representation of heaven, but was sustained by the agricultural surplus. The inscriptions are filled not only with references to the elite aristocrats and their meritorious acts, but also contain details of land ownership, field boundaries and the duties of retainers. We find many references to slaves, but it would be wrong to regard this as a slave-based society. The rural populace donated part of their time and labour to maintain the local temple. Thus part of their production, be it rice, butter, honey, cloth or livestock, was directed to the capital. Our knowledge this, the first dynasty of Angkor, comes from the inscriptions, reservoirs and surviving stone or brick temples. On the one hand, we encounter a dynasty of kings who built on an increasingly massive scale and extended their power through elite aristocrats to the sustaining populace. On the other hand, we find endemic instability rooted within disputes in a dynasty that had no clear rules to govern the succession, and the constant problem of maintaining control over the provinces (Pp53-4).
The concentration of control over surpluses naturally created a target for attempted seizure.

How Jayavarman II came to power is unclear, though sites with relevant inscriptions provide indications of the extent of his power. A map (p.55) usefully charts where inscriptions associated with various rulers have been found. For details about events of Jayavarman II’s reign we are dependant on inscriptions dated about 260 or more years later. Higham takes us through the archaeology, how little is known about his son and successor Jayavarman III then the building, and unclear lineage, of his successor Indravarman I, who describes himself as a great warrior. His son and successor Yashovarman I also described himself as a great warrior and built on an even grander scale (Pp54ff).

The inscriptions of Yashovarman’s reign show royal control over the allocation of land, with a social hierarchy radiating from the king:
The key element in this great architectural achievement is the control of labour … It may be that the same people who worked on the buildings during the dry season would return to their duties in the rice fields with the rains. … The state superstructure … fundamentally relied on the agricultural surpluses, a situation that illustrates the importance given to land tenure and agricultural production (p.69).
Inscriptions from the reign of his sons and successors Harshavarman I and Ishanavarman II tells us of an official in charge of collecting the rice taxation and grants of exemptions from service.

This review will be concluded in my next post.

Wednesday, December 21, 2011

The consequences of equalitarianism

Equality involves considerable complexity under apparent simplicity. The US Declaration of Independence famously declared that:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.
Who was equal and in what respect did not turn out to be a remotely simple question. Women were obviously excluded (the US has Founding Fathers but no Founding Mothers) as were slaves: slaveowners being prominent among its signers and protection of slavery being, fairly obviously, a significant motive for the Declaration (given the outcome of Somersett's Case a few years previously). As was settler land hunger clashing with the British Crown's public commitment to its treaties with the Amerindians. (The American Republic's appalling history of breaking treaties with Amerindians was somewhat encoded into its founding "DNA".)

But that multi-dimensionality can make equality a very useful banner: since there are so many dimensions along which equality can be considered, there are always new realms for the partisans of equality to conquer. And, while the slogan "no taxation without representation" was fairly clearly brilliant political shorthand for a range of public policy issues, it was brilliantly effective because it was true: British subjects in North America were denied any say in public policy decisions that affected them deeply. There was a profound inequality at work.

But we can differentiate the egalitarian urge--concerns with legal status, opportunities, having a say--from the equalitarian urge--trying to create a society equal in outcomes. What distinguishes the equalitarian urge is that it creates a profound inequality: the inequality between those who are to be equalised and those who do the equalising. The more complete the equality to be sought, the more complete the control, and so the power, flowing to those doing the equalising over the lives of those being equalised.

In this equalitarian drive, private property gets in the way: variations in luck, skill and past legacies mean private property precludes equality of outcome. Yet no complex society can abolish property since property is just the right to control a specified resource. So, in an equalitarian society, property clearly needs to be controlled by the equalising authority. Which is just a specific manifestation of the logic already set out in the previous paragraph.

Which is why the societies most ostentatiously committed to equality--Enver Hoxha's Albania, North Korea under the Kim Family Regime--have also been the most totalitarian societies. The absolute drive for equality creates an absolute centralisation of power. In the case of North Korea, that has been taken to the stage of creating hereditary Stalinism. The ruling tyrant becomes effectively the owner of the entire country (including its people) since all are under his control (in a very direct and practical sense) so he can choose to pass that ownership onto his son.

Which is a grotesque negation of the stated original intent of creating a profoundly equal society. But a straightforward manifestation of equalitarian logic as a political program. For it is not airy intent which matters, but how the intent's logic works out when implemented. Bob Carr's claim that North Korea is the logical working out of Marxism possibly goes a little far. But that Albania under Hoxha and North Korea under the Kim's represent the working out of the equalitarian urge is clearly true.

Though the equalitarian urge is not the only form where ostentatious equality undermines itself. Even in more limited versions, that partisans of equality so often, so clearly, regard their commitment to equality as a manifestation of moral superiority is another way ostentatious equality undermines itself. The forms of equality worth having typically involve some strong sense of reciprocity. Where that is lacking, the equality on offer is probably not worth having: or, worse still, will make things much worse.

There are forms of equality which matter deeply: and there are others which are disastrous to seek. The apparent simplicity (even "self-evidence") of equality can be treacherously misleading.

[Cross-posted at Critical Thinking Applied.]

Friday, December 16, 2011


Much of the history of the last few centuries is the history of emancipation, sometimes labelled that, sometimes labelled differently. Catholic emancipation, the emancipation of the Jews, the emancipation of women, the abolition of slavery, civil rights, queer emancipation; the list goes on. The process of extending basic moral and legal protections to an ever wider range of people.

This history of emancipation is a history of expanding capacities, particularly cognitive and economic capacities. They are products of the Scientific, Commercial and Industrial Revolutions.

Farming can support much higher populations than foraging. But it is also a highly constrained existence; one is tied to a particular plot of land and the rhythms and vagaries of the seasons. If the population increases too much, then the constraints pinch tighter. As niches get more constrained, they are defended more rigorously. As the risk of hunger increases, patterns that have proved viable will be clung to. There are good reasons why landed peasantries are notoriously socially conservative. (Landless peasants, by contrast, can be an explosive social force since they both lack assets at risk from social disorder and seek the security of landholding—by expropriation, if necessary.)

Religion can both validate the moral constraints needed to make such a society function and legitimise particular social arrangements that provide order. And order has very strong value to a farming society. Seeing the cosmic order as a struggle between order and chaos is much older, and more widespread, than seeing it as a struggle between good and evil.

Commerce can be disruptive because it is dynamic: it seeks income from exchanges, so seeks both people to exchange with and goods and services to exchange—it is a process of discovery. Though commerce is much concerned with risk, the new or unusual has much greater implications of benefit than in farming. It is why static orders tend to frown on commerce: its dynamism is disruptive; as is its focus on exchange, on gains through trade. Features that can loom large in static orders—ethnicity, belief, gender, sexuality—are a matter of indifference to a commercial order. Commerce has persistently treated marginal groups better than has religion or politics.

French man of letters Voltaire expressed this memorably in a famous passage in his Letters on the English, first published in 1734.
Take a view of the Royal Exchange in London, a place more venerable than many courts of justice, where the representatives of all nations meet for the benefit of mankind. There the Jew, the Mahometan, and the Christian transact together, as though they all professed the same religion, and give the name of infidel to none but bankrupts. There thee Presbyterian confides in the Anabaptist, and the Churchman depends on the Quaker’s word. At the breaking up of this pacific and free assembly, some withdraw to the synagogue, and others to take a glass. This man goes and is baptized in a great tub, in the name of the Father, Son, and Holy Ghost: that man has his son’s foreskin cut off, whilst a set of Hebrew words (quite unintelligible to him) are mumbled over his child. Others retire to their churches, and there wait for the inspiration of heaven with their hats on, and all are satisfied.
So a shift towards a more commercial order will tend to be a shift to a more cosmopolitan or ecumenical social order.

Science can also be disruptive to established orders: the expansion of knowledge, the discovery of how things work, can both undermine old rationalisations for existing arrangements and validate the possibility of new arrangements. This includes discovery of other cultures: awareness of potentially very different social patterns can make existing social arrangements seem much more contingent and so contestable. Either way, the expansion of knowledge makes received wisdom seems less authoritative; more up for reconsideration, even rejection.

Technological change can magnify both the commercial and the scientific effects: the need for new skills, the experience of new possibilities, makes existing arrangements seem even more contingent and, worse, impediments. What was previously reassuring and protective can come to seem outmoded and constraining. It is not that people are not still threatened by change (some can be very threatened), it is that change acquires more partisans. The Industrial Revolution, the expanding commerce of multiplying technology, was a conjunction and magnification of the disruptive effects of commerce and science.

The shift from being a society dominated by the land/population ratio to one dominated by the capital/population ratio creates both a more dynamic and far less constrained society. Capital can not only expand far more than land can, but comes in far more varied forms and social consequences. Social possibilities increase greatly.

In such circumstances, the dynamics of emancipation are a push-and-pull interaction. With the expansion of commerce, science and technology, it becomes easier for the traditionally repressed to conceive of a situation where their repression goes away. As incomes rise, and transport and communication capacities expand, it becomes easier for them to interact and organise. As labour becomes more scarce (compared to capital), and so more valuable; as incomes rise; as commercial possibilities expand; paying attention to the formerly repressed offers more gains. As more people experience social change, further change becomes more “normal”, so less dramatic and threatening. Change begets change. The example of the emancipation of one group, the lifting of some socially imposed constraints, inspires another.

Some socially imposed constraints turn out to still have value: that part of the process can overshoot. Some of what went on in the 1960s is reasonably construed as having done that. But the process of expanding legal and moral protections, so that all have the same protections, is a process that cannot overshoot—provided full reciprocity is maintained. That is, provided it is a process of expanding the moral and legal community so all share the same protections, not a process of finding new ways to privilege certain groups. After all, emancipation is basically the process of achieving full legal and moral reciprocity.

It is no accident that the liberal capitalist societies of the West have led the way in the processes of social emancipation. They, more than any others, had the triad of expanding commerce, science and technology.

[This post has been amended to expand the argument and has been cross-posted at Critical Thinking Applied.)

Sunday, December 4, 2011

Doing it better Downunder

This is based on a comment I made here.

Looking at the on-going crises of the eurozone, the problems of the UK, the serious economic slump in the US all give grounds for appreciation of how much better Australia's political class has performed compared to those of other Western countries.

The Hawke Government (1983-1991) did broad economic reform; the Keating Government (1991-1996) reformed "super" (expanded private pension arrangements) and some labour market reform; the Howard Government (1996-2007) did more labour market reform, tax reform and massively retired public debt; the RBA brought in explicit (inflation-over-business cycle) targeting (1993). Our political class Downunder has done so much better than most other folks'.

The tyranny of distance and the long term decline in our terms of trade concentrated minds. Too much of the EU political classes seemed to have think the EU, or the euro, or both, were magic talismans that would protect them from Bad Things Happening.

Folk such as Paul Krugman banging on about how worrying about debt was way over-rated did not help. (Taking reassurance by comparisons with very high post WWII debt was not appropriate--there is a difference from debt generated by a major emergency and debt being structurally generated; there is also a vast difference between positive baby-boom demographics and "easy" technological growth--catching up with the US--compared to adverse fertility-crash demographics and more restrained technological growth--more countries near the technological edge.)

Australia had very bad 1890s and 1930s depressions in large part due to high public debt levels, so economic history encouraged scepticism Downunder about high structural debt levels. Holding the recent commodity boom to be solely, or even mostly, responsible for Australia's much better economic performance than other developed economies underplays decades of sustained reform effort by Australia's political class.

Wednesday, November 30, 2011

The Great Depression in a nutshell

This was based on a comment I made here.

In the late 1920s, most developed economies were on the gold standard. The Bank of France and the Fed took gold out of (pdf) the monetary system, driving up the price of gold inside the monetary system, which drove up the price of money (since gold set the price of money) which drove down the price of everything else, and so people’s incomes. A significantly leveraged economy suffering an income crash (for debt, nominal income is what counts) leads to bankruptcies and bank failures in a disastrous downward spiral in economic activity.

The quicker countries left the gold standard, which the Bank of France and the Fed had turned into a doomsday machine, the quicker they recovered from the Great Depression. (If they were not on the gold standard, they did not suffer it at all.) There does not seem to be much mystery to all this.

R. G. Hawtrey (pdf) and Gustav Cassell (pdf) accurately predicted the danger in the early 1920s and explained what was going on at the time. Alas, Hayek was a brilliant economist who brilliantly expounded the Austrian (the real one, not the internet one) theory of the business cycle at precisely the wrong moment. Alas, Keynes was a brilliant economist who decided to revamp macroeconomics in quite unnecessary ways, when a Swedish economist and a British Treasury official had already got it right. But a Swede and a bureaucrat were not nearly as well placed as Keynes-the-public-intellectual and brilliant (if not always entirely honest) rhetorician to capture the debate.

It is strange, how much people seem to want complicated or new, or complicated and new, explanations for grand disasters in preference to a simple one already available.

Tuesday, November 29, 2011


It is a striking thing, that those who look for racism always seem to find it.

Another triumph of human analytical ingenuity and confirmation bias.

Sunday, November 27, 2011

Bad metaphysics parading as economics

Based on a comment I made here.

Bill Woolsey made the observation that: Critics treat nominal GDP as the product of real output and the price level.

We do not live in a barter economy with money add-ons, we live in a thoroughly monetised economy where prices, contracts and debts are set in money terms. I find this thinking that there is a "real" economy that generates monetary "epiphenomena" just bizarre. It is bad metaphysics parading as economics.

(As I discuss in my previous post.)

Friday, November 25, 2011

Money is not an epiphenomenon: the unreality of the “real”

There is no such thing as “real wages”. Economists talk about “real wages” but what do they mean by that? In a monetized economy, prices and costs are measured in money terms. So, a firm has to worry about the terms of labour—the ratio of labour costs to the prices of what it sells (weighted by how much labour produces how much product: so constraints on the use of labour will still affect the terms of labour). It experiences these things, and makes judgements accordingly. If the ratio moves adversely (which might be because the prices of its products have fallen, or because they have risen less than labour costs: any movement in either labour costs or output prices is potentially compatible with an adverse shift in its terms of labour, since it is the ratio of the two that matters) the firm will tend to cut back on hiring. If the ratio moves positively, the firm will tend to increase hiring.

But the terms of labour are not the same was the terms of wages—the ratio of payment to the worker to the prices of what the worker purchases. First, because wages received are not the only labour costs. Second, because what a worker purchases has no particular connection to what the firm sells. Indeed, different workers will have different terms of wages, since they will not have exactly the same pattern of purchases; just as the terms of labour will vary between firms and, even more, between industries.

So, when economists talk of “real wages”, what do they mean? Do they mean the terms of labour or the terms of wages? If they mean both, they effectively mean neither but instead some mystical (because very unclear) amalgam of both which is not specifically either.

And how do we measure “real wages”? By “deflating” wages (which are not the price of labour, but leave that aside) in terms of some general price index? If it is some specific index, such as the CPI, then that is yet another general amalgam which, at best, crudely correlates to what either the worker or the firm is experiencing and making their judgements about. If it is a general measure, such as a GDP deflator, it has less arbitrary selection problems but still has only a crude connection to what the worker or the firm experiences and makes judgements about.

But, why bother going to that effort? The process of deflating adds nothing to the information to be had from terms of labour and terms of wages. Indeed, it is worse than that, because it actually takes information away. Sticking with the money prices and costs both reflects what people actually make judgements about and does not lose information.

The underlying idea that the notion of “real wages” taps into is that money is some epiphenomenon which overlays a “real” economy. But, as we have seen, trying to postulate something called “real wages” fails to pick out a specific phenomenon, suppresses information as it does so and does not capture what people actually make judgements about. If our concern is with human behaviour then the issue becomes what information do people use to make their decisions. The notion of “real” wages fails to accurately capture any specific thing.

Consider the asymmetry between increases and cuts in (money) wages. If money was an epiphenomenon over some “real” economy, there should not be any difference between raising money wages when the price level is rising and cutting money wages when the price level is falling. But contracts, debts and financial obligations are set in money terms and operate across time periods, so there is a clear difference between the two. Cutting money wages increases the burden of existing debts and obligations. So, it is perfectly rational for workers to resist cuts in money wages even if their general terms of wages are rising. Looking at “real wages” again suppresses information; indeed, it seriously misleads.

Nor is the notion of “real prices” any better. There are only two sorts of prices: money prices and barter prices—prices in terms of money and prices in terms of other goods and services. The first can be expressed in a common range of numerical values, a measure of prices that operates across goods, services and assets. It is one of the great advantages of money. The second can only be expressed in terms of other goods and services. The notion of “constant price” is not a “real” price: it is simply prices expressed in “frozen” money abstracting away from general shifts in money prices/the barter prices of money. One is using a key characteristic of money while pretending to get “past” it. To so attempt to use money to get “underneath” to the “real” economy is to, in fact, express how much money is not an epiphenomenon. One is still using money, just in a particular way.

Yes, people are aware of shifts in the barter prices of money: which is to say, the inverse of money prices. But there is not some “real price” beyond that.

Money is a transaction good: people use it to transact to get the goods and services they want. So, if we have three goods in an economy (consumption, assets and money) then we have two markets (money for consumption goods, money for assets). The process of transacting uses a medium of account (money) and does so for good reasons. The advantages of money over barter are not some epiphenomenon. They are major advantages that change how people behave and so how the economy works, particularly given money operates across time periods (we can spend now or later; we have previous entered into obligations expressed in money terms).

Using the concept of "real" prices abstracts away from “actual” money while continuing to invoke its functions. This is not analytically helpful, for we then make money what it is not—immediately, transparently “neutral” about prices in terms of goods and services. Cognitive simplification—being able to express prices in common numerical values—means precisely that and is a genuine economic function. It takes time to register general shifts in the barter price(s) of money and for credit, contracts and other prices to adjust. Which means that shifts in spending have effects on output, until people adjust for any general change in what money buys (in terms of goods, services and assets). By "abstracting away” from money (even though we are actually not fully doing so) we also abstract away from money being a cross-temporal constraint due to contracts, debts and other financial obligations.

The notions of “real wages” and “real prices” do not get to “underlying” realities, they obscure economic realities because they abstract away from how people are actually making decisions and constraints on those decisions. Money is the prime form of information in a monetised economy. By treating it as some epiphenomena, we are not revealing, we are obscuring.

Money is not an epiphenomenon and it is actively misleading to use economic language that implies it is: particularly when such language ends up suppressing relevant information.

Wednesday, November 23, 2011

A Socratic dialogue with the inflationphobics

This is based on a comment I made here.

Perhaps we need a bit of Socratic dialogue with the inflationphobics.

Q: What has caused more damage; entrenched inflation (the 1970s) or massive deflation (1929-32)?
A: Deflation. But that is not what we face.
Q: What has caused more damage; entrenched inflation (the 1970s) or unexpected disinflation* during a leveraging crunch (2008-?).
A: But inflation is evil.
Q: Why is inflation bad?
A: Because it distorts private decisions.
Q: Does it do that making basic parameters for judgement unreliable?
A: Yes.
Q: So it is about creating a clear and reliable framing for private decisions?
A: Yes.
Q: So, a central bank should provide a reliable framework for private decisions?
A: Yes.
Q: So it is about framing expectations in a credible way?
A: Yes.
Q: So, what is more important to people, expectations about income or expectations about prices?
A: [Some obfustication]
Q: So, should not a central bank seek to credibly generate expectations about income?
A. [Some more obfustication]
Q: In a highly leveraged age with many wages set by contracts operating across time and a range of "sticky" prices, which is more important to people, expectations about money income or "real" income?
A. [Even more obfustication]
Q: So, would not a clear target about aggregate income (aka NGDP aka Py) create a framework to anchor expectations in what people actually care about?
A: [Meltdown]

* Yes, other things are going on, but the surreptitious disinflation was when the US economy really nosedived.

ADDENDA Lars Christensen was good enough to repost the comment as a blog post.

Tuesday, November 22, 2011

Forms of employment, unions and wages

Loath as I am to disagree with an economic historian as eminent of Peter Temin, his paper The Great Recession in Historial Context (pdf) has a claim about wage stickiness and its source I disagree with.

In explaining the development of stickiness of wages and the rise of unions. Temin writes:
As the size of production units, whether mines or factories, became larger, the ability of labor markets to be optimally competitive also diminished. Large employers yielded little bargaining power to workers to negotiate wages and working conditions. If a factory, for example, was the only large employer in town, the options for workers were even more limited and the market power of the employer more obvious. Workers formed unions to countervail the market power of employers, and wage bargaining and strikes supplanted the individual wage negotiations implicit in Hume’s and Smith’s analyses.
This is a wonderful (indeed popular) “just so” story. The trouble is, it is clearly wrong. Large employers tend to pay more than small employers, just as large supermarkets tend to be cheaper than corner stores. Size does not equal market power and does not determine comparative wages or prices.

There is a much simpler reason why unions arose in response to large employers. The workforces of large employers are easier to organize. The rate of unionization increases with the size of the employer (hence the public sector is far more unionised than the private sector) because the bigger the employer, the easier its to organize the employees—they are easier to identify, collectively talk to and have more commonality of interests. Moreover, the power of unions comes from their ability to exclude competing workers. The true enemy of a union is not the company, it is the “scab”, the non-unionised competing worker. The more centralised the workplace, the easier to exclude.

Similarly, wages are “sticky” outside unionised workplaces and across employers regardless of size. The “stickiness” comes from the labour relations being across time periods and asymmetric information. Reliable workers who understand how the firm operates are worth keeping, are valuable. Massively undermining their status as bargaining agents—and your own reliability as a bargaining agent—by unilaterally cutting wages is not the way to have a good relationship with your employees. Particularly given they have obligations set in money terms, so cutting their money income makes their situation worse regardless of what money prices are doing generally. Nevertheless, that money is how contracts “keep score”—so go directly to employee status as bargaining agent and employer reliability as bargaining agent—is even more important.

Moreover, with the development of extensive regional, national and global markets, and increased complexity of products, it becomes harder to workers to judge employer claims. A medieval peasant could see how good the harvest was, and could observe grain prices, so variability in income was much more manageable because far less trust was involved. A modern employee has far less information to directly observe about inputs and outputs in what they produce. That leads to more emphasis on what workers can judge as “proxies” for what they cannot. The reliability of employer behaviour, the respect (or lack) of employee status as bargaining agents has to be increasingly relied upon in an ongoing interaction (a repeated game, if you like).

It is not the size of the company that determines “stickiness”, but the form of the employment contract. “Spot” markets in labour allow much more flexibility in wages since there is no ongoing relationship. It also provides an example where unionisation provided large gains to (some) workers—the unionisation of the waterfront. But that is a case where unionisation changed the form of the labour contract. It is also a case where exclusion of competing labour is particularly intense—employment on the Australian waterfront, for example, has practically become hereditary.

It was not unionisation, but changes in the forms of labour contracts, in the structure of labour relations so that labour became much more an across-time interaction with increased information asymmetries, which increased the “stickiness” of labour. Unions are a symptom of that change far more than they are a source of wage “stickiness”.

Contemporary unions confront a range of problems. First, with the growth of two-income households, variation in income became rather less of an issue for many households, so workers become more willing to shift to forms of labour provision not susceptible to unionisation. Second, the increase in incomes and growth of regulation and other government interventions has meant that legal mechanisms (lawyers) and political ones (politicians and media) became increasingly competitive to unions as bargaining mechanisms. Third, the interests of unions is to make employment remuneration as complex as possible—both because that increases the need for a bargaining agent and because that provides various “victories” for unions to trumpet. The problem is that such a strategy increasingly generates wasted resources that can be harvested by moving to different forms of labour provision or contractual arrangements. Just as it was not employer market power which drove the rise of unions, nor is it driving their decline.

As to why large corporations tend to pay more than small employers, consider why large supermarkets have lower prices than the corner shop. The corner shop is, indeed, the corner, that is local, shop. A large supermarket has to make it worth your while to go that extra distance. Once you have decided to travel further (typically drive) to shop, then it is competing with all the providers in reasonable driving distance. It offers range and low prices to compensate for more travel time and less personalised service.

A large corporation finds it easier to spread/manage risk than a small employer but harder to tie worker effort to productive outcome. So, it pays a “hostage premium”—more than the employee can get elsewhere so that they police themselves more, as they have more to lose. This “hostage premium” is not merely basic salary; it includes a range of benefits and common activities to try and encourage self-policing. So, even in the absence of a unionised labour-exclusion premium, wherever the corporation finds it hard to tie employee effort to productive outcome, we can expect a “hostage premium” to encourage self-policing.

This does not explain what we observe of CEO pay, however. Tying the pay of CEOs to performance should be a lot clearer than executives further down the corporate hierarchy. Yet, what we observe is pay rates that seem unconnected to performance. A (very high) premium that is apparently often not hostage to productive behaviour.

So, consider the mechanism that selects pays for CEOs. In political science terms it is like rigged election autocracies. What we get is an "insider's game": insiders agree that you should be rewarded for being an insider, a game they all hope to benefit from so seek to maximise the return for being an insider. Benchmarking just increases the “gaming” (pdf), since it just increases information to insiders without increasing effective accountability since it does not breach the insider dominance of such decisions: the problem is not information asymmetries, it is insider privilege. The real puzzle is not why CEOs are paid so much, it is why their compensation can be notoriously unconnected to actual performance.

Forms of employment (including expected length of interactions), degree of centralisation of workplaces, information assymetries, insider privilege/outsider exclusion: they explain a lot more of how labour markets work than alleged employer market power. Including wage stickiness and the rise and decline of unions.

Tuesday, November 15, 2011

Of human bondage and history’s selection processes

In farming (i.e. agrarian) societies it has been standard for about 8 out of 10 people to be farmers. The land/labour ratio is a crucial determinant of social patterns in such societies. For example, which of the two factors – land or labour – is more constrained affects profoundly the use of human bondage.

If land is more constrained than labour (i.e. the fertile area is densely populated for the existing technology level), then the cost of labour will be low and control of land will provide the basis for extracting a surplus (for production above the level required to support the producers). Any use of slavery is likely to be limited to households, specific forms of production that dangerous or unpleasant and easily supervised (e.g. mining, cotton production, rowing galleys) or to tie loyalty to rulers by eliminating family ties (eunuchs, state slaves, slave warriors).

If labour is more constrained than land (i.e. the fertile area is lightly populated for the existing technology level) then the cost of free labour will be high, the return to control of land low and there is likely to be extensive use of bondage to extract a surplus, since the cost of subsistence plus supervision and lessened productivity will still less than that of free labour. Some form of bonded farming (such as serfdom) is likely to be used, since it has lower supervision costs and productivity loss than outright slavery and, unlike slave populations, serf or similar populations will reproduce themselves, so provides more reliable continuous labour supply than outright slavery.

(The only substantial slave population which might have reproduced itself is that of the antebellum American South and, even there, is seems likely that slave smuggling was significantly larger than has been commonly admitted. Elsewhere, the total lack of family rights usually pushed slave fertility well below replacement. Even in the Roman Empire, the significant prospect of manumission [pdf] is unlikely to have substantially improved fertility before freedom was gained.)

Some classic examples where loosening of the land constraint led to mass use of human bondage are the Americas after the importing of the Eurasian disease pool decimated the existing population, enserfment in Eastern Europe after the defeat of the “Tatars” and blocking of the Ottoman Turks freed large tracts of land for farming and the development of coloni in the later Roman Empire after the devastation of the Antonine plague and the Cyprian plague, a process which accentuated after the population crash at the end of the Western Roman Empire. Demand for staple products such as grain, sugar, tobacco (production of which are easily supervised) accentuated the process.

There is one great exception to all this: post Black Death Latin Christendom. Attempts to re-imposed serfdom failed, because the various Crowns refused to provide the necessary enforcement. The most obvious reason why they failed to do so is that knight’s service (i.e. military service by landlords) was no longer their key source of military power: taxes paying for the hire of free peasants was a crucial part of their forces and their men-at-arms were often contracted rather than feudal levies. (In Eastern Europe, by contrast, the reliance of the local Crowns on the military service of the servitor class meant that the Crowns were willing to enforce serfdom.)

But even among the knightly class of C14th Latin Christendom, the pressure for re-enserfment was uneven. This was not merely a matter of great magnates having other options (they were to be also less interested in enserfment in Eastern Europe than the lesser servitors) or the uneven impact of the Black Death (which just encouraged labour to “spread out”). It was also that tenancy and capital substitution provided alternative ways landowners could respond to labour shortages. The technological and capital market dynamism of medieval Europe, along with the depth of available skilled (i.e. “craft”) labour, the range of enforceable contracts and forms of property, made capital substitution a much more “live” option than it was in any of the other cases.

In other words, C14th Latin Christendom had, far more than the others, more intensive use of capital as an alternative to imposing bondage on human labour. Social capital in the form of effective laws and range of property rights; human capital in the form of skilled labour; financial capital in the form of sophisticated capital markets; and physical capital in the form of a machine-oriented production. The efficiency of mixed production (pigs, sheep, cattle, crop rotation), by raising supervision costs, may also have been a factor.

One might object: why did this not happen in the later examples of the Americas and Eastern Europe? To which the answer is: it did, eventually. As the institutions of the Commercial and then Industrial Revolutions seeped into Central and Eastern Europe, serfdom decayed and was eventually abolished. Greater New England adopted the free labour/capital intensification approach while the antebellum South remained with the “tropical zone” pattern of cheap labour and concentrated wealth. Unfortunately, the combination of British institutions and American practicality led to slavery becoming more profitable and efficient, hence the resistance to any abolition of slavery (which would have wiped out about a third of the wealth of the South and reduced significantly the value of white votes). Latin America lagged somewhat, as one would expect from its lower level of capital intensity. Islam lagged further still, in part due to slavery having Sharia endorsement. Conversely, densely populated and comparatively capital-intense Japan was one of the first non-Christian countries to abolish slavery in the medieval and post-medieval era.

The Soviet Union re-introduced both slavery (state slavery, in the forced labour camps) and serfdom (as workers were banned from leaving their workplaces without permission: the essence of serfdom). Neither proved particularly efficient and the man who oversaw them longest – Lavrentiy Beria – moved to abolish both as soon as Stalin was dead.

The shift to the capital/labour ratio playing an increasingly important role in society (generally) encouraged the abolition of bondage. (The antebellum South, the Soviet Union under Lenin and Stalin and Nazi Germany being conspicuous exceptions to the general trend: In the first and last case, the arbitration of war resolved the issue.)

Selection processes
To put the early exceptionalism of Latin Christendom another way, there was a lot more for the selection processes of history to work upon in C14th Latin Christendom than there was in the other cases (such as the later Roman Empire). Which is a general reason for the rise of North-Western Europe and its descendant societies. A significant number of competitive jurisdictions in close proximity between which ideas, capital and skills were relatively mobile; displaying a range of institutional forms; with legal and cultural diversity plus a rich intellectual and historical heritage from its Classical predecessor civilisation to draw upon. There was both more for the selection processes of history to work upon and more intense selection processes which were nevertheless operating within sufficient political stability for institutional learning and evolution to take place.

No other civilisation centre in Eurasia had that mix of features. Most others were dominated by autocracies as essentially the sole (or overwhelmingly dominant) form of government. Many had long periods of a single, dominant, autocracy. Even when that was not so, the ability of ideas, capital and skills to move between jurisdictions was often somewhat limited. In the case of Islam and Hindu India, laws being held to be of divine origin (Sharia, the laws of Manu) limited the possibilities of legal evolution.

The civilisation centre which had the largest overlap in features was Japan, with its competing daimyo—unsurprisingly, it was the non-Western civilisation which was most easily able to adapt Western methods because it already had the most similar institutional structure. But it lacked the cultural diversity of Europe or the intellectual depth provided by the Classical heritage incorporating memory of institutional variety and mathematised abstract theorising about the structure of things. It was unable to achieve the take-offs North-Western Europe did: but it was able to be first to catch up.

Having much more for the selection processes of history to work from, and a competitive-but-continuing institutional framework for them to work in, proved to be a world-beating advantage for North-Western Europe and its descendant societies.

Tuesday, November 8, 2011

On the stupidity of (some) Central Banks

The short answer from history to the question of how stupid can a central bank be? is: a central bank can be really, really stupid.

I am using ‘stupid’ in a technical sense: doing things that seriously adversely affect lots of people with no justifying benefits to any wider public good—that is, which show a lack of intelligence, understanding, reason, wit or sense. The actions may seem a good idea to the central bank at the time—due to perverse incentives, policy framings disconnected from economic reality or whatever—but in terms of wider public policy, they are (to varying degrees) disastrous. Central banks exist to serve, so how that “serving” is framed can make a great difference.

For example, hyperinflation is usually a deliberate attempt to inflate away government debt and/or generate revenue well beyond the willingness or ability to tax. It may be wicked, but it is not stupid in quite the above sense. (There are justifying benefits for decision-makers, without necessarily justified benefits.)

Beware of the French and central banks
Among stupid central banks, the all-time winner is the interwar Bank of France turning the gold standard into a doomsday device (pdf), helped by the US Federal Reserve, by building up its gold reserves without issuing money to match, so taking gold out of the monetary system, thus driving up the price of gold in the monetary system (and so the price of money, as such gold set the price of money) and thus driving down the prices of everything else. It and the Fed created the Great Deflation of 1929-32 we call ‘the Great Depression’ and so mass unemployment, the impoverishing of millions, the unravelling of much of (pdf) the world trade system, the fall of Weimar Germany and the rise of Nazism (followed by the Fall of France). It was a disaster of monumental proportions.

It was hardly the only disaster of central banking, however. Another (in)glorious episode also came from France with John Law’s Banque Générale gaining the right to issue paper money, which stimulated economic activity. The Regent, the duc d’Orleans, decided that if some paper money was good then even more paper money must be even better, leading to the truly spectacular Mississippi Bubble. This French disaster was based on the same logic (using that term loosely) as that which created the Great Deflation/Depression namely, “if some is better (some paper notes, some level of gold backing of the franc) then more is better and even more is better still.” One is reminded of the Abbe Sieyes dismissing the argument for bicameralism on the grounds that if the upper house agreed with the lower it was pointless and if it disagreed it was pernicious. Pernicious simplification passing itself off as sophistication: how very French. (Perhaps the baleful influence of Cartesian rationalism?)

By contrast, the Bank of England has a long history of considerable policy success, starting with vast improvement in management of government debt. The South Sea Bubble was rather less of a problem than the Mississippi bubble precisely because the Bank of England had disapproved from the beginning. While the Bank’s management of the gold standard over the two centuries up to 1914 suffered various bumps and problems, it had nothing to equal the aforementioned French disasters.

In our own time, the Bank of Japan’s management of the yen since the collapse of the bubble economy has come in for much criticism. However, the demographics of Japan make some of that criticism less clear-cut than is often suggested.

Even though some of the ECB’s problems are “built in”, there are also plenty of grounds for criticism for the European Central Bank (ECB), until recently with a French head (perhaps not encouraging; especially as the euro is effectively an artificial gold standard for its member countries).

Doing right
A contemporary example of successful central banking is the Reserve Bank of Australia. It has run an inflation target since 1993 (pdf). Its website is very clear on its policy target. In the words of the Reserve Bank:
The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.
The minutes of its Board meetings are published two weeks after each meeting: this matters much less than that it has a clear monetary policy regime.

The Reserve Bank sees its role as providing an anchor for private sector inflation expectations and it does so by being upfront about its policy target. That it has an explicit target since 1993 is no coincidence: the experience of the severe 1992-93 recession where inflation was squeezed out of the Australian economy in a particularly costly way made it clear to policy-makers that being explicit about monetary policy was preferable. As had the problems with monetary policy in the 1980s:
In the early 1990s, the Reserve Bank did not enjoy the largely uncritical press it receives today.
The conduct of monetary policy in the 80s was fundamentally incoherent, unsuccessfully pursuing multiple objectives and shrouded in a veil of secrecy.
Without a policy commitment to price stability, the Australian economy lacked a nominal anchor.
(Does any of this sound familiar, by chance, to American readers?)

The success of the Australian economy since then has provided strong evidence for the good sense of this approach of a clear monetary policy regime via an explicit target. But there is also no mystery about why being explicit has been a successful approach. The point of money is to facilitate transactions by massively decreasing transaction costs. Not only are the search costs that barter imposes avoided by use of money, but there are a range of problems with barter than using money eliminates or greatly ameliorates, thereby greatly facilitating transactions.

If people have reasonably accurate expectations of how (money) prices in general will go, they can make arrangements (including contracts) based on those expectations. As Canadian economist Nick Rowe points out, inflation targeting in Canada came out of pressure from the private sector. They wanted reliable expectations about prices so as to set wage contracts.

Sudden, unexpected changes in prices can leave these arrangements misaligned with actual prices. If, for example, that results in changes in the terms of labour—the ratio of labour costs to the price(s) of what the firm sells—so that wages become seriously over-priced (in normal, somewhat imprecise, economic speak, “real wages have risen”) then firms will stop hiring, workers may be sacked, firms may collapse (i.e. they absolutely stop hiring and all their workers lose their jobs). It is not good to have significant, unexpected downward shifts in price movements, since that essentially guarantees that the terms of labour will rise unexpectedly. (So unexpected disinflation can have similar effects to deflation.)

Doing wrong
Which is what happened at the beginning of the Great Recession in the US. When uberblogger Matt Yglesias calls it a “huge failure of central banking” he is absolutely correct. To put it another way, serious expectation failures were imposed on the US economy, resulting in a dramatic drop in transactions. (That the Federal Reserve decided to surreptitiously disinflate as a financial crisis—the sub-prime crash—was building made things much worse: including the financial crisis, providing some reprise [pdf] of the Great Depression.)

How did this happen? Have a look at the US Federal Reserve website. There is no statement about what the specific aim of US monetary policy is. The US Federal Reserve provides no explicit anchor for expectations in the economy. So, the US Federal Reserve can decide to disinflate—to significantly reduce the inflation rate—and there was no warning for private agents that this was happening. To act in this way is to actively degrade the level of information in the economy and so misdirect expectations.

This is deeply stupid in both theory and practice. There is no economic gain from changing monetary policy surreptitiously, there are only unnecessary costs. Australian policy makers found this out the hard way in 1992-93. They learnt the lesson and have moved on. But, alas, almost no one takes what Australia does seriously: we are too small, too far away, too “lucky”, too “colonial”. Europeans and Americans tend to be deeply parochial people, seeing themselves as the measure of all things, and so are rather bad at learning from the policy experience of others.

[Read the rest at Skepticlawyer or a slightly revised version at Critical Thinking Applied.]