What is it about money?

I was going to hold off blogging until the New Year, but irritation drove me to posting ...

In a recent article, Alan Kohler had this to say:

The real war is between monetary policy and the Digital Revolution – between the world of finance trying to reduce the value of money and therefore debt, and the world of technology pushing for greater efficiency and productivity, to drive prices lower and the value of money higher.

Why does money make perfectly sensible economists and economic commentators forget elementary economics? Money is a good. Fine, it is a special type of good, it is a transaction good--something used to facilitate transactions.  We use money, not because it has production or consumption utility--the paper or polymer notes we use as money has no interesting element of either--but because it has transaction utility (expected utility in future transactions).

Nevertheless, money is a good. The price of goods in a market is set by supply and demand. Sure, the price (in the sense of the swap value) of money is the inverse of the price for all other goods and services. That is, if P is the price level, the swap value of a unit of money is 1/P. (The money price of money is itself; i.e. the money price of x dollars in dollars is x dollars.)  Still, the price (swap value) of money is a supply-and-demand matter.

Since the supply of money need not be fixed--the joy of a token-money central bank is it can produce any amount of the tokens we use as money--there is no necessary effect for any amount of extra productivity to do anything to the price (i.e. swap value) of money. Productivity and output tell you nothing on their own about the swap value of money and thus the price level.

If you don't believe me, ask the Zimbabweans. Zimbabwe has no currency of its own any more (Wikipedia labels its currency as "various"), because its central bank under Governor Gideon Gono was so profligate in printing money that hyperinflation got to an estimated 6.5 sextillion % in November 2008. In January 2009, Zimbabweans were legally able to use other currencies and shortly thereafter the Zimbabwean government stopped issuing currency. Whatever was happening to Zimbabwean productivity was rather beside the point in the face of such currency profligacy.

Gold standard effects

Kohler cites the deflationary experience of the C19th as supporting his view of the deflationary consequences of higher productivity:

During the second half of the 19th century prices fell consistently – that is, there was deflation – because of the impact on productivity of the Industrial Revolution. Between 1870 and 1900 the purchasing power of the US dollar doubled as prices came down.

Yes, there was a prolonged deflationary period in the latter C19th. The US, Germany and France all went on the gold standard in 1873. Under the gold standard, the price of gold sets the the price of money since money has a set exchange of rate of money into gold. So, if output of goods and services rises faster than the stock of gold--as happened in the gold zone from 1873 to 1896--then there will be deflation.

Conversely, if gold production outstrips growth in output of goods and services--as happened from 1896 to 1914 due to the Kalgoorlie/Coolgardie and Klondike gold rushes coming on top of the earlier Witwatersrand gold rush--then there will be inflation.

The Industrial Revolution did not suddenly go into reverse in 1896. Just as the current plunge in the Greek price level is not due to surging Greek productivity.

Sure, rising output and increasing productivity put downward pressure on prices. But whether this will have deflationary consequences depends on what is happening (and expected to happen) with money. Kohler is breaking Sumner's dictum--never reason from a price change. (Or, in this case, a price level change). Price, it is a supply AND demand matter. Including for money. Money may be special, but it is not that special. The gold zone deflation followed by the gold zone inflation were a gold-production and goods-and-services-output story, not just a goods-and-services-output story.

Good and bad deflation

As it happens, I agree that rising output and productivity was an important part of the 1873-1896 story, but not quite the way Kohler tells it. It helps explain why the 1870s expansion of the gold standard was bad for Britain, provided one understands the different sorts of deflation. For deflation can be divided into the good, the bad and the ugly (pdf).

Germany was in the process of industrialising: it could import millions of peasants into its cities, and did. The US was also in the process of industrialising and incorporating its westward expansion into its economic system. It could import millions of migrants into is cities, and did. In other words, Germany and the US had lots of inputs to add to their industrialising economies. Germany also received the institutional and transaction cost benefits of unification while the US received the institutional benefits of establishing a stable post-Civil War constitutional regime with the Compromise of 1877. To a significant extent, Germany and the US experienced "good deflation" (the downward pressure on prices of expanding output due to expanding, and more efficient use of, inputs). In other words, their aggregate supply curves kept shifting rightwards (i.e. producing more for a given price level).

Rising productivity (good),
falling demand (bad),
collapsing incomes (ugly).

By the 1870s, Britain was already highly urbanised, highly industrialised and its institutions were about as economically efficient as was achievable without major political pain. There was not a lot of good deflation to be had. So, they experienced more "bad deflation" (downward pressure on nominal income/aggregate demand) due to growth in output of goods and services being higher than growth in the stock of gold. With income prospects therefore relatively poor in the UK, capital flowed out to the US, Germany and other places where returns were easier. (Throughout this post, income means money or nominal income.) Hence the UK falling behind the US and Germany in economic growth and industrial modernisation. (The US and UK had similar levels of per capita economic growth for much of the C19th: the US per capita growth rate only shifted above Britain's in the 1870s.)

The Euro is like an artificial gold standard. Just as entering the gold zone was about a pound sterling for everyone, so the Eurozone was a Deutschmark for everyone. And just as the initial expansion of the gold zone was bad for Britain, so too there was a similar adverse effect for Germany in the creation of the Eurozone. But Germany then went through a series of supply-side reforms (particularly labour market reforms) which put it in a much better position. German adjustment was helped by higher income growth in the Mediterranean countries; now it is the latter countries who need to do painful adjustments to make the Euro work, Germany is refusing to return the favour of accepting higher nominal income growth via higher inflation.

Inflation targeting

Applying the lessons of the 1873-1914 apotheosis of the gold standard, and grasping how simple inflation targeting is somewhat like the gold standard, enables us to see what is actually behind the phenomena Kohler is discussing.

Kohler writes that:

When the Industrial Revolution reduced costs, debt wasn’t an issue and prices could be allowed to fall. In fact, society’s most powerful were savers, not borrowers: for them deflation was a good thing so they made sure it happened.
This time around it’s different: borrowers are ascendant and central banks are working for them, not savers. In fact, savers are being plundered with super low interest in the name of promoting aggregate demand and maintaining inflation.

Pausing here, if it is all about rising productivity, how did savers "make sure" deflation happened? By insisting on a certain monetary policy regime perhaps?

The cross of gold.

But Kohler is right in that deflation is nastier for debtors. But so is any collapse in income expectations (and income), since debtors rely on expected income to remain solvent.

Of course, a collapse in income expectations and income also becomes rapidly a problem for creditors, as their debt-assets (one person's liability is another person's asset) become increasingly threatened the sharper and more sustained the collapse in income and income expectations is. The problem with the Great Depression was "ugly" deflation--a massive and sustained drop in prices leading to a massive and sustained drop in income (since income = price x quantity) leading to mass insolvencies and financial collapses and crises.

Why was there a massive drop in prices? Because central banks (led by the Bank of France) hoarded gold, driving up its price, and therefore the price of money--which was at fixed exchange rates to gold--therefore driving down the price level in the gold zone (since the price level is the reciprocal of the swap value of money). Which then drove down incomes.

With both the gold standard and simple inflation targeting, the central bank takes responsibility for the maintaing the "value" of the currency (either in gold or on a set rate of change of the price level) but no responsibility for income expectations. So, if income expectations crash, that's unfortunate but does not lead to any change in the policy regime. (Until, of course, it does--such as by abandoning the gold standard.)

Recovery from such a transactions crash requires that income expectations recover. Such as due to an expected sustained rise in the price level.

Which is clearly not part of current expectations. Inflation has been low because central banks are making keeping inflation down their central priority and are very credible on that point.

As it happens, there is a productivity price norm (pdf) which Hayek and Keynes almost agreed on (pdf) where productivity shifts drive monetary policy. Keynes was a firm supporter of a stable price level; Keynesianism may be associated in some quarters with inflationary policies but, in this matter, Keynes was clearly not a Keynesian. A case of Etienne Gilson's point that the conclusions of the master are the premises of the disciple (who therefore fail to end up in quite the same place). But the productivity price norm is an explicit monetary policy regime, it is not some "natural" consequence of rising productivity.

The secular trend to low interest rates over recent decades are a product of rising incomes in China, India and most of Asia in between, leading to high savings rates. So saving has been "pushing on" investment, in a low inflation environment, hence low interest rates. Low interest rates are usually a sign that money has been relatively tight (i.e. the expected path of money is low compared to the expected path of output). So, once again we are back to supply and demand and the monetary policy regime.

Kohler's story of central banks heroically fighting the threat of rising productivity is fairy tale stuff. Worse, it is a fairy tale that allows central banks to evade responsibility for their actions. But ignoring the role of money and monetary policy in economic cycles does that. Acknowledging that supply and demand matter for money too--a point of elementary economics--would be a good start.

[Cross-posted at Skepticlawyer.]

The distance of the recent past

Recently. I went on a bit of a Criminal Minds (2005- ) binge, watching the first 7 seasons. Still looking for some more profiling action, I then re-watched The Silence of the Lambs (1991).

The film holds up well. But what struck me, re-watching it, was how primitive the technology seemed. In Criminal Minds, it is all contemporary hi-tech--mobile phones, emails, digital screens, internet and database searches and, in the later seasons, tablets.

Those low-tech early 90s

In The Silence of the Lambs, there are no mobile phones, emails or internet. Clunky faxes are used and a "database search" is looking up old newspapers on microfiche. It seemed laughably low-tech. Yet we are talking about a contrast well within my own adulthood.

Low tech

Part of the contrast is the "boiling lobster" effect. While, in historical terms, 20-odd years is a mere eye-blink, we have experienced the IT revolution in waves, seeping through society. Seeing 20 years of difference in one hit is naturally much more striking. Particularly when the same activity is being engaged in, 20 years apart--inferring the characteristics and habits of the unknown serial offender from behaviour. Not only the same activity, but an information-heavy activity.

The contrast is striking, and the sense of recent tech "primitiveness" even more striking, though the effect somewhat undermines Alvin Toffler's famous "Future Shock" thesis. We have adjusted to--nay embraced--I-tech with remarkable ease, even enthusiasm. The recent past of The Silence of the Lambs seemed tech primitive, not restful or preferable. Most of us deal with commercialised I-tech, and commercialisation is about making things attractive, useable, accessible (to varying degrees of success).

Gender shifts

It is not commercialised technology the people generally find confronting or disorienting. The other "distance of the recent past effect" was the role of women in law enforcement. That Jodie Foster's FBI agent Clarice Starling has to deal with male presumptions of females as delicate flowers not up to the grit of law enforcement--even if located in the film as part of rural backwardness--is a theme notably absent from Criminal Minds. There, female law enforcement officers are just taken for granted. Bad-ass female law enforcement officers, indeed. This is a general phenomenon--is not Cote de Pablo's Ziva David in NCIS the deadliest law enforcement officer in TV? Of course, ex-Mossad assassin is not a common former career for such. (Jim Caviezel's John Reese in Person of Interest [2011- ] is more menacing, but not a law enforcement officer.)

Admittedly, this is fiction we are talking of.  Female sheriffs are way more common in police procedurals than in real life. Still, that female-law-enforcement-officers-being-somehow-remarkable is not even a significant theme in Criminal Minds and similar shows increases the "distance of the recent past" effect from re-watching The Silence of the Lambs.

Toffler's thesis may make more sense in other societies. Western societies and East Asia (or, for that matter, India), even Islam seem to be embracing technology with both hands. It is the last societies where (social) future shock seems more in evidence, particularly in Middle Eastern Islamic societies. But our status vis-a-vis other humans is a much more emotionally-laden thing than our interactions with cool new tech. (Tech and social relations have some interaction, but it is still the social relations which have the far more powerful emotional resonance.)

Fem techs 

One area where there is an amusing interaction between I-tech change and gender roles is how ubiquitous the feisty, genius-smart, female techie has become in TV shows. Prominent examples include Willow in Buffy (1997-2003) (the original?) and Abby in NCIS (2003- ). Criminal Minds (2005- ) has its own Penelope Garcia. Warehouse 13 (2009- ) has Claudia. Arrow (2012- ) has Felicity Smoak.

The smart, tech-savvy female character extends beyond actual techies. The X-Files's (1993-2002) Scully was very tech savvy and an actual gun-toting FBI agent--so, however tech savvy, not a techie. Similarly for Stargate's (1997-2007) Major (later Colonel) Carter. Who was a genius-smart, bad-ass fighter and later commander (of Atlantis). Amanda Tapping did so well at being the smartest and sexiest person in the room, she moved on to being the esoteric super-scientist lead in Sanctuary (2004-9). Chloe in Smallville (2001-2011) was the tech-smart friend and side-kick, so not really a techie. Amita in Numb3rs (2005-10) was the computer-smart fellow-mathematician girlfriend of child-prodigy mathematician Charlie Epps, so also not an actual techie, however tech-savvy.

Goth tech

Dr Temperance Brennan in Bones (2005- ) is a squint (technical expert) rather than a techie. And while IQ-wise she is the smartest person in the room, her Asperger's regularly makes her engagingly emotionally clueless. Though, in its own way, that is also operating against gender stereotypes. Lydia in Teen Wolf (2011- ) is also the smartest person in the room, but she is vast-reading and good-reasoning smart, not a techie as such.

The feisty techies have a range of roles with major characters.  Willow was Buffy's BFF. In NCIS, Jethro Gibbs and Abby have a very father-daughter relationship--part of the fun of the Gibbs character is that he seems to be such a strait-laced ex-Marine Gunnery Sergeant, yet is completely fine with Abby's in-your-face Gothiness. In Criminal Minds, Penelope and Derek Morgan have a flirt-outrageously pseudo-sibling friendship. In Warehouse 13, Claudia has a delinquent-daughter relationship with Artie and later a pseudo-sibling relationship, even  fag hag connection, with Steve Jinks. In Arrow, Felicity starts off as Oliver Queen's employee and then becomes tech side-kick.

As an aside, the phenomenon of TV series not only have quite long runs but increasing their ratings over time (as happened with NCIS, for example), may also be a consequence of I-tech. Nowadays, one can simply "catch up" with a series by buying or borrowing the DVDs, or downloading it. So one can be up-to-date with the story arcs and get all the nuances, as the new episodes air, even if you come late to a series.

The other advantage of watching via-DVD, especially for genre fans, is that you don't have to put up with the TV station screwing up the sequence of episodes. (Which Oz TV channels seem to do with truly remarkable regularity.)

We live in an age of ordinary wonders and the distance of the recent past effect is very much part of that.

[Also posted at Skepticlawyer.]

The unknown country

Which country is this?

• First nation in modern history to secure full unification without killing anyone.
• First major nation to have achieved independence and sovereignty without killing anyone.
• First nation in modern history to appoint a Jew as commander of its armed forces,
• Never had any form of slavery or serfdom.

The answer is below the cut.

Righteous rage

In September, there were two horrific jihadi attacks in Africa against "soft targets"--the 21 September attack on the Westgate shopping mall in Nairobi, Kenya and the 29 September massacre of students in the male dormitory of the College of Agriculture in Gujba, Yobe State, Nigeria.  The first attack killed at least 61 civilians (plus 6 Kenyan soldiers and 5 jihadis), the second 44 (mostly Muslim) students.

Conflicted history

Africa has a long history of jihadism. The frontiers between Islam, Christianity and animism have been violently contested ever since the first waves of Islamic conquest swept across North Africa and into Spain from the mid C7th to early C8th. The notion that the jihadi impulse went dormant after the initial wave of Islamic imperialism until being "revived" by Western imperialism is quite false, and particularly so in Africa.

Not only was there violently contested religious frontiers, but the social pattern of isolated trade cities and thin agrarian strips surrounded by lineage-organised pastoralism which had produced the original Islamic explosion in the Arabian peninsula was reproduced in North Africa, especially in the Maghreb. Periodically, a religious leader would inspire unity across lineages, leading to another wave of conquering, religious-inspired pastoralists, such as the Almoravids in the C11th and the Almohads in the C12th.

Not that Africa is the only border area of Islam where there is a long history of contested religious frontiers. The tiny Christian minority in Pakistan continues to be the regular target of mass-murder attacks.

Revealing rage

The September attacks were massacres of civilians (in the second case, teenage boys), though the Westgate mall turned into a prolonged gun battle when Kenyan forces arrived. The attacks were mass murders, and intentionally so. In the case of the Westgate mall attack, there seems to have been some attempt to only target non-Muslims.

The attacks prompted me to re-read Bernard Lewis's 1990 essay The Roots of Muslim Rage. The analysis therein does help make sense of such attacks in ways that "blaming the West" narratives do not. The organisation behind the massacre of students--which has previously carried out similar attacks--is Boko Haram, whose name apparently translates as "Western education is sinful". Such attacks are about controlling behaviour and belief--above all, within Muslim societies themselves.

Who is attacked, how and where can be very revealing. Consider the attempt to kill 14 year old Malala Yousafzai, an advocate for schooling for girls. How can a 14 year old girl be such a threat that she had to be killed?

Very easily, if one understands that the focus is control and belief; particularly controlling women. Indeed, what could be a greater threat to that goal than a Muslim teenage girl who publicly embraces actively thinking and seeking knowledge for oneself?

Attacks on Western targets are subordinate to that ultimate goal and make sense in terms of that goal. First, because the West is seen as the most dramatic source and exemplar of belief and behaviour outside the designated righteous patterns. Second, t0 create an "us and them" dynamic, to encourage more Muslims to see the West as the wicked Other. Third, to display the power and commitment of the jihadis, through their ability to strike at the powerful West--especially the most powerful and culturally salient Western Power, the US.

None of which reasons operated in the slaughters of Boko Haram, in the Westgate mall massacre, in the slaughters of Pakistani Christians, in the attempt to kill Malala. It is not a matter of how Western policy or actions drive such attacks, it is a matter of how the underlying motivation--given the goal of controlling belief and behaviour--drives who is attacked, how and where.

Which means that US policy can have only a very limited impact on the motivation behind the attacks on US targets because they are not driven by responding to US policy. American films and TV shows, and the culturally subversive patterns therein, are ultimately a greater offense than, for example, supporting Israel. The level of anti-Americanism in Muslim countries has much more to do with the local dynamics of political mobilisation (pdf) than the specifics of US policy or even the local level of religious piety. Turkey is one of the most secular of Muslim countries, yet anti-American sentiment is high. Senegal is one of the most traditionally pious of Muslim countries, yet anti-American sentiment is low.

Ironically, phrases such as "they hate our freedoms" and "the war on terror" are closer to the mark in describing that nature of the jihadi struggle than more "knowing" sophistications. It is not, however, their being "our" (i.e. of the West) freedoms which is the problem; the problem is the spread of such freedoms--that they become not merely of the West. That is what is truly threatening.

Hence a murderous attack on a 14 year old girl.

Culture jihad

Complaints about waging the war on terror being a "war on a noun" (which, strangely, do not come up when people talk about fighting racism, for example) do have a germ of a point, however. The problem is the homicidal rage of the righteous. Terror may be their strategy, but it is a cultural struggle, a kulturkampf, that they are engaged in.

Yet the mere fact of cultural struggle is not, in itself, a problem. The problem is precisely in what means they employ to prosecute that strategy. So, in that sense, it is a war on terror that the West is engaged in.

If, however, the aim is to get the jihadis to foreswear the strategy of terror, then there is a deeper problem. For there is no more complete way to express rage than slaughter and no more complete statement of commitment than embracing death for the cause. Terror then becomes not a merely strategy but a fulfilment. Both an instrument to an end and an end in itself. Suicide bombing may be a tactic, but it is one overwhelmingly associated with religious motivations; especially when it is realised that the leadership of the "secular" Tamil Tigers also invoked religious claims.

Fuelled by righteous rage, terror becomes a fulfilment which does not simply profoundly discount the costs to others. Horror at the attacks, pity for the victims, these are manifestations of empathy. Yet, in the dynamics of righteousness, refusal to empathise with the unrighteous is not psychopathology, it is commitment to righteousness; it is the highest morality. All who refuse to follow the path of righteousness are guilty.  The pain and horror inflicted are not "collateral damage", they are successful punishment of, and warning to, the unrighteous. The costs to (unrighteous) others is part of the benefit to the righteous.

For the unrighteous do not become non-persons, they become anti-persons. Their pain is gain to righteousness and the servants thereof. There is no warrior code to restrain the killers, because all the unrighteous are legitimate targets in the highest struggle of all. Warrior codes exist to distinguish between warriors and murderers and this war of righteousness makes no such distinctions in who may be killed, just by whom and why.

Particularist moral systems--such as those of tribal and nomadic communities--differentiate between members of their moral community and outsiders. The latter are effectively moral neuters, who are treated with amoral pragmatism. The are, in a sense, morally non-persons. Though they may gain moral status--as in the rules concerning hospitality.

Universal moral systems have no category for moral outsiders in the above sense. The moral rules apply to everyone--that is what makes such a system a universal one. To be outside its precepts is to be morally pathological, unrighteous, and not as some unfortunate accident but as deliberate choice. Systems of sin or grace both expand the ways to be fallen and the consequences of being so. To wilfully embrace unrighteousness is to become an enemy of righteousness. You are not merely outside the moral system, you are opposed to it. Hence you are not merely a non-person--a moral neuter--since a universal moral system admits no such category, but an anti-person, an enemy of righteousness. Someone whose success is an offence to righteousness, and whose loss is therefore a gain to it; a literal reversal of moral standing from someone of positive moral standing to someone of negative moral significance.

Systems of eternal salvation raise the stakes, and hence the anxiety, attached to adhering to righteousness. Vilifying the unrighteous becomes an excellent way of displacing one's own anxiety while signaling to oneself, and others, one's commitment to righteousness. (The Islamic doctrine of "the torments of the grave" adds to such anxiety.)

In such universal moral systems there is status and authority to be had from acting as gatekeepers of righteousness. Righteousness becomes a club good, and there is power and authority in saying who is in and who is out; what is righteous and what is not. Pakistani clerics issuing fatwas against Christmas celebrations are precisely playing that game. But so, of course, is a Cardinal-Archbishop denying communion to those displaying the rainbow sash.

Not that is purely a religious game. Political correctness is simply a secular form of righteousness, where part of signalling how righteous you are is ad hominem denunciation of those who fail to follow its precepts of righteousness. The point being precisely that those who so fail are not merely mistaken, but of bad character, as the point of the club is to mark out the better people, the "good" people, and the more intense the vilification, the greater one's commitment to righteousness and the more one is one of the "good" people. There is a certain wry amusement to be had in watching human rights commissions and Catholic and other clerics struggle over who gets to be socially dominant gatekeepers of righteousness, who gets to be the more effective moral bullies. It is, however, a struggle that rarely leads to murders; still less to patterns of mass murder.

There is a range in degree of adherence to generalised normal norms (applying to everyone) or to limited (ambit) moral norms (typically tribal or clan based), to adopt a distinction from social science literature (pdf). Thus, Europe has developed more reliance on generalised norms ("the city"), China more reliance on (pdf) (via) limited norms ("the clan"). Islam offers universalised norms in a region when limited ambit clan/lineage norms are very powerful. It is perhaps not surprising that "tipping over" into commitment to norms with wider application is both more intense and more easily structured into a new, and particularly intense, form of insider-outsider norms. Especially when, due to its all-encompassing nature, Islam is structurally hostile to alternative generalised norms (such as nation, citizenship or democracy-based norms).

Indeed, in the Asharite theology that al Ghazali helped make dominant in mainstream Sunni Islam, there is literally no knowledge, morality or binding injunction outside God's will and revelation. Revelation does not reveal what is good or evil, it constitutes what is good or evil. Allah is a Nietszchean (beyond good and evil) legal positivist whose revealed law is the only morality. Islam is, in effect, a system of limited-ambit norms with universal claims and exclusions. With very different notions of locus of control than presumed in Western thought, so very different presumptions about individual responsibility and standing--or, indeed, causation in general. There is no other evil than disobeying God because God's revelation literally defines good and evil. There is no individual conscience, there is only submission to God.

Signals and framing

Demands from within the West for other Muslims to publicly reject the actions of the jihadis is usually simply signalling reassurance--are you Muslims we can live with or are you all our enemies? But there is also a framing reassurance--do you buy into the framing of righteous versus unrighteous used by the jihadis?

To which the accurate answer is usually--well, yes, to some extent. The jihadis are not engaging in a delusional fantasy about Islam. They are being highly selective in which manifestations of Islam they embrace and the religious authority for some of their actions is very thin, to say the least. But their framings are not just made up. Jihad as religious war against non-believers is deeply rooted in Islamic jurisprudence, the working out of God's rules (which is all that there is left after the Asharite reduction of everything to God's will and power).

Moreover, the technology may be modern but the outlook is familiar from history. The Zealots of Jewish history had essentially the same motivations, framings and modes of action as contemporary jihadis. They, after all, were also engaged in a kulturkampf against contamination of Jewish culture by Graeco-Roman culture.

Titus destroying the Second Temple.

Waves of brutal Roman repression, and dispersal to permanent minority status, shifted Jewish history into the same sort of path that the Ismailis (whose religious lineage includes the original Assassins) have embraced for the same reasons. But cultural threat colliding with an aggrieved sense of righteousness generated very similar responses among Jews under Roman rule as among contemporary Muslims under Western cultural hegemony.

The Zealot impulse burned itself out once the costs were demonstrably so high that Jewish culture evolved mechanisms to ensure that path was closed. Given how comparatively limited the costs to the global Muslim community have been from jihadi actions and the responses to same, I suspect that Islam's fraught interaction with modernity will continue to motivate jihadi responses for decades to come. That righteous rage will continue to generate mass murders. And that the spectre of hi-tech jihad will continue to hang over us.

[Cross-posted at Skepticlawyer.]

Thompson troubles

Economist Earl Thompson (1938-2010) developed a theory which (pdf) postulated that defense externalities are what made (pdf) taxing imported consumer durables such a common tax policy. The idea being that build-up of local capital made a taxing-jurisdiction more of a target for aggression, so taxing such goods and various forms of capital adjusted for the increased danger; it internalised the costs of said danger. A "coveted capital" theory of taxation. A theory extended to postulating the role of guilds (pdf) as limiting capital formation to reduce the "coveted capital" defense externality, providing a city defense force and a source of emergency war finance.

Easy tax targets

As someone conversant in Australian political history (pdf), and aware of how well Ronald Rogowski's application (pdf) of the Stolper-Samuelson theorem and Heckscher-Ohlin analysis (abundant factors of production favour free trade, scarce factors favour protection) explains patterns of C19th trade policies, I find the thesis on the levying of tariffs deeply unpersuasive. (Do we really want to postulate that protectionist Victoria felt more vulnerable to aggression than free trade New South Wales or Western Australia?)  This is not helped by Thompson's fantasy economic history which sees competition for productive individuals as a fundamental driver of historical taxation strategies.

Earl Thompson

Firstly, the classic response to serious competition for productive individuals--that is, labour scarcity--was bondage; serfdom or slavery. Serfdom if the targeted population was local (it required less effort than slavery and did not affect fertility), slavery if the labour needed to be imported (as they were stripped of any connections--enslaving was "social death", typically in situations where actual death was the alternative--it was easier to make people property and they could be replenished by further imports).

Moreover, consumer durables are an easy taxation target (hence export or import tariffs being levied on them at different times and places). Given the historical importance of administrative costs in driving policy (particularly tax collection), no further explanation is needed for taxation to target high-value, relatively easily spotted, goods. Particularly as, before the Industrial Revolution, land and trade were the dominant (pdf) revenue sources and the dominant targets of aggression. (Nomad peoples had their herds, but they were difficult targets except from other nomad peoples.) Any accumulations of capital were overwhelmingly trade-derived. Thus, accumulating consumer durables and fixed capital were by-products of much more basic targets for aggression. People did not think folk magically acquired wealth. Walls around cities not only protected residents and their wealth, they also protected the trade-nodes, and provided a base to dominate the farm lands, which generated said wealth.

Hoping to acquire some moveable wealth

To the extent that Thompson has a point, it would make rather more sense to say that taxing imported consumer durables, or structuring your tax system so as to target wealth concentrations, is aiming for an optimal trade-off of where the revenue is most accessible and who has most to lose from successful aggression against the state and its trading interests (internal or external). One does not have to postulate some extra defense externality, given that defense and public order are already public goods. Especially as states were generally keen to grab what trade or land income they could. Indeed, the revenue value of trade and land generally dominated fixed capital or moveable wealth quite strongly for those organised to extract same. Thieves, raiders and looting soldiers would be more attracted by moveable wealth (rather than the fixed capital that Thompson focuses on), but that goes back to who had most to lose.

Missing the past

Since Thompson claimed his original insight came from looking at the American tax system, he may have simply failed to grasp how relatively unimportant capital was as a source of wealth and revenue in pre-industrial societies compared to capital's post-Industrial Revolution dominance of both. He certainly does not seem to have grasped the importance of the labour/capital ratio for wage levels, given his speculations about (pdf) wages possibly heading back to subsistence levels. (Regarding the importance of land/factor ratios, bondage systems were typically attempts to evade the return-to-labour implications of high land-to-labour ratios and/or trade effects driving up the value of easily-supervised labour.)

As for competing for productive individuals via tax policy; where competitive jurisdictions operated, far more basic matters of protection of person, property and commerce were typically much bigger factors in policy competition than mere tax policy. Indeed, places which offered the best protections of person, property and commerce could typically tax significantly more than places which did less well at such. Hence parliaments provided a taxing advantage (pdf) as they allowed negotiation of higher tax-benefits trade-offs. The extreme example being the United Kingdom at the time of the Opium Wars squeezing close to fifty times more (pdf) taxes per head out of its population than did Qing China--taxing a richer population (itself not an outcome independent of Parliamentary mechanisms) about nine times the Qing rate per head--such that the central government of the United Kingdom had four times the gross income as did the central government of Qing China.

Guilding the lily

Thompson seems to regularly fall into a trap that is perhaps natural for modern analysts--to discount how pervasive and basic concerns for internal public order, and how constraining administrative costs, were for past societies. His discussion, in his analysis of the defense role of guilds (pdf), of the length of time apprentices were bound to their masters misses the point, for example, that young men without family or property attachments were, quite reasonably, regarded as prime threats to social order. Legislating to bind them to their masters until they were 25 might indeed have provided a pool of military manpower for a town or city (though surely not a particularly large one; the role of craftsman in city defense extends well beyond just apprentices) but it also acted as a mechanism of social control. While standard periods and ages for indentures reduced transaction costs for enforcement in societies where enforcement was a serious issue.

Guild members using their fixed capital

There is also something of a tension in arguing that guild restrictions reduced the "coveted capital" defense externality by reducing capital formation (internalising the increased defense risk) while also claiming that guilds were a key source of emergency war finance. (A role which, along with the contribution of apprentices to city defense, is postulated but never quantified; even for rough orders of magnitude.) In the medieval period, general tax levies and bankers were the dominant sources of war finance. The most obvious exception being Venice developing the first bonds, the prestiti, in 1171. That in a city with, as Thompson notes, a strong guild system.

Moreover, indentureship was a widespread mechanism across complex societies which had the normal effect that binding to a workplace did--it reduced the cost of labour. In the case of apprenticeships of various forms, it helped to generate a more reliable return from training. Arguing, as Thompson does, that the negotiated upfront lump sum used to purchase an indentureship blocked the effect misses the role that the lump sum played in compensating the master for risks involved in the untested aptitude, character and commitment of the (very) young apprentice-to-be. After all, if the upfront lump sum used to purchase the indenture could deal with the return-to-training-effort, why bother with any set indenture time at all? Conversely, if time-required covered the risks, why bother with the upfront lump sum? (There is some analogy here with charging both a base fee to enter a network plus a fee for usage.)

Even for training systems aimed explicitly at training warriors, time-serving requirements seem to have been dominated by return-for-effort considerations. The page-squire foster-training system of the knights was less time-serving constrained than apprenticeship typically was because part of the trade-off was establishing connections between knightly families (and the knight provided training but not their squire's equipment). Conversely, slave-soldier systems (notably mamluks) were (far) more time-serving constrained than apprentices (mamluks stopped being slaves once trained but their obligation to serve continued) as the cost of training and equipping a mounted armoured warrior was so high and there were typically no outside connections to trade-off against (precisely the attraction, but also the danger, of such warriors).

Guild heraldry showed who they were protecting

The most curious absence from Thompson's analysis of guilds as the apparently absolutely militarily and economically crucial institution from the early medieval period to as late as 1900 in Russia is; what was in it for the guild members? As Thompson points out, guilds typically set maximum prices and minimum quality standards (the reverse of what a conventional monopolist would do) and limited the ability of masters to expand their operations. Since guilds only made sense if they helped their members, surely the first place to look is to ask what benefit such provisions provided to guild members.

Limiting the scale of operations spread the commercial joy, making it easier to cooperate, and increased the number of masters (and journeymen), giving them more collective weight in city affairs. (Unions make similar trade-offs when, for example, teacher unions agitate for limits on class sizes.)

Moreover, a guild could not be a conventional monopolist because it was not a single firm but a collection thereof. Any restrictions had to benefit all the members without requiring excessively costly negotiation of distribution of gains or enforcement costs; a guild was at best a cartel rather than a conventional monopoly. One, moreover, that could not ensure complete exclusion of outsiders, as city authorities could, and periodically did, grant the "freedom of the city" to crafters refused guild membership. Maximum prices and minimum quality standards provided positive branding for guild members and had much lower enforcement costs than did the reverse. This gave guilds standing, which made them much more effective as political organising and protection devices for their members. Highly desirable to have in a medieval world of expanding trade and complex jurisdictional interactions.

Guilds were first and foremost embedded in the commercial life of cities, and it is there that analysis has to look first to to explain their characteristics; not the taxing of postulated extra defense externalities which also contradict their (completely unquantified) alleged value as sources of emergency finance. Especially as church and merchants were more important concentrations of urban wealth than crafters.

Thompson is also quite wrong to claim that tax levels rose to tax away (pdf) the labour scarcity effects of the Black Death; the later C14th and C15th were periods of sustained higher incomes for peasants and workers across most of Europe. (Not so much in Spain [pdf], but that was because it disrupting trading networks in what was already a labour-scarcity economy.) Neither the standard "labour trapping" techniques of bondage or walls were employed--likely not the former because European states lacked the military incentive to support re-introduction of bondage while the latter was not a practical option. So competition for labour drove wages up.

Missing the present

Even on contemporary dynamics, Thompson's characterisation of the Western victory in the Cold War as reducing competition for (pdf) productive individuals also seems wrong-headed. Yes, it has weakened the bargaining position of states vis-a-vis the US and Western-supported international organisations, but competition for productive individuals seems to have, if anything, become more intense; it is just that the effect has been more than counteracted by the massive broadening of labour supply for globally-traded goods. Contra Thompson, in explaining the US experiencing prolonged economic expansion in the 1990s without median wage growth, December 1978 is a much more important date than November 1989 or December 1991.

Similarly, his suggestion that (pdf) US support for policies which produced the German and Japanese economic miracles were a form of "hostage" wealth rather misses the point that it was in the US interest for countries bordering Command economies (West Germany, South Korea, Japan, Taiwan) to do as well as possible to sharpen the competition and that there was an explicit US defense guarantee for all four countries precisely because they were border states. (The outbreak of the Korean War being a salutary lesson in what happens when one fails to be explicit about such matters.)

Missing both

The first time Thompson's economic history annoyed me was when he characterised China as (pdf) having been on the gold standard. Apart from the southern Warring State of Chu, gold has not been (pdf) a significant monetary metal in China. Silver was often a medium of account in Chinese history, but characterising that as a "gold standard" for definitional simplicity is to feed the way overdone mystique of gold.

Thompson dismisses free rider issues with remarkable abandon when convenient, treating notions of collectively-acting ruling classes and providers of "ideology" as unproblematic. Given the challenge the work of Mancur Olson posed on the difficulty of collective action, the work of Elinor Ostrom on what is required for effective management of common property, and the work of Peter Turchin (building on the original insights of Ibn Khaldun) on the difficulties in generating and maintaining asabiyyah (common feeling or group coherence), this is not a persuasive way to proceed. Moreover, Thompson treats the issue of the power of "ruling classes" over policy and institutions as unproblematic whenever convenient but it suddenly becomes contestable when that is convenient. Indeed, Thompson's notion of (pdf) "poison pill" asset bubbles designed to forestall revolution descends into history-as-conspiracy. (Just think about the information control requirements, let alone the wider coordination issues, for such a putative policy.)

Given that autocracy has been historically the most common political form, the principal-agent problems all have rulers faced, and how contested political power perennially is within and between power groups, Thompson assumes away much of the stuff of history--particularly in the evolution of institutions and public policy. It is one thing to analyse, for example, status behaviour as a club good; quite another to postulate high levels of collective action in situations of intense competition for power (or, for that matter, intellectual prominence). Some of the analytical consequences of doing so, such as his "bad economic theory" explanations (pdf) for the collapse of the (Western) Roman Empire and French Revolution, are just bizarre. Thompson's apparent notion that laissez faire free trading views have been the prime significantly policy-distorting beliefs (apart from what he calls Hellenism*) is not much better.

Thompson's use of democratic and democracy is also unfortunately loose; he applies the labels to times and places which were not remotely democratic in any serious meaning of the term. Thus, when C19th thinkers argued that democracies could not manage, let alone survive, great crises (such as wars and civil wars), the success of the United Kingdom in its Second Hundred Years War with France was, quite reasonably, not counted as a counter-example. Thompson calling the 1688 Glorious Revolution "democratic" is, to put it mildly, a stretch. Using the far more accurate term Parliamentary might have productively expanded Thompson's concern for coordinating mechanisms. While referring to (pdf):

Byzantium's unique form of democracy (p.162)

is simply bizarre. Referring to (pdf):

an early-ninth-century renaissance in ancient Chinese religion and effective democracy (p.1)

is hardly less so. Whatever he meant by the term, it does not have much connection to anything resembling normal usage.

I am also not much impressed by claims such as that his brilliant insight on taxing to deal with defense externalities was rejected because (pdf) it upset the preconceptions of, and demand for, economists. The Austrians play this game about why economists in the 1930s, after a brief surge of interest, rejected the Mises-Hayek Austrian business cycle explanation of the Great Depression. However flattering it is to the adherents of the theory ("we are so much more public-spirited than you lot") I find a much simpler explanation to be that neither theory is a persuasive explanation of what it purports to explain. And my income or potential income does not depend in the slightest on whether I agree, or disagree, with either theory.

Earl Thompson is fondly remembered by various prominent economists, was clearly an original thinker and his papers on monetary matters (pdf) in particular (pdf) can be read with profit (pdf); though I prefer David Glasner's reworking of Thompson's discussion of classical monetary theory. Thompson also has a rather delicious (pdf) rational expectations and efficient market analysis of the 1630s Dutch Tulip mania. Thompson's more general economic history is, however, not to be relied upon. He seems to have become far too wrapped up in his "coveted capital" theory of taxation, the explanatory power of its alleged defense externality and the analytical presumptions needed to make it all hang together.

Note

* Hellenism (pdf) (the curse of Plato, Aristotle and Socrates):

... gives a social thinker a hubristic, unrealistically positive, self-image, and a similarly unrealistic image in the eyes of a similarly educated employer ... Its effect on bureaucratic decision making has been to give bureaucrats a license to interpret facts so as to benefit the classes of people they consider most deserving. In particular, a bias against successful investors is observed among Hellenists (p.152).

[Cross-posted at Skepticlawyer.]