Friday, August 1, 2014

Unhelpful dichotomies

I recently finished The Creation of Inequality: How Our Prehistoric Ancestors Set the Stage for Monarchy, Slavery, and Empire by Kent Flannery & Joyce Marcus, a very accessible rendering for the lay audience of a huge amount of anthropological and archaeological data about the development of state societies. At the end of Chapter Twenty-Two ("Graft and Imperialism"), there is the following comment:
The rarity of laissez-faire market systems in early civilizations has fueled a long-standing debate among two kinds of economists: formalists and substantivists. Formalists believe that the laws of supply and demand usually determine what societies do. Substantivists, as exemplified by economic historian Karl Polanyi, believe that, on the contrary, the economy is embedded in society and constitutes a special form of social relations. Indeed, many substantivists would argue that economics began with the reciprocal gifts exchanged by hunters and gatherers and grew from there. ...
Perhaps the best way to leave the debate is this: Substantivists can cite dozens of anecdotal cases in which cosmology, religion or cultural values restrict the interaction of supply and demand. The formalists, however, have produced all the sexy equations that might win you a Nobel Prize.
Apart from displaying the Nobel-envy of economics which is widespread among other social sciences, this is not a helpful way of thinking about such matters. Adam Smith, for example, believed that economic relations were embedded in society, but also held that analysis of supply and demand could get you a long way. Yes, there is a strong tendency and temptation towards narrow formalism in mainstream economics. But there is a wide range of mainstream economic opinion between the polarised dichotomies set out above. 

What do you mean
Part of the problem is in that monumentally unhelpful construction laissez faire market systems. What does one mean by "laissez faire". No regulation? Minimal regulation? Regulation of what? What does one mean by "market system"? Does there have to be a market system for there to be markets? (Well, no.)

The simplistic dichotomy rests on a now-backwards conceptual framework, where rhetoric from modern ideological struggles is invoked to create a simplistic analytical dichotomy. Yes, it is perfectly possible to find economic analysis which way over-simplifies--to a very misleading extent--the complexities of the past (Carl Menger on barter and money, for example). But the implied exorcism of anything resembling mainstream economic analysis as a useful tool in historical analysis is not a good way of advancing understanding of the past. 

It is striking, for example, how many of the cited anecdotes turn out to be ways of dealing with risk, particularly variability in output. I would not, for example, characterise the internal economics of foraging bands as:
... reciprocal gifts exchanged by hunters and gatherers ...
Admittedly, it is unclear whether the reference is to interactions within or between foraging bands. But, as the author's themselves note in an earlier chapter, pooling hunted meat is an effective way of dealing with the high variability of hunting. Similarly, the reference to the development of a fixed price for copper in a particular set of long-distance trade arrangements strikes me, not as a "refutation" of supply-and-demand analysis, but as a risk-management device. Which, indeed, is what the author's suggest it was. Adding in the risk-dimension enriches supply-and-demand analysis, it does not abolish it.

Harold Demsetz's classic article on the development of property rights (pdf) makes it perfectly clear that social constraints will affect the weight given to particular problems and solutions. But his discussion of how property rights develop in response to changing possibilities and constraints is entirely compatible with the two authors's discussion of how Mesopotamia seems to have developed the first private ownership of land. (Said discussion somewhat punctures the presentation of Mesopotamian economies in David Graeber's Debt: The First 5,000 Years.)

Having previously done considerable reading on the economics of marriage, one of the pleasures of reading The Creation of Inequality is that the narrative provides very helpful explanatory context for concepts and conclusions in the economic papers discussing family forms. A case of archaeology, anthropology and economics all providing mutually supporting enlightenment. But, then, the aforementioned economic papers took the anthropological data as their starting point, so that is less than surprising.

Come Romanticise with me
Which gets back to the real problem--theorising poorly grounded in the empirical evidence. Often for reasons of ideological comfort. The authors's citation of Karl Polanyi is particularly apposite, since Polanyi seems to appeal in direct correlation to both ideological affinity and empirical ignorance. As Deidre McCloskey points out:
Yet when Appleby thinks a little about earlier economies, outside her specialty, she turns Polanyist. Everyone tends to, because, to repeat, Polanyi gives expression to the nineteenth-century Romantic story on which we all were raised. We all revert to fairytales when we get beyond what we actually know, especially when the tales seem to support what we believe fervently to be politically true. It’s human nature, or social psychology, or ideology, or rhetoric. We adopt stereotypes about women or black people or medieval peasants or robber barons just when we actually don’t know much about them.
The trouble with Polanyi is that he was half right, and wholly appealing:
Some very perceptive scholars have fallen for Polanyi, because a big part of what he says — that ideology and rhetoric matter — is so obviously true and important. Therefore they have believed the rest of what he says — that societies were not organized by markets until the nineteenth century. The emotional pattern seems to be something like, “Polanyi, a leftist like me, says many true things, beautifully. Therefore his tales about what happened in economic history must be true.”
Part of the problem is the dreadful term capitalism.  The term capitalism is like feudalism--it is an analytical black hole from which the complexities of actual history rarely escape. People create an "ideal type" of the "system" and then impose it on a much more complicated historical reality.

Markets, markets, all over the place
Markets turn up very early. Some civilisations (Mesopotamia, the Aztecs) used markets a lot. Some (Pharaonic Egypt, the Incas) ran something more like command economies. But even they had local markets. (Somewhat like modern command economies had black markets, except that the rulers of the ancient economies were not hubristic enough to think that all markets had to be replaced.) Once flows of goods and services get too complicated to be handled by personal connections, markets will arise. 

Both Macfarlane (The Origins of English Individualism) and Braudel (in his three volume Civilization and Capitalism) attempted to find that time when England was not a land of individualist property-owners engaging in truck, barter and exchange and could not find such a time. Which, if you look at various social mechanisms as operating on continuums of reliance, is not terribly surprising. The geography and institutional history of England militates strongly against the creation of early command economies or overwhelming reliance on personal connection.

About money
Another unhelpful dichotomy, though one rather more soundly grounded in actual analytical patterns than the above, is what economist Bruce Goodhart calls (actually rather helpfully) C-theory and M-theory (pdf) on the origins and nature of money. A lot of the problem here is the difficulties of what we mean by money. To start with, should we think of it as a thing, a noun--something is, or is not, money--or should we think of it as an adjective, a quality--things have varying degrees of moneyness? In a strict analytical sense, the latter. Alas, the money we use all the time pulls us much more naturally to think of it as a thing.
Most widely used form of money, across space and time.

The reason why Goodhart's term C-theory is helpful, is because it we take the strict chartalist notion that "money is a creation of law" (or worse, the state), then we are wrong from the start. Things which can clearly be described as money (or having a high degree of moneyness) arise in non-state societies and operate across jurisdictional boundaries. But if we take note of the network characteristics of money, then C-theory is not without its insights. It is just not remotely the whole story, for which M-theory also has to be utilised.

In both cases, the problem is that thinking of social phenomena as operating in continuums is messy and ideologically unhelpful. We like our dichotomies, they are rhetorically and analytically much more comforting. But, alas, comfort is not truth.

[Cross-posted at Skepticlawyer.]

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