History and surplus: 10,000 years in one blog post

Human history has largely been driven by the creation and use of surplus production -- that is, production beyond subsistence. (Subsistence meaning sufficient to sustain life and reproduction.) The change from prehistory to history is very much a matter of the generation and use of surplus production.

There are essentially only three ways for such surplus to be created.

(1) Labour scarcity

If the scarcity of labour compared to land and capital increases, then the return to labour rises as the marginal productivity of labour increases (since there is more land and/or capital per unit of labour) and so labour income can rise above subsistence. A demographic disaster such as the Black Death creates such labour scarcity.

Given the historical norm of low levels of capital in human societies, such labour scarcity as did occur was predominantly increased scarcity relative to available land. For most of human history, demographic disaster was the dominant way for labour scarcity to occur, apart from a sufficiently quick increase in the ease of calorie production (such as the introduction of potatoes and other crop transfers from the Columbian Exchange) raising the productivity of land.

Sufficiently quick because, in the normal course of events, any labour scarcity would be (literally) eaten away by increased production of babies. What is known as Malthusian dynamics. (The most accessible discussion of Malthusian dynamics is in Gregory Clark's A Farewell to Alms; though see Deidre McCloskey's response to his [pdf] explanation for the onset of the Industrial Revolution.)

Historically, most labour scarcity generating occurrences were once-off events with, due to Malthusian dynamics, temporary effects on labour scarcity. Hence, after the Black Death, across most of Europe (but strikingly not in NW Europe), wage rates declined back to their pre-Black Death level.

Until the Growth Revolution (i.e. the Industrial Revolution and associated changes), growth in production mainly went into increased population. That is the essence of Malthusian dynamics.

There were some exceptions, periods of economic efflorescence that various scholars have noted: the Greek city states; the Roman Republic and Early Empire; early Abbasid Mesopotamia; C18th Qing China; Tokugawa Japan; early modern NW Europe. But these periods and places were historically unusual (and are matters of lively debate among scholars) and were generally followed by return to Malthusian norms. Long-term population growth was very low -- slightly over 2 surviving children per woman.

Increased labour scarcity (relative to other factors of production) is the only mechanism for increasing average returns to labour other than increasing productivity of existing factors of production (which historically mean land, as capital was so limited) through technological change (e.g. increased calories production via new crops).

(2) Capital intensity

If resources are set aside from consumption, capital (the produced means of production) can be created. That setting aside creates an initial surplus. It can be done as a setting aside from reproduction -- say, to support religious devotions. It can also be done as a deliberate investment in higher quality children (i.e. with more human capital) rather than simply more children.

Whatever the motive for the original setting aside, capital so created can then generate surplus production and do so for the owners of the capital (for, if it does not, there won't be much capital creation). It, however, will only generate a surplus for the holders of capital unless the production of capital is of such a scale as to increase general labour scarcity.  (I.e. sufficient capital per unit of labour to raise labour productivity, giving labour a scarcity premium above subsistence.) Even then, the production of capital will only have a continuing effect if the resultant increase in the ratio of capital to labour is persistent: if the labour force is growing, that then requires capital to be created at the same, or faster rate, than the growth of the labour force. 

Central to the Growth Revolution was capital being continually created at a higher rate than the growth in the labour force; including investment in higher quality children. The latter effect eventually led to the demographic transition -- a dramatic drop in fertility rates. Especially as a drop in child mortality rates encouraged greater investment in child quality, rather than more children, while the increased role of capital in production, and concomitant increased labour scarcity, led to expanding economic role and status for women (who disproportionately bear the costs of child rearing; so giving them more say and options can be expected to lower fertility rates). The expansion of the importance of human capital further broadened benefits from capital deepening and increased capital complexity; both effects then moving societies even further away (pdf) from any worker-capitalist class dynamic.

As Adam Smith famously noted with his example of division of labour in pin manufacture, specialisation increases production; this, of itself, does not increase incomes above subsistence, apart from some initial labour scarcity effects eaten away by normal Malthusian dynamics. If specialisation does increase incomes above subsistence in any persistent way, it is usually to the owners of the capital involved, and may also involve some combination of human capital, specific-location resources, advantages in information and risk management. Specialisation increases the scope and scale of production and, typically, of markets but does not, thereby, increase labour income.

Note: one should generally not use the term capital accumulation to describe the process of expansion of capital. Capital does not "accumulate" like dust bunnies under the bed. Capital is the produced means of production; someone has to make the conscious decision to use resources to produce capital rather than simply consuming the resources; and to produce some specific capital. Who is making such a decision, why and in what circumstances is not some mere bagatelle, it is utterly central to understand any process of capital formation. The phrase capital accumulation does not put capital into history, it takes it out of history--that is, out of the realm of contingent human action.

Note also: in the Growth Revolution, innovation hugely dominated allocation. That is, it was not merely that resources were set aside for the production of capital, it was that--due to the invention and application of technology that we call innovation--the range and productivity of capital (and thus labour) that could be, and was, produced hugely expanded; notably through the expansion in access to, and use of, energy. The increase in the range and productivity of capital then further encouraged the further creation of capital and innovation, creating a reinforcing upward spiral.

It was not merely the "piling up" of capital that counted, but the institutions and habits for the expanding creation, and effective use, of capital. (The importance of effective use is a major reason why foreign aid has often had such disappointing results--including the, often dreadful, incentives it generates for authoritarian rulers.)

Economic historian Deidre McCloskey has written extensively on how innovation, and the habits and institutions thereof, came to dominate allocation; but the more general point of innovation hugely dominating allocation in explaining growth and expanded capacities of the Growth Revolution is widely acknowledged by those who attend seriously to the history of such matters. In Gregory Clark's words:

investments in knowledge capital that generate efficiency growth not only explain most modern economic growth at a proximate level, they explain all modern growth (p.207).

Thus, given any significant degree of potential technological dynamism, the costs of any scheme which sacrifices innovation for allocation (including redistribution) will expand dramatically over time.

NB: This section has been slightly expanded to (hopefully) clarify the importance of efficiency growth in the Growth Revolution.

(3) Expropriation

The third way to generate a surplus is to seize production before it can be use to support reproduction. That is, to expropriate it.

Mere increased production does not generate a surplus above subsistence. The normal historical effect of increased production is simply to support more babies. Expropriation allows production to be seized and diverted (pdf) before it supports more babies, thereby creating a social surplus.

Across human history, from the development of farming around 11,000 years ago until the Growth Revolution, what was the dominant way to create a social surplus? Expropriation.

Leaving aside low level thievery and brigandage, by far the dominant expropriators were wielders of organised violence. Which is why the history of major human constructions prior to the Growth Revolution is utterly dominated by such wielders. Either the rulers of states, or their agents, or those holding expropriation franchises under them.

Hence also, the production of enough stored food able to be so expropriated is basic to the development of ranked societies, and social hierarchy more generally. Thus social hierarchies, and ultimately states, evolved where (pdf) cereals (which are highly seasonal, so have to be stored, so can be expropriated) dominated farming and not where non-seasonal tubers (which don't have to be stored, so can't be sufficiently expropriated) dominated farming -- potatoes, being seasonal, had the same dynamics as cereals.

All of which meant that elite social position tended to be much more about one's (direct) relationship to the process of expropriation than to (what might be a quite indirect) relationship to the means of production. Thus, in medieval societies, that mounted armoured warriors were capable of dominating (and expropriating surplus from) local peasants was much more central to their social position than simply holding land--especially as, in the case of Islamic societies, they held tax grants, not land as such. (Tax grants were used rather than land grants, as owned land would be subject to Sharia inheritance laws, requiring division between heirs into holdings not large enough to support a mounted armoured warrior).

But even those who were directly involved in production had their lives profoundly affected by the processes of expropriation. Indeed, anthropologist and political scientist James C Scott has written a brilliant book on how basic mode of production (farming, horticulture, foraging), and even cultural identities, resulted from different social strategies regarding the process of expropriation. (Seriously, if you have any interest whatsoever in historical dynamics, one really should read Scott's The Art of Not Being Governed: An Anarchist History of Upland Southeast Asia.)

Expropriation could also be a way of blocking labour from enjoying the benefits of labour scarcity--through operation of human bondage (i.e. slavery or serfdom).

Providing so as to extract

It would be incorrect, however, to think that expropriation was merely extraction. To have stable expropriation, a certain amount of public goods had to be provided to establish and maintain the social order needed for routine expropriation.

State societies (societies with a dominant wielder of violence) were safer than non-state societies and societies where the state was the effective monopoly wielder of violence tended to be safer still. There was an implicit protection deal attached to state expropriation, as live-and-productive farmers provided so much more to expropriate than dead-or-devestated ones.

That the state both expropriates and protects (and protects in order to expropriate) is the basis of the paradox of politics or paradox of rulership. The fundamental idea was expressed by Ibn Khaldun (1332-1406):

[The residents] are thus prevented by the influence of force and governmental authority from mutual injustice, save such injustice as comes from the ruler himself (p.97).

The paradox can be expressed more generally:

We need the state to protect us from social predators but the state itself is the most dangerous of social predators.

A paradox that can never be solved, only managed more or less well. (Lebanon represents the technique of avoiding state predation by having a state so weak it fails to provide basic public goods.) The delusion that one has solved the paradox of politics typically just leads to much greater levels of state predation, since said delusion generally leads to abandonment of checks and balances on wielding state power. (The entire history of Leninism is one long, dreadful, series of examples of this principle.)

The struggle over expropriation
Until the Growth Revolution, production was overwhelmingly dominated by land (i.e. farming, fishing, mining); expropriation dominated the creation of social surpluses; and organised violence dominated expropriation. Therefore, violent struggles over land productive enough to support expropriation were a hardy perennial of human affairs. Even in our time, high value production fixed in location (such as oil or diamonds) is disproportionately important in promoting armed conflict (pdf).

Historically, trade complicated but did not transform matters. Trade was potentially mobile, so it was a somewhat more difficult expropriation problem than fleecing stationary standard-crops farmers, as trade typically required more specific provision of public goods.

But precisely because trade could swell or shrink in ways sensitive to state action (such as provision of public goods of what quality over what territory), and given its nodes-and-routes network structure and effects, trade almost certainly had positive economies of scale for revenue collection--unlike land, whose revenue possibilities likely simply scaled up proportionately for any given quality of land. Trade was thus likely disproportionately important for the size and scale of state activity; as revenue from trade counteracted diseconomies of scale in costs of control over territory while revenue from land generally did not. (Even gold and silver mining mostly got its revenue benefits from the value of gold and silver as trade goods.)

But taxing trade was not so much more difficult an exercise than fleecing stationary farmers that states did not also use organised violence to seize key trade nodes and attempt to dominate trade routes. This was the world aptly described by Nicolo Machiavelli (1469-1527) in his Discourses on Livy:

... it is not gold, as is vulgarly supposed, that is the sinews of war, but good soldiers; for while gold by itself will not gain you good soldiers, good soldiers may readily get you gold.

A transformed dynamic
The Growth Revolution's dramatic increase in the role of capital, especially given the diverse (i.e. heterogeneous) nature of capital, did transform matters. Expansion in the ways of producing social surplus made expropriation much more derivative in accessing any surplus, as it became much more about taxing surplus production after it was generated rather than creating surplus by seizing production before it was used to support reproduction.

But becoming more derivative did not mean that the return to expropriation declined. On the contrary, the Growth Revolution's expansion of documented employment arrangements has massively increased tax's share of total production (especially in societies which have adopted the full Growth Revolution deal), by making production much more transparent to the state and turning firms into agents of the expropriation process. But that is about accessing surplus production, not creating surplus by removal, so seriously shifts the expropriation incentives in dealing with those from whom production is to be expropriated.

Thus, the potential return to production-fostering (rather than production-seizing) government greatly increased (with the caveat about fixed-location resources noted above; though even there a certain competence in managing the resource is also required). Effects that have been further increased by innovation dominating allocation in expanding production. All of which has encouraged a strong tendency to broadening of political bargaining and participation.

The shift to taxing income (much of it labour or human capital income), the increased density and complexity of production, the political organising and bargaining implications thereof; all increased dramatically the return to linguistic homogeneity, and ethnic homogeneity more generally, for states. Linguistic and ethnic homogeneity increased the costs of exit, allowing higher taxation. Ethnic homogeneity reduced diversity in framings and preferences, allowing more efficient public good provision; while linguistic homogeneity improved the ability to negotiate taxation-public good trade-offs.

In other words, abstracting from other factors, the more ethnically homogeneous the citizens of a state are, the higher the taxation-expenditure trade-off can be expected to be; the less ethnically homogeneous the citizens of a state are, the lower the taxation-expenditure trade-off can be expected to be.

One of the inherent problems of the EU is that -- due to its ethnic and linguistic diversity -- it lacks a functional demos, a shared realm of political bargaining among citizens.

It is not surprising that the first political-organisation effect of the Growth Revolution -- massive increases in trade due to railways and steamships -- led to a surge in imperial expansion (i.e. territorially larger states) while the second political-organisation effect of the Growth Revolution -- particularly given the massive expansion in literacy-based markets -- was a dramatic surge in nationalism.

The latter effect, combined with the dramatic drop in the relative importance of land per se as a revenue source, then massively undermined territorial imperialism.  That is, territory became both less specifically important and more problematically differentiated (at least in the sense of resident populations): though a solution to the latter has been population exchange so as to achieve ethnolinguistic homogeneity.

More recently, globalisation of culture and the evolution of English as something of a global lingua franca has weakened these effects, at least in the developed democracies.

Expansion of political nations to include all adult citizens has tended to make such democratic states more squeamish about casualties from warfare. While the expansion of welfare states meant that colonisation of their own societies came to massively dominate colonisation of other societies as a source of expropriation-funded career paths (especially given externalisation of the welfare model -- i.e. foreign aid).

But, even among authoritarian states, the decline in the return to seizing land in general, and linguistically divergent populations in particular, probably has something to do with the general drop in violence, particularly wars, as well as the shift in wars being much more intrastate (i.e. fighting over access to, and direction of, existing expropriation processes) than interstate (disruptively seizing production). One notes that regions where various states share a single language, often without much deeper history as states (the Middle East), or where borders have a high rate of failure to match ethno-linguistic patterns (Africa) have been prone to higher levels of violent conflict.

It is also not surprising that states organised to expropriate labour surplus (i.e. all command economies)* have been more highly militarised than states with broader production of social surplus (and the politics that tend to evolve with that).

On the other hand, the decline in the material return to violence tends to make other motives more salient in the violence that does occur; motives such as status (notably avoiding or achieving domination) and search for transcendence (whether secular or religious).

Even so, that we live in a world where the production of social surpluses above subsistence is not dominated by expropriation (and violent struggles over the same) is just one of several ways we live in a very different world than did those before the Growth Revolution.



* Command economies control prices and wages. That means that prices and wages can be set so that basic wages are below subsistence, but "bonuses" from extra production push wages above subsistence, increasing the systematic extraction of labour surplus beyond merely paying subsistence wages. (Public choice economist Mancur Olson explains the mechanics nicely in his posthumous Power and Prosperity: Outgrowing Communist And Capitalist Dictatorships.) Hence command economies typically blocked exit--all labour surplus extraction systems rely on blocking alternatives for workers. (So, yes, exit-blocking command economies are in the same game as slavery and, especially, serfdom.) It is also why states that continue to have Leninist regimes (China and Vietnam) open their borders as they move away from being command economies; (1) they extract revenue from a widening range of transactions, so wish to expand the number of transactions, which closed borders militate against and (2) the less they rely on extracting labour surplus, the more the benefit in blocking exit declines.

[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.] 

Coercive competition

A useful way to think of organised crime is as the application of coercion for profit in social spaces where the power of the state does not effectively reach.

It is common to think of organised crime gangs as having "territories".

Such as this map of the territories of Mexican drug cartels.

Obviously, the drug cartels are not the only coercive power in such territory -- the Mexican state still operates. Nevertheless, it make sense to talk of territories and turf wars -- which can be vicious and deadly. So deadly, that law and order can break down if the struggle gets sufficiently intense. Ex-military personnel can be prime recruits for such gangs because they are trained in applying violence.

Researchers have found that American street gang territories in Los Angeles can be modelled by predator-prey equations, with violence concentrated on the boundaries of territories. (Abstract of article here.) Organised crime being a form of competition over scarce resources -- income from crime; in the above cases, primarily from sale of illegal drugs. Though human trafficking is apparently rising in importance as an income source.

Essentially, organised crime gets its "in" because the state fails to maintain a sufficient monopoly of organised coercion. This can be because the state just does not bother (as in various shanty-towns and slums in Latin America or the Philippines). Or because its mediation and enforcement services are sufficiently incompetent, as happened in Bangalore in India, where organised crime provided land ownership enforcement and mediation services more effectively than the slow, complex and corrupt official land ownership registration, mediation and enforcement system. Or because the state bans a range of transactions, thereby withdrawing its mediation and enforcement services from them -- given that said ban fails to eliminate such transactions.

Practitioners captured with tools of the trade

Which is why command economies tend to become, over time, spectacularly pervaded by corruption. So many transactions people wish to engage in are illegal, that huge "black" markets form. Which then creates a demand for mediation and enforcement services that the state refuses to provide for such transactions; demand that is open (and likely) to be fulfilled by organised crime. Since command economies tend to have ruthless enforcement services that -- by a thoroughly Darwinian process of selection -- tends to breed ruthlessly effective organised crime (as they are the only ones that survive). A legacy that can persist (or even be exported) after the command economy has collapsed. Hence the notorious problems with Russian organised crime gangs.

The market for official discretion
Corruption is the market for official discretion, so the more pervaded by regulation based on official approvals the economic life of an economy is, the greater the level of corruption tends to be. In Australia, land markets have long been the major markets most pervaded by official discretions, so have a long history of corruption scandals. Since the Spanish and Portuguese exported highly economically controlling systems of government with elaborate licensing and other forms of official discretion, their former colonies tend to have notoriously high levels of corruption. Up until the mid C18th, English-cum-British politics were also notoriously corrupt. There was then a century or so of repeal of official monopolies, licenses and other regulatory interventions which massively shrank the scope of official discretions. By the mid C19th, British politics had a very high reputation for probity. Shrinking the realm of official discretions naturally shrinks the likelihood of corruption, just as expanding it tends to have the opposite effect.

Note that official discretions and regulation are not the same thing. One can regulate by some general rule or by requiring official approval; the latter is a form of official discretion, the former is not. The German Federal Constitution, for example, essentially blocks official discretions from interfering with (pdf) property rights. That effective ban does not stop Germany from having land and environmental regulation, it just forces it to be via open rules. The complication is that any regulation generates some form of official discretion in its enforcement; nevertheless, systems of explicit official discretion are much more vulnerable to corruption than rule-based systems.

While organised crime (in the sense of competing mediation and enforcement services to those provided by the state) and corruption are connected, they are not the same thing. In China, for example, the Communist Party elite dominates both the official state and the market for official corruption, greatly reducing the scope for any competing source of coercive services. Though whether this is a stable arrangement is another question, as continuing sale of official discretion is likely to undermine the social coherence, the asabiyya, needed to make such continuing exclusion of alternatives work. The Gu and Bo Xilai scandal may be the Party leadership drawing "lines in the sand" that organised violence will remain a Party-state monopoly.

Competing mediation and enforcement
Gambling, prostitution and drugs are notorious realms for organised crime precisely because they are banned transactions that the state has thereby withdrawn its mediation and enforcement services from which nevertheless continue to occur. As demand for such transactions are not eliminated by the ban nor such withdrawal, income sources are opened up able to support alternative mediation and enforcement services as neither party in such transactions wishes to attract the attention of the state.

Prohibition was notoriously a hey-day for organised crime precisely because so many people still wished to consume alcohol. This connection between the wish to control other people's transactions and willingness to supply banned services can lead to an effective alliance between the controlling moralists -- the wowsers -- and gangsters; the so-called "Baptists and Bootleggers" phenomenon. The notion that officially banning, or failing to recognise, something will make the thing go away is very attractive. Even if it is not fully believed, it can be a great way to express righteous malice towards others.  A central appeal of political action is, after all, precisely that one can impose costs on others which one avoids oneself. (There is some depressing economic experimental evidence on the power of human malice.)

They will accept us as their new protectors after we smash them

Protection rackets are the most direct form of competing mediation and enforcement services. (Anarchists of various stripes would argue, of course, that the state is just a protection racket that has managed to clothe itself in an aura of legitimacy.) The existence of protection rackets relies on people being either isolated from, or otherwise lacking confidence in, official state protection.

The failure of a state to enforce an effective monopoly of organised violence can have very unpleasant consequences. For example, there was a major drop in homicide rates in Western Europe after the medieval period (pdf) as the nascent modern state became the monopoly provider of organised coercion, rather than relying on that local franchising of protective services which we call "feudalism". Coverage of protective services became less contested, so increasing in clarity and effectiveness. The state acquiring the income and administrative resources to be the monopoly provider being what led to the transition from "franchising" protective services to direct central provision. This led to a serious of inter-related "knock on" effects. As the nobility became less bellicose, its behaviour became more "courtly", generating different social expectations. The expansion of centralised provision of protection led to less reliance on personal honour -- a form of "privatised" protection -- and less tolerance of its effects by state officers and judges.

Neighbourhood self-help group

Conversely, competition in the effective provision of mediation and enforcement, in organised violence, is competition in the ability to apply violence. An obvious way to demonstrate effectiveness is to eliminate the opposition, thereby reaping the benefits of local control. The recurring need to "prove" effectiveness, the dynamics of challenge and response, of displaying "honour" and protecting "standing" as per a system of privatised violence, and the problems of competing ambition both between and within gangs, can lead to high levels of violence.

Whenever territory is the primary source of income subject to coercive capture, border violence is likely to be high. A major reason for the decline of warfare between states in modern times is that land is no longer such a central source of income. Conversely, conflict within states has been plausibly connected to high salience of natural resource income open to territorial capture (pdf).

Intentions and consequences
If one wants to reduce corruption, reduce official discretions and the extent of banned transactions. If one wants to reduce organised crime, ensure that the enforcement and mediation services of the state are effective and reliable -- including well plugged into the local communities -- and minimise banned transactions. Of course, the enforcement and mediation services of the state are more likely to be effective and reliable the less reliance there is on official discretions and the less banning of income-generating transactions.

But the desire to control the transactions of others -- due to malice, righteousness, to generate or protect privilege, to provide income, to some combination of these -- can be strong. And the consequences of high levels of official discretions or of banned transactions can be remarkably easily ignored or denied.

Nor should we underestimate the willingness to inflict costs and misery on others for no other reason than preserve our own cognitive comfort. Particularly when all sorts of fears about what might happen if we don't require official approvals, or ban said transactions, can so easily be conjured up and contrasted with the "manifestly" good intentions of such controls. Especially when we can associate ourselves with said good intentions and deny or ignore the consequences for others. A central appeal of political action being that one can impose costs on others which one avoids oneself.

Coercion is control over others without their consent. That reality is at the heart of organised crime but also of the policy and social failures that give rise to it.

[Cross-posted at Skepticlawyer and at Critical Thinking Applied.]