Capitalism, Socialism and other terms to be avoided

Capitalism is a term coined, or at least popularised, by the enemies of the system they labelled capitalism. It was understood from the start to have a pejorative connotation and the term’s use is still dominated by that pejorative connotation. Despite the efforts of supporters of capitalism-so-labelled to reclaim capitalism as a positive, or at least neutral, label; particularly based on historical experience.

One should always be wary of any term where the pejorative element built in. Even if you somehow do not let the pejorative element infect your own thought, it is going to be there in the mind of many, often most, readers.

Socialism is a term coined, or at least popularised, by the proponents of the system they labelled socialism. It was understood from the start to have a positive, indeed overwhelmingly positive, connotation and its use is still dominated in many quarters by that positive connotation. This despite the efforts of the opponents of “socialism” to give it thoroughly negative connotations, particularly based on historical experience.

Capitalism has at least has some vague consensus on what the term means. Socialism does not even have that, as recent American politics has demonstrated, thanks to the attempts of Sen. Bernie Sanders, self-proclaimed socialist, to win the Democratic Party nomination for President of the United States.

Capitalism has some vague consensus regarding what the term means because almost everyone agrees that there is currently, and has been, a lot of it. Apart from some labelling of command economies as state capitalism, there is a general consensus that we more or less know capitalism when we see it.

There is no such consensus around socialism, mainly because socialists typically want to dissociate the term from every command economy that has ever operated, or patent embarrassments such as Venezuela. Conversely, the enemies of socialism what to hang every command economy that has ever operated, and embarrassments such as Venezuela, on any use of socialism.

If socialism has never been “really” tried, then it can never have failed. Or if there is this new form or conception of socialism that has never been tried, then clearly it has nothing to do with any command economy that has ever operated, or any embarrassment such as Venezuela.

Of course, one might suspect that this attempt to constantly separate socialism from history might be a bit of a warning sign. Especially if folk want to play the game of comparing the ideal of socialism (carefully separated from history) with the practice of capitalism (often using carefully edited, selected or re-construed bits of history).

For me, there is a simple solution. Avoid, as much as possible, using either term. Then you can at least aspire to some analytical rigour.

Other possibilities

That does not remotely foreclose considering new social possibilities. It just means trying to do so with some analytical precision without dragging along the deadweight of fraught ideological conflicts.

Moreover, contemplating the social possibilities that do not seem to be much explored can be a very useful exercise. To consider the dogs that don’t bark in the night.

If not separating workers from the product of their labour, or simply having the workers in charge, is such a fine thing, one might think that would be entirely possible to set up worker-controlled companies. Then the non-alienated, self-controlled workers might be expected to produce so well that they can outcompete capital-owned firms in the market place.

Of course, if your notion of alienation covers any attempt to produce for exchange, then even in a worker-controlled firm workers will be alienated from their labour. Of course, not producing for exchange then reduces Homo sapiens to the economic level of every other species on the planet. One might consider the possibility that producing for exchange permits the scaling up of production and consumption far more extensively or efficiently than any other way of dealing with the issues of subsistence and surplus. So, perhaps giving up an advantage that may predate our emergence as a species is not a good move.

Let’s assume that something we have been doing for maybe 320,000 years or so (and certainly for 200,000 years), exchanging things we have produced, is not some alienating disaster, and go with worker control is good. Worker-controlled firms is still an entirely possible option. So, why don’t we see far more of such?

What is a firm? A firm is a mechanism for lowering transaction costs and dealing with risk. Do we want to dump risk on to labour or on to capital? Surely, on to capital. So, a labour-controlled firm is going to make the decisions, and is going to need capital, but will also want to dump the risk onto the holders of capital.

So, which firms are going to operate better? Those where control ultimately rests with those who have to deal with the risks or those where control ultimately rests with those who get to systematically dump risk on to others?

Clearly the former. The owners of a capital-owned firm get the residual income from the firm because they also cover the residual losses from the firms.

Moreover, when we say “worker controlled”, which workers? The original workers presumably. But what if you want to hire new staff, do they get the same control rights? Suppose the firm has too many workers, it needs to lay off staff, how do you decide that? What are the dynamics of a group of workers who every so often may have to vote on who gets to be ejected from the firm?

Capital-owned firms solve these problems by essentially having a market in control. The more you are willing to buy in, the more control you have. If you want to leave, you sell your control rights. Decisions about hiring and firing are left with those who are managing the firm. (And firms with mechanisms for workers to become shareholders are still capital-owned firms.)

What about coordination issues as a worker-controlled firm gets bigger?

At this point, we can see why the somewhat Darwinian selection processes of markets select for capital-owned firms and not worker-controlled ones. It is not that worker-controlled firms are illegal, it is that they represent a risk-and-decision profile that no one (including workers) are likely to invest in. The closest we get are partnerships, and they represent human-capital firms, not worker-control.

And about the state

Consider again the question: which firms are going to operate better? Those where control ultimately rests with those who have to deal with the risks or those where control ultimately rests with those who get to dump the risk on to others? Here’s something to conjure with. Is not: a structure where control ultimately rests with those who get to dump the risk on to others, a pretty good description of the state?

People (often with good reason) complain about the socialisation of losses and the privatisation of profits. But that is precisely what an awful lot of state politics is about. Shifting benefits to one group and costs, including risks, to another because the coercive power of the state makes that a game that can be played (and is obviously one with significant potential pay-offs). When one sees risks being shifted from capital to labour, there is generally some state action underlying it.

This is why the term state capitalism has a little bit of purchase behind it. If you squint just right.

In a command economy, the state owns all (or almost all) the capital. So, in a command economy, risk regularly gets dumped by the capital-owning state on to labour. Including risks of mass starvation or environmental degradation. But that is not because capital owns the state, but because the state owns the capital.

Lenin, Stalin, Mao, etc. did not control the state due to their ownership of capital, they controlled the creation and use of capital due to their control of the state. To call such capitalist or capitalism is to get the causal drivers entirely the wrong way around.

So, yes, it is significant that state owns the capital in a command economy. It affects its patterns of behaviour and means there is no significant non-state control of surplus, so no significant basis of institutional resistance to the power of (those who control) the state. But the capital is entirely subordinate to the state. So, the society is not capitalist.

And we are back with avoiding the use of terms so weighed down with emotionally-laden connotations. Because, without those connotations, there would be no incentive to so badly mis-characterise the relevant social, political and economic dynamics.

Serfdom versus slavery

Slavery remains a live issue, as discussed in the Global Slavery Index. The Index uses the following operational definition of slavery:

Slavery is the possession and control of a person in such a way as to significantly deprive that person of his or her individual liberty, with the intent of exploiting that person through their use, management, profit, transfer or disposal. Usually this exercise will be achieved through means such as violence or threats of violence, deception and/or coercion (p.11).

That is a definition of labour bondage, rather than slavery as such, but as all human bondage is an offence against people as moral agents, one can understand the attraction of slavery as catch-all term. Especially as the inaugural edition of the Index (conservatively) estimates that 30 million people are in such bondage world-wide.

The economic scholarship on slavery and serfdom usually starts with Evsey Domar’s classic article (scroll down), summarised here by Paul Krugman. See an updated version of Domar’s model. (And further.)  Economic discussions of the choice between slavery and serfdom tends to be somewhat unsatisfactory, as the key factor--whether the source population for the labour in bondage is local or imported--is rarely given the significance history suggests it should have. The American experience of mass multi-generational slavery, along with the myth of no slave smuggling, perhaps distorts perspectives.

Return to labour
Historically, labour bondage (from slavery through to serfdom and similar arrangements) occurred when the return to labour was sufficiently high that the policing costs of bondage were more than covered by the reduction in the cost of labour from imposing bondage compared to the cost of free labour. (The effects of coercion on productivity is a more complex issue.) Typically, this occurred due to either a drop in the population (e.g. the rise of the coloni in the Roman Empire after the Antonine plague and the plague of Cyprian) or to an expansion in land available for farming (e.g. after the advent of gunpowder weapons led to the retreat of the pastoralists in Eastern Europe). In these cases, the return to labour increased because it became relatively scarcer compared to land: to put it another way, labour's marginal productivity went up because there was more land per provider of labour. So coercion blocked labour's ability to get the full return therefrom.

The expansion of export markets (also a factor in the Eastern European en-serfments), so an increase in the demand for the products of labour, and development of gang (or other easily-supervised) production methods (increasing the output for a given level of coercion) could also encourage use of labour bondage. In the former case, increased demand for the product increased the return to labour. In the latter case low supervision costs increased the return to bondage.

Pre-industrial mining and cotton harvesting were both often done by slaves or other bonded labour. In both cases, the resource was unpleasant to gather but said gathering was easily supervised. Sugar harvesting (which was particularly easily supervised) was even more prone to use of slave labour.

So, effort-intensive (unpleasant but relatively simple) production was much more prone to bondage, particularly slavery. Care-intensive (more attention complex) production tended more towards serfdom or free labour; although an "open" slave system (i.e. freed slaves then integrate into the society) would allow care-intensive slavery--such as the labour market of (pdf) the Roman Empire. It would even permit slave agents if a lack of corporation law or equivalent made free-but-controlled agents problematic. In the words of (pdf) economic historian Stefano Fenoaltea:

Another of the principal consequences of the slave's legal incapacity is that the slave is legally an extension of his master, so that a sum paid to the slave of Titius is considered paid to Titius himself. Nowadays, this would matter little: legal intermediation by an agent is not difficult, and in any case most of our bills are paid not directly to individuals but to abstract legal persons (which in substantive terms are also intermediaries). In classical antiquity, on the other hand, both legal agency and abstract-legal persons were restricted to very special cases where they were recognized at all; but an effective substitute for the nonhuman person or the legal agent was found in the human nonperson, who was legally but his master's instrument. Slaves thus also had a specific advantage in the role of agents, and slave agents were common even where slaves were generally scarce (p.657). 

Economic historian Peter Temin makes a similar point (pdf):

As [Sir John] Hicks noted, slavery was the most common formal, legally enforceable long-term labor contract in the early Roman empire. A person with a long-term relation to a principal would be his or her most responsible representative. Slaves were more valuable than free men in that respect. Witness the frequent references to literate, skilled slave agents in the surviving sources (p.536).

Slave-serf spectrum
The difference between serfdom (in its various forms) and slavery is that a serf is bound to the land or workplace (the Soviet Union operated a system of workplace industrial serfdom from 1940 to 1956) while a slave is property. That distinction seems clear enough, except that (pre-revolutionary) Russian serfdom was perilously close to slavery in several senses--serfs were bound to owners more than land, and could be bought and sold (or, at least, the right to their labour could be). Forms of bondage have been historically so varied that the distinction between owning a person (slavery) and owning their labour services (serfdom) is not always very clear-cut.

Another difference between slaves and serfs is that serfs could legally own property, slaves could not (being, themselves, property). Russian serfs could own property, for example. Except that distinction is more de jure than complete. Slaves could have economic property rights (i.e. effective control over goods or attributes thereof), even if said property rights were not legally recognised or protected--otherwise slaves would not be able to buy their freedom, as some did. (The point also works in reverse: inmates of labour camps may not be legally slaves, but they functionally are.)

Both serfs and slaves could be born such. Indeed, serfs were typically born into serfdom. This was less true of slaves, who were often enslaved, as slave populations generally did not fully reproduce themselves. Roman slavery had significant slave breeding (pdf). Indeed, judging by the age data of slaves, it is possible that a significant proportion of Roman slaves purchased their freedom in part by raising children to replace them. There was also significant slave breeding in the Antebellum South, hence it received a relatively small proportion of enslaved Africans transported across the Atlantic, even including smuggling (mainly via Cuba).

That both systems had significant slave breeding was true despite Roman slavery being an "open" slave system (relatively high levels of manumission with ex-slaves being integrated into the wider society as full citizens and economic participants) and American slavery being a "closed" slave system (very little manumission and ex-slaves were not integrated into the wider society).

But it is highly doubtful either slave population was able to fully reproduce itself. The claim that the slave population of the Antebellum South was an exception to this principle seems to be based on ignoring or downplaying the (apparently considerable) smuggling of slaves.

That the family status of slaves had no standing, so they received little or no economic benefit in extra labour or provision for old age from raising children--remembering that children have to be not only brought to term, but then nurtured--militated against full internal reproduction of slave populations.

Serf populations never had that drawback. Serf populations had little difficulty reproducing themselves, having the normal economic incentives for raising children (extra labour and provision for old age) given that they could own property and their family status was fully recognised.*

Local or imported?

The clearest difference between serfdom and slavery is that serfs were local populations bound to the land, while slaves were (at least originally) imported. If the supply of bonded labour is local, that means:

(1) things have to be arranged so that the population continues to locally fully reproduce itself; and
(2) the costs of reducing said population to being property will be particularly high, due to the size and propinquity of the population. (This will include possible threat to the legal status of other members of that society.)**

Binding people to the land or workplace was a lot cheaper and safer than stripping them of all legal rights and standing--given that most of the advantage of bondage is gained simply by blocking the ability to offer their labour elsewhere. Which led to the further advantages of requiring significantly less ongoing policing while allowing said population to unproblematically locally reproduce itself. Thus, while debt slavery did occur (selling yourself or your children into slavery to pay a debt), debt bondage is more commonly a form of serfdom--due to reduced policing costs and much increased possibility of multi-generational labour services.

Conversely, if the supply of bonded labour is foreign or otherwise scattered:

(1) the process of enslaving will have already stripped them of rights and standing;
(2) the expectation of further imports will reduce any need to arrange for full local reproduction of the slave population; and
(3) the more tradable they are, the more the cost of more complete stripping of rights will be ameliorated. 

Policing costs will be higher, however, and the cost of the enslaving will be reflected in the purchase price. So slaves will have to be more productive than serfs to be profitable, reflecting the higher acquisition and enforcement costs. Which, in return, requires either extracting more output or doing so at lower cost, or both. (Use of slave labour to reduce the costs of oppression--as in the labour camps of totalitarian states such as the Soviet Union or North Korea--is a somewhat different case.)

Serfdom will therefore dominate slavery, as the policing costs of serfdom will be substantially lower and acquisition costs will be entirely contained within the return to the serfs, who will retain the normal reasons in farming societies to have children. So, the more use of serfdom (or its cognates), the less use of full slavery. Which is what we observe historically.

Since serfdom dominates slavery, slavery--particularly mass slavery--will typically occur when some effective constraint blocks the enserfing of local population. Such as a simple lack of such population; as in the Americas after the disease catastrophe of the Columbian exchange. (Though a form of serfdom was enacted while and if significant indigenous populations remained.) Or substantive political constraints--such as wanting poor locals to row warships or serve in the army, giving them the status and bargaining power to avoid bondage (classical Athens and Rome). The very notion of citizenship militates against enserfing.

Conversely, Sparta did not use mass slavery, as it already had an enserfed local population--the helots.  (It is notable that the coloni of the later Roman Empire evolved after Roman citizenship had become universal, so of much less moment, and the Roman Empire was on the defensive, so fewer slave imports.)

Imported bonded non-slave labour did occur--in the case of "blackbirding" and other indentured labour in the colonies. A little surprising, since the importation costs would at least partly replicate enslaving costs. But slavery being illegal would give space for use of imported "serfs". And importation costs may not fully equal enslaving costs, especially if lower policing costs also operate, given that these indentures were often entered into quite voluntarily, looking to a desired outcome (such as being paid to move to a society with improved income prospects).

Where the possibility of imported bonded-but-not-enslaved labour exists as an alternative to slavery, other factors may play a role. If there is a mode of production--such as gang-production--where the return to using slaves more than compensates for extra policing costs, then slavery will be favoured. Moreover, if the bonded labour is ethnically distinctive, that reduces policing (and psychic) costs of slavery. So, if physically distinct slaves are available, but physically distinct serfs or other bonded labour is not, slavery will also tend to be favoured (as the policing costs advantages of servitude over slavery is reduced). Thus, in most American colonies of European states, (African) slavery was comparatively favoured against (European) servitude.

Even so, indentured labour was imported into the more northerly British American colonies even while slavery was entirely legal and slaves were available. The key factor seems to have been the nature of production: indentured labour was preferred for care-intensive production (typical of the small farms and businesses of the northern colonies) while the balance of advantage shifted towards slavery when the expansion of gang-production methods made slavery more economic for various crops in the southern colonies.

The enserfment that did not happen
One of the historical puzzles about the use of labour bondage is the (re)enserfment that did not happen after the massive population loss of the Black Death (1346-1353). Here was a society which had had extensive labour bondage confronting a sudden labour scarcity (since lots of people had died, but the land and capital was still there). There was a clear increase in wages as a result of said labour scarcity. Yet the attempts to re-impose bondage failed.

Looking at the historical record, two elements seemed crucial:

1. The landlord cartel was insufficiently coherent because there were too many alternative ways of deriving income from land.
2. The crowns had become much less dependant on landlord military service, so lacked sufficient interest in enforcing such a landlord cartel (which is what mass enserfment essentially is).

A paper on the economics of labour coercion (pdf) suggests that my intuition was on the right track but not quite broad enough. The paper argues that effort and coercion are complements; that is more coercion means more production. But the paper also argues outside options are crucial, because that affects the alternatives available to coerced labour.  In the words of the paper:

Labor scarcity creates a labor demand effect: it increases the marginal product of workers in the coercive sector, and thus encourages employers to use greater coercion and extract higher effort from their workers. It also creates an outside option effect: it increases the outside option of the workers in the noncoercive sector, and reduces coercion because employers demand lower effort and use less coercion when workers have greater outside options. ... Whether the labor demand effect or the outside option effect dominates simply depends on whether the population change has a larger direct effect on the market price or the workers’ outside options (Pp587-8).

In post Black Death Western Europe, the paper argues that the relatively high degree of urbanisation increased the outside option effect, reducing the use of coercion. While, in Eastern Europe in the early modern period, the lack of urbanisation meant a minimal outside option effect, increasing the use of coercion.

Which is fine as far as it goes, but it was not merely urbanisation. Western Europe also had commercially more complex economies, which also increased the outside option effect. A commercial complexity that was in part a result of more extensive states, able to mediate and facilitate such complexity: a point which particularly applies with the comparison to Russia (which had much fewer officials per given number of population), where serfdom lasted longest.

As for my above point about what the crowns wanted, at the deepest level, it is the same point; that the societies had become sufficiently commercially complex also meant that armed forces were increasingly dominated by monetary taxes and payments independent of the return to landlord coercion. And it is enforcing (or not) the landlord cartel which is the key element. Not merely to block shifting between landlords but also to block alternative contracts (as the basis of mass bondage is that essentially the same conditions are imposed across controllers of labour), as both effects reduce outside options and make coercion more profitable.

Constraints and returns

So, slavery, particularly mass slavery, will occur when there some effective constraint blocks the enserfing of local population and the option of imported "serfs" is not suited to the mode of production, has insufficient advantage in policing costs or is otherwise not practical. For example, because passage is too risky to be attractive or contract enforcement is too problematic. A West African labourer had no capacity to contract with a potential American employer and, when slavery was legal, no protection against being enslaved on route. Conversely, moving from one part of the British Empire to another as indentured labour had much better contract enforcement possibilities.

Hence the slavery versus serfdom choice--in a situation where labour bondage is practical, and the return to bonded labour is positive--will be primarily a matter of the source of the population on which bondage is imposed. If the source population was local, serfdom (or some cognate) would be used. If the source population was foreign in origins, then (with the caveats noted above) slavery (i.e. being reduced to merely property, so more tradable) would be used to compensate for the increased acquisition costs, despite the increased policing costs of slavery over serfdom.


[Cross-posted at Skepticlawyer.]

* Slavery implied sexual bondage, as family status was not recognised; serfdom did not, as family status was recognised. This provides a particularly clear contrast between being property oneself and having one's labour services owned (in part or full). [Added footnote in response to a Facebook discussion.]
** As Yoram Barzel points out (pdf), this made slavery most problematic when it threatened the legal status of members of the domestic population. Unless, of course, such threat was the point--as in labour camp slavery. Modern servitude (amounting at times to slavery) among illegal immigrants operates precisely because they are isolated from the domestic population.

States and gangs

Having previously defined the state as (a structure of) systematic coercion requiring hierarchy to operate and revenues to sustain itself extracted from a given territory, an obvious question is: what about criminal gangs? They engage in systematic coercion, have a hierarchy which they use to extract revenue to sustain themselves from a given territory.

One objection might be that criminal gangs do not have a "territory" in quite the same sense. They extract income from individual acts of coercion within a given region rather than being "sovereign" over a specific territory. Sovereign as defined by the 1933 Montevideo Convention, which adopted the declarative theory of the state as:

a person in international law with 1) a defined territory; 2) a permanent population; 3) a government and 4) a capacity to enter into relations with other states.

Or, more simply:

as a community which consists of a territory and a population subject to an organized political authority; that such a state is characterized by sovereignty.

Which means a lot is resting on the notion of government or political authority, as gangs can have territories, even in a strongly exclusory sense. For example, the Swedish police have released a map of 55 "no-go" areas (via). (In France, they are known as Sensitive Urban Zones; Zones Urbaines Sensibles or ZUS.) If the armed organs of the state cannot operate in specific areas, said areas might be within the official boundaries of the state, but not its effective authority. That would appear to rest with whatever gang is dominant in a given "no-go" area.

State authority contested.

There is likely some notion of legitimacy lurking in the above definitions to distinguish a state from, say, a criminal gang, but legitimacy is a dubious descriptive concept. Is the state just a criminal gang with pretensions?

In a sense, yes. Both derive revenue fundamentally from coercion, from expropriation. Both are exercises in domination, nicely characterised by political scientist Xavier Marquez as:

asymmetrical relations where one party (“the dominant”) has an incentive to prevent the other party (“the dominated”) from exiting the relationship or meaningfully altering its terms, i.e., from resisting it, while the other party has a contrary incentive.

But state and gang engage in domination on rather different scales. A criminal gang is about personal status and profit, often highly localised; there is little or no serious pretensions beyond that. A state claims authority in a much "thicker" sense. It might operate at its core as a protection racket ("pay us, or bad things will happen to you") but states make larger, and very public, claims, when criminal gangs typically don't bother. On the contrary, gangs operate much more in the shadows. Indeed, the more openly gangs operate, the more compromised the authority of the state--for, if the authority of the state was not sufficiently compromised, being too public just makes the gang members targets of state sanctions. 

Which does point to the ways in which states and gangs are competitors. Criminal gangs flourish particularly strongly when the state declares a range of (continuing) transactions as being illegal--i.e. not covered by the normal property rights enforcement and adjudication services of the state--such as prostitution, gambling, drugs. Gangs move into to provide such goods and services and have to provide their own property rights protection and mediation services, backed by private violence. Gangs are then providers of property rights protection and mediation services that the state refuses to provide. Thus they can also operate in areas the state does not bother with (e.g. Latin American shanty towns) or does so too incompetently (e.g. Bangalore property rights).

Creating disorder

So, by banning a range of continuing transactions (or being too lax or incompetent to deal with them effectively), the state creates social disorder into which competitors move. Which is the wider point made in James Q. Wilson and George L. Kelling's 1982 "Broken Windows" essay: subtitled, revealingly, "Police and neighbourhood safety"--that enforcement of social order is not merely a matter of law:

Though the police can obviously make arrests whenever a gang member breaks the law, a gang can form, recruit, and congregate without breaking the law. And only a tiny fraction of gang-related crimes can be solved by an arrest; thus, if an arrest is the only recourse for the police, the residents' fears will go unassuaged. The police will soon feel helpless, and the residents will again believe that the police "do nothing." What the police in fact do is to chase known gang members out of the [housing] project. In the words of one officer, "We kick ass." Project residents both know and approve of this. The tacit police-citizen alliance in the project is reinforced by the police view that the cops and the gangs are the two rival sources of power in the area, and that the gangs are not going to win.

The state and gangs as competitors becomes very explicit in such circumstances.

But rather localised competitors. Which is part of the problem--the comfortable can largely ignore the consequences of policies they do not have to live with. So the Swedish police publish their map of "no-go" areas and it just disappears into the ether, since that (largely Muslim) migration to Sweden has resulted in such intense (if highly localised) social disorder is too confronting to progressivist comfort to deal with. The Baptist-and-bootlegger de facto alliance operated much the same way, as does the modern "war on drugs" equivalent.

Being public
States need public effectiveness, for if authority is going to "scale up" beyond the narrow and personalised intimidation of the criminal gang, habitual obedience is required to make the state work. Both within the hierarchy of the state and the wider populace. The notions of government and political authority used in the above definitions of a sovereign state incorporate a notion of sufficient control generating habitual obedience. But very public control and very public habitual obedience. 

Hence the importance of signalling for systematic coercive power. The more publicly a gang operates, the more it signals its power. The more people are surrounded by effective signals of state authority, the more habitual obedience is likely to be. Hence the aforementioned "broken windows" theory of crime. Hence also the "cosmological bluster" (to use James C Scott's lovely phrase) of states, expressed in stone, ritual and public discourse. States require habitual obedience over much wider territory and areas of life than does a criminal gang.

Exit, resistance and voice

The dangers to such habitual obedience are exit, resistance and voice--ways of coordinating against state activities and authority. Not necessarily exit from the territory of the state--European states exported large numbers of people in the C19th without losing authority. The dangers are rather exit from its authority within its territory and public denial or contesting of its authority; either as a political community (the wish to secede: as seems a factor in the Swedish and French cases mentioned above) or as a current regime.

Leninist states famously attempted to block exit. While widespread wish to leave did undermine the cosmological bluster of such states--that they were the golden path to the future--at least as important an issue was the loss of people to expropriate from; given the level of expropriation such states engaged in. Hence, for example, East Germany "selling" people to West Germany. 

A wall to keep people in.

Leninist regimes also typically seek to drown out any alternative voices in public social space. Less total regimes are usually content with merely "pruning" the public social space.

So, the main difference between the state and a criminal gang is the scale of the operation of the state. Unless, of course, the state acts to broaden the benefits it provides. Which, of course, modern democratic states do. Indeed, the point of elections and representation is precisely to get the state to do that.

Which can then provide a strong positive-social-standing effect to what the state does, and does not do. For good or ill. The "war on drugs" and the "fight against crime" provide cover for noxious withdrawal of state coverage of transactions and inadequate police accountability respectively, to take topical examples. 

Community, state and regime
There is also some ambiguity between political community/society, state and regime. Partisan feeling can generate widely varying attitudes to particular office holders or governments. In the US, conservatives tend to be strongly attached to the US as a society & political community, but be rather more dubious about aspects of the American state. Conversely, progressives tend to be more positive about a wider range of aspects of the American state, but rather less enamoured of the US as a society & political community. 

The belief that the state can reduce "sin" in society has done much to increase the level of crime and the ambit of the state's localised competitors, criminal gangs. Fear of said crime in a highly armed community has done much to undermine police accountability in the US. A bit more scepticism about what the state can do in stopping "sin" would go a fair way to reducing crime.

Ironically, it is the failure to extend basic operations of the state to a range of continuing transactions that gives its localised competitors such revenue opportunities and expands the ambit of crime, including theft and violence. Less hubris about what can be achieved and more coverage would work rather better. 


[Cross-posted at Skepticlawyer.]

Constrained by God: an epistemic event horizon

Reading about inadvertent patterns created by Islam brings to mind how adaptability is an advantage in a civilisation. While it is true that religious belief can be something of a moveable feast, it is nevertheless true that religious doctrine--particularly text-based religious doctrine within monotheism--can be a powerful and continuing constraint.

This is particularly obvious in Islam. In the C12th ibn Jubayr (1145-1217) wrote the following about the Franj (Franks, i.e. Christian crusaders):

Upon leaving Tibin (near Tyre), we passed through an unbroken skein of farms and villages whose lands were efficiently cultivated. The inhabitants were all Muslims, but they live in comfort with the Franj—may God preserve us from temptation! Their dwellings belong to them and all their property is unmolested. All the regions controlled by the Franj in Syria are subject to this same system: the landed domains, villages, and farms have remained in the hands of the Muslims. Now, doubt invests the heart of a great number of these men when they compare their lots to that of their brothers living in Muslim territory. Indeed, the latter suffer from the injustice of their coreligionists, whereas the Franj act with equity.

His response was not "let us learn from these people" but "and that's why they must be smashed". A response we see repeated within contemporary Islam. Dramatically in the case of Israel, but also about the West generally.

The notion that submission to the revelations of God puts one in a different class of person from those who do not blocks information in a systematic way. It creates a crippled epistemology (pdf). It undermines the adaptability of one's civilisation.

It creates a serious and longstanding problem within Islam. Within 50 years of the development of Gutenberg's press, the printing press had spread across Latin Christendom. It took over three centuries for it to spread from the Christian north of the Mediterranean to the Muslim south. Even when the printing press did spread to the Muslim world, it was blocked from printing in Turkish or Arabic due to the objection of Muslim clerics. The publication of scientific works in post-Reformation Catholic countries was hampered by local clerical authority over the license to print, but the effect was nowhere near as restrictive. In part, because printing could just shift to Protestant Europe.

After the early Islamic surge, Islam became remarkably uncurious about other civilisations--hence the Muslim world translating fewer foreign books in a millennia than a single Christian country (Spain) does in a year. Even now, the entire Arab world translates about a fifth of the foreign books each year as does Greece.

An epistemic black hole

A certain conception of God became dominant within mainstream Islam, thanks particularly to al-Ghazali (1058-1111). He, more than anyone else, is responsible for the closing of the Muslim mind. His is perhaps the most powerful example of ideas having consequences, for he entrenched two views which had already been latent in Islam but now became dominant.

(1) That revelation constitutes the good--that morality is whatever God says it is and has no existence beyond His Will.

(2) That there is no independent structure to the universe beyond what God wills; that whatever regularities we see are merely the habits of God which He can change at any time.

These two propositions constitute a sort of philosophical black hole; a religious event horizon beyond which reasoning cannot take you as long as you accept those two premises. Theology trumps both morality and metaphysics and does so on the grounds that anything less is a blasphemous restriction of God's omnipotence and transcendence. There is no independent grounds on which to reason about morality or the nature and structure of the world. In particular, causality has no existence beyond the will and habits of God.

After Maimonides (1135-1204) and Aquinas (1225-1274), Judaism and Latin Christendom were in quite different situations. In both cases, the acceptance of Aristotelian philosophy provided the good with an independent existence. The good was not the good because God willed it, God willed it because He was Good.

Similarly, the world had patterns and structures, and things in the world had their natures, in themselves. God had created all, but he had created patterns and structures. He was the ground of causality, the unmoved mover; causality was not His wilful plaything. Metaphysically speaking, God was a constitutional monarch, ruling over an ordered universe.

Statues of two great Aristotelians in Cordoba: Averroes (ibn Rushd) (1126-1198) and Maimonides (1135-1204). Both influential in Latin Christendom, minimally so in Islam.

If the good had independent existence, if the world had structures and patterns in itself, then both could be reasoned about without reference to God. Theology may have been the medieval queen of the sciences, but other disciplines had their own reference points and legitimacy.

Medieval scholasticism provided a bridge to the Scientific Revolution and the Enlightenment.

Mainstream Islam has no such bridge. Instead, it is stuck in constant re-reruns of the Reformation, in the search, via scriptures which ultimately have trumping authority, for how to get submission to God correct. That C7th Arabia really is the manifestation of the ultimately correct social order.

Remembering that the Qu'ran is the direct word of God, eternal and uncreated. It is not like Jewish or Christian scriptures, which operate through human intermediaries. The Jewish and Christian understanding of scripture opens up analysis of the structure of scripture in worldly terms in a way that Islam has never done or been seriously open to. The difference between scripture as human-intermediated manifestations in an ordered universe versus scripture as world-trumping direct manifestation of divinity in a world which has no independent existence or legitimacy beyond the habits and Will of God.

In Christendom, law is a human institution. In Judaism, accepting its role as permanent minority, God's law is for the community of the Chosen, who accept the strictures of the laws of the societies they live in. In Islam, law is yet another manifestation of the authority of God, of His complete sovereignty.

All of which means it is a path to great misunderstanding to see Islam and Christendom as two parts of the one civilisation. They may both be civilisations of the One God, but very different principles and understandings underpin Western and Islamic civilisations.

Westerners are children of the Enlightenment (and the reactions to it) and of God as constitutional monarch. Political adults who can make and unmake law themselves.

Mainstream Islam is based on profoundly different presumptions. Adherents live in a world where law, morality and metaphysics (particularly causality) have no authority or existence beyond the revelation, will and habits of God. Which makes the moral universe of Islam very different from that of the West, with the difference tending to widen over the past century or so, not narrow.

Medieval differences

Ibn Jubayr's contrast between Muslim peasants under the Franj and under their fellow Muslims was the result of Sharia. In Christendom, law was a human thing. So primogeniture could evolve, allowing mounted armoured warriors to be landholders, as primogeniture kept landholding unified (so large enough to supported a mounted, armoured warrior) with the oldest son inheriting the lot (someone likely to be old enough to defend the landholdings) and providing a simple inheritance rule. Thus, the warrior elite had an interest in the productivity of the land and in productive, long-term relations with peasants. So crusader knights sought productive relations with their Muslim peasants.

In Islam, Sharia had strict inheritance laws, requiring sharing out amongst children. Warriors could not be given land grants in the sense of land ownership, since such grants would rapidly fall below the size able to support a mounted armoured warrior. So the iqta, tuyul, timar or jagir tax-fief evolved instead. Descriptions of them as "land grants" are highly misleading. If they were land grants, they would be subject to Sharia inheritance laws; the entire point of the evolution of these tax-holdings was to avoid that. Instead, the holder collected taxes from the grant. They were thus a public function, not private property within the meaning of Sharia, and so not subject to its inheritance strictures.

The new landowners move into Jerusalem

Since they were only tax-collectors and, particularly early on, the tax-collection grants were entirely revocable, the connection to the local peasants and the productivity of the land was much weaker than with Western knights. Hence the pattern ibn Jubayr noticed, of the land-holding knights treating their (Muslim) peasants better than did the tax-holding Muslim warriors.

More broadly, the Christian warrior elite had far more interest in the economic and commercial development of their society than did the Muslim warrior elite. Moreover, the Christian warrior elite represented a more difficult political management problem than did the Muslim warrior elite, requiring the development of more sophisticated social bargaining mechanisms. Conversely, the Christian warrior elite had a broader interest in social order, from being embedded in the legal system (in Islam, a matter of muftis and qadis) to upholding the principle of primogeniture, than did the Muslim warrior elite. The Christian warrior elite had long run social stakes to bargain about. The fratricidal civil wars that marked (almost every single) ruler succession in Islam were much less common in Christendom.

Which left ibn Jubayr with a dilemma. The patterns of the Franj could only be copied by accepting law not theologically endorsed. Something of a cosmic insult, that. Smashing what did not fit was much more satisfactory. Contemporary Muslim, particularly Arab, attitudes to Israel typically display the same patterns. So, if somewhat more mutedly, do attitudes to the West.

So, Christendom did not only operate on very different motivating principles, it also had profoundly different institutional evolution. Islam and the West are not two halves of the same civilisation. And Islam is still struggling to get out of its epistemic event horizon; hence its enduring problems with modernity.

[Cross-posted at Skepticlawyer.]

Ronald Coase 1910 - 2013

Ronald Coase, the 1991 Nobel Memorial Laureate in Economics, passed away on 2 September at the age of 102.  He was working to the end, having recently published a co-authored book on China. A good one.

I have loved Coase's work ever since I first came across it. He won his Nobel Memorial for essentially two articles. One he wrote as an undergraduate in his 20s, the 1937 article The Nature of the Firm (pdf).  The other was published in 1960, The Problem of Social Cost (pdf), the most cited law article. Both pieces, plus his somewhat notorious The Lighthouse in Economics (pdf) and some other key articles and essays, were published in 1988 in his The Firm, the Market and the Law, available on Amazon in Kindle edition for $US15.12.

Buy or do?

Coase is best known for a concept he did not name--transaction costs--and a theorem he did not formulate--the Coase Theorem. The concept of transaction costs first appears in a 1931 article by economist John R. Commons. Coase, however, elaborated the concept and applied to a very practical problem--why do firms exist? Why is not the price mechanism always used? Why does everyone not operate as sole traders trading their services in the market place?

As he sets out in his Nobel Memorial Prize lecture, having completed the course requirements for his degree in Commerce from the LSE in two years, but graduation requiring three years attendance, he spent the third year traveling the US studying vertical and horizontal integration of firms. Thomas Hazlett describes nicely what young Coase did in the introduction to a 1997 interview with Coase:

Coase's scientific methodology? He asked businessmen why they did what they did. One key question, for instance, involved why firms chose to produce some of their own inputs (vertical integration), and why they sometimes chose to use the market (buying from independent suppliers). He was fascinated by their answers, but even more by their astute calculation: Firm managers were keenly aware of all the relevant trade-offs.

Coase identified the costs of transacting as the key variable determining the answer and therefore the existence, and boundaries, of firms. Firms existed because it was cheaper to do some things within a firm than in a market place; that there were costs to using the price mechanism. One of those insights which is blindingly obvious once someone has pointed it out.

Ronald Coase

In doing so, he explicitly disagreed with economist Frank Knight's analysis that risk led to non-market transactions, establishing an on-going pattern where risk and transaction costs are the key factors used by economists to discuss institutional arrangements. For example, Deidre McCloskey and Stefano Fenoaltea's debate over the structure of medieval manors turns very much on the relative importance of transaction costs and risks. Similarly, a paper on (pdf) taxation policy in the Ottoman Empire looks at the balance of risk and transaction costs according to what level taxes were levied at. If risks were more constraining, it made sense to tax at a more territorially encompassing level, so risks could be pooled. If transaction costs were more constraining, it made sense to tax at a more local level, so local knowledge could be used.

Economist Yoram Barzel has offered an analysis of the boundary of the firm which puts risk back at the centre, the boundary being set by the range of transactions guaranteed by the equity capital. Though transaction costs are hardly irrelevant in that decision. Especially as risks can be transferred--to other transactions, to other agents, across time--while risks and transaction costs overlap.

Coase's insight also make it easier to see how the IT revolution and the Internet has affected both the structure of firms and the variety of commercial and other arrangements.

While Coase's insight on the boundary of the firm may be obvious in retrospect, the insight remained remarkably fallow in economics for decades. As Coase himself noted in his Nobel Memorial lecture, the concept needed to be "operationalised", quoting 2009 Nobel Memorial Laureate Oliver Williamson. As was done by such scholars as Williamson himself, Steven Cheung and Harold Demsetz. But informing and inspiring the work of other scholars is what makes great insights intellectually productive.

Social costs going both ways

If the idea at the heart of The Nature of the Firm seems obvious in retrospect, there is nothing obvious in the massively counter-intuitive idea at the heart of Coase's other seminal piece, The Problem of Social Cost, which is that, in a world with costless bargaining, it may make no difference to the net social outcome whether a producer has liability for the damage they cause or not. If they have liability, they can pay others for the damage caused to them. If they have no liability, they can be paid by others not to do the damage. Either way, the same level of production will be agreed to. As Coase himself put it in that 1997 interview:

The law of property determines who owns something, but the market determines how it will be used.

The operative term is in a world of costless bargaining. Coase's intent was to draw attention to the role and importance of law in a world of positive transaction costs and to the reciprocal nature of the problem of damage (i.e. both the doing and the not doing cause costs to someone). But it is much easier to model a world with zero transaction costs. Economists became entranced by the world of what 1982 Nobel Memorial Laureate George Stigler termed the Coase Theorem--that, in a world of zero transaction costs, private and social costs were the same. It was a world without externalities (a term Coase did not approve of) because they could all be bargained away.

This fascination with an unreal zero transaction costs world of tractable models frustrated Coase. As he wrote in Notes on the Problem of Social Costs:

The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth (p.174).

But this unreal world was great for mathematical models. As Coase wrote at the end of Notes on the Problem of Social Costs:

In my youth it was said that what was too silly to be said may be sung. In modern economics it may be put into mathematics (p.185).

It was not that Coase was against the use of mathematics in economics. Far from it. He just wanted the maths to have a strong connection to the world we actually live in.

Which is a world where price mechanisms are not always used because it is a world of positive transaction costs. Hence not only firms but also laws and institutions. Coase's insights became central to analysis of firms, to law--the entire field of law and economics flows from his insights--and economic history. The last is most obvious in the work of 1993 Nobel Memorial Laureate Douglass North with his analysis of institutions as ways of dealing (indeed minimising) transaction costs but it also lurks underneath 1993 Nobel Memorial Laureate Robert Fogel's work on the efficiency of slavery. Anyone who reads a significant amount of economic history becomes very aware of how basic transaction costs are to making sense of history because they are so important to making sense of law, rules and institutions. No wonder economic historians find Coase's insights so useful.

(As an aside, the committee which picks Nobel Memorial Laureates does seem to like folk who extend the ambit of economics, the most imperial of the social sciences.)

Institutions can be analysed longitudinally (across time) but also laterally (across space). Coase's insights are a fundamental building block of 2009 Nobel Memorial Laureate Elinor Ostrom's work on common property and the evolution of rules to manage them.

Coase himself pointed out that what became known as transaction costs had already been basic in economic analysis of the origins of money--particularly in the famous coincidence of wants problem. Search costs are a basic transaction cost and a reason to have money. More recent work on "money is memory" (pdf) and money as a response to limited enforcement is yet another form of transaction cost analysis.

Coase was very aware of the difference in how lawyers and how economists think while linking between the two mindsets. As he notes in The Problem of Social Cost, lawyers are concerned first with establishing who has the legal right to do what, and then working through the consequences. Economists look to what bargains can be made.

Coase pointed out that exchange was not merely about physical items, but about bundles of rights to bundles of attributes. Harold Demsetz's famous beaver trade analysis (pdf) of the origins of property rights based on the cost and benefits of internalising externalities is very much based in such Coasian perspectives.

Coase's insights made it easier to see that any exchange is first and foremost an exchange of ownership. Mere physical possession can be resolved in any particular instance by force; who is functionally stronger and sufficiently motivated? It is accepted rights to which create enduring bargains.

Spreading influence

It is an instructive exercise to go through the list of Nobel Memorial Laureates and see for how many of them their seminal work was based--explicitly or implicitly--on the insights of Ronald Coase. Insights conveyed clearly and lucidly without any more mathematics than simple algebra and arithmetic.  Indeed, his two seminal articles should be read by anyone interested in social analysis.

Ronald Coase was not, however, a public intellectual in the way of Keynes, Hayek, Friedman or Krugman. Though his work was instrumental in developing the key arguments for privatisation: indeed, the Problem of Social Cost was written as a result of a previous article on privatising the radio spectrum being challenged by Milton Friedman and other University of Chicago economists in a memorable night of argument.

Coase drew attention to the necessity of laws, rules and institutions, but also wanted economists to be a bit more sceptical about government intervention than they had been--as he pointed out governments are not immune to transaction costs. One of the reasons he disliked the concept of externalities (apart from obscuring the reciprocal nature of the issue of effects) is because he thought it encouraged intellectually lazy presumptions about government intervention. Particularly when economists did not stop to enquire how much of current private actions rested on government protections and exemptions.

Or whether other possibilities had arisen. Coase's The Lighthouse in Economics points out that the historical record regarding lighthouses does not conform to "no private provision of lighthouses is feasible" presumption of prominent economists. Elinor Ostrom's investigation of the wide range of possibilities between private ownership and government control in governing of common property is very much in the same spirit--yes, but what do people actually do, and why? There is a Coase Institute which seems to be motivated by the spirit of its namesake.

Coase may not have been a public intellectual in the way of more famous economists, but that apparently did not stop him attracting the ire of would-be policers of academic opinion. Both he and 1986 Nobel Memorial Laureate James Buchanan were apparently encouraged to leave (via) the University of Virginia because they were regarded as too "right wing". Coase refers to the hostile sentiment in the aforementioned 1997 interview:

They thought the work we were doing was disreputable. They thought of us as right-wing extremists. My wife was at a cocktail party and heard me described as someone to the right of the John Birch Society. There was a great antagonism in the '50s and '60s to anyone who saw any advantage in a market system or in a nonregulated or relatively economically free system.

A particularly silly view of Coase, as British pragmatism seems to be the best description of his views: but insisting on evidence-based policy can get in the way of all sorts of glib presumptions. As Dr Barry Marshal, the 2005 Nobel Laureate in Medicine, was also encouraged to leave said university, the University of Virginia may have an inglorious record in the number of Nobel Laureates discouraged from working there. (Though comfortable conformity is, I suppose, a branding.)

The economic blogosphere has some fine posts on Coase, with more good things in comment sections. Scott Sumner has a nice short post, Lynne Kiesling has a post with lots of links. Peter Boettke has an nice discussion of Coase's contributions.

Coase himself said of his work that:

I’ve never done anything that wasn’t obvious, and I didn’t know why other people didn’t do it. I’ve never thought the things I did were so extraordinary.

But is not pointing out the obvious-in-retrospect a mark of truly great intellectual contributions? To me, Coase is the most important economist of the C20th as his insights so expanded the ability of economics to usefully analyse social phenomena. If you think that claim of importance is too big a claim, I refer you back to the list of Nobel Memorial Prizes in Economics and how many of them had their seminal work based, at least in part, on Ronald Coase's insights.

Which he originally came to by asking folk about how they reached particular decisions. Businessfolk often seem to be the only living group academics feel entitled to analyse without ever seriously (or even not seriously) talking to any about what they do and why or ever using any work or evidence from someone who had. Here's a challenging thought: without Coase's work, how many economists would be in that situation?

[Cross-posted at Skepticlawyer.]