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.

Single-Spouse Marriage Systems: the elite male problem

While most human marriages have been one husband, one wife, most human societies have permitted multiple-spouse marriages. Most commonly, they permitted a man to have more than one wife.

Since fathering a child takes rather less inherent biological effort than mothering one, it is hardly surprising that multiple wives (polygyny) is the most common deviation from single-spouse marriage.

In societies where women make substantial contributions to subsistence — almost invariably, hoe-farming societies — rates of polygyny can get very high. For the cost of adding extra wives is much less than in societies where males dominate subsistence activity: typically plough-farming and pastoralist societies.

Foraging societies tend to have low levels of polygyny, as subsistence contributions are relatively even (the subsistence contribution of women is more constant, that of men more nutrient dense) and entirely labour driven. There are no productive assets, beyond weapons and other hand-held tools.

The landscape management and foraging complexity of Aboriginal societies in Australia generated distinctive patterns of gerontocratic polygyny. Old men married young women, young men married their widows and, in their old age, married young women. It kept fertility down and fostered the transfer of complex foraging knowledge across the generations. They also developed some extraordinarily complex marriage-and-kin systems as part of complex landscape management, as that preserved a rolling network of kin connections.

If women control the main productive asset, and there is no other basis for elite male status, then there is no elite male problem. If that is not the case, then if a society is going to have compulsory single-spouse marriage systems, it is the elite males who have to be convinced. There seems to be two general reasons for the elite males to accept single-spouse marriage.

First, there are very strong pressures for social cohesion. If there is a need to have maximum internal cohesiveness against outside groups — specifically, if there is a need to include low-status males — then a single-spouse system minimises internal sexual competition and maximises the breadth of stakes in the success of the group. The fewer elite males there are, the lower the cohesion pressures need to be for such an arrangement to emerge.

This is the pattern that seems to explain the emergence of single-spouse systems in the classical Mediterranean and in groups such as the early Christians and the Alevis. In the case of classical Greece and Rome, access to slaves further reduced the cost of single-spouse marriage to elite males.

The second reason for single-spouse marriage being accepted by elite males is if the education cost of raising a child, particularly a son, to elite status is sufficiently high. Multiple-wife systems mean less investment by the father in individual children. If such an investment is at a premium, then a single wife is a better option.

This is the pattern you see in the Indian caste system and in the modern world. Brahmins could theoretically have multiple wives, but very rarely did, as the training investment in raising a Brahmin son was so high. Indeed, this very high training cost seems likely to be the reason why the jati system developed — to ensure the daughters of Brahmin, who understood the needs of raising a Brahmin son, were available to marry Brahmin grooms.

Single-spouse systems did not develop as territorial or population expansion devices. On the contrary, polygyny is a much better territorial expansion device because it creates a shortage of wives. Polygyny creates a shortage of wives as a woman who gets married leaves the marriage market, but her husband does not. So low-status men end up excluded from the marriage market. The classic response to this problem is “those people over there have women, take theirs”.

Islam sanctified this pattern, with the Quran explicitly endorsing sexual access to “those your right hand possesses” (Ma malakat aymanukum: i.e. women acquired by the sword). Sanctified sexual predation helped drive the territorial expansion of Islam for a thousand years. From its rise in C7th Arabia to the turning back of Islamic expansion into Europe after the Battle of Vienna, 12 September 1683. (And yes, that is apparently why 11 September was chosen in 2001.)

The Norse (Viking) raids also seemed to have been significantly fuelled by polygyny and died away as the Norse lands Christianised.

If external expansion is fuelled by low-status men seeking women that the local marriage market does not provide them, then elite males have no reason to accept a single-spouse system. Which comes back to; if one wants to explain why a single-spouse system is being accepted, then one has to explain why elite males have accepted the system, as they are giving up the benefits of multiple wives.

These musings are part of the intellectual scaffolding for a book to be published by Connor Court looking at the social dynamics of marriage. As they are somewhat a work in progress, they may be subject to ongoing fiddling.

Corrupting risk at the top of the surplus pyramid

Chairman exiting his bank

In a real sense, human history starts with the creation of a social surplus, a surplus beyond simple subsistence. Such a surplus could be used for--indeed, was required to--build more complex societies. This included the literal building of the monumental architecture, the most striking creations from the existence of such surpluses.

More food, more babies
Merely increasing production does not mean there will be a social surplus. The normal tendency has been for population growth to increase to consume the food production available; given that the best way to manage farming and ageing was to have children. This Malthusian constraint continued to operate in human societies until quite recently--the history of China from 1700-1850 is a classic example of increased food production leading to population increasing faster than food production leading to a massive breakdown in social order (one of the deadlier such in history) with the loss of state revenue and diversion of resources to warfare undermining basic management of resources.

As I noted in a previous post, it is highly plausible that expropriating elites were what originally created the social surpluses enabling the building of more complex societies. For much of human history, it was obvious what was the dominant way to get access to social surplus: political power—either having it or serving it. Control of the means of coercion provided the dominant source of wealth. (And having the backing of the dominant coercive apparatus is still pretty useful.) With considerable amounts of said surplus being invested in the priests who helped manage both social complexity and expropriation by providing rituals of belonging; norm-advocacy; narratives of meaning, explanation and rationalisation; various services (calendar management, doctors of body and mind, teachers, engineers, scribes, mediators); plus formalised signals of commitment to the expropriating rulers and their social order.

To be sure, there was plenty of trade (and wealth from trade). Nevertheless, extracting surplus from peasants or controlling trade routes (and particularly trade nodes) was much the dominant source of wealth: especially inheritable wealth. In many early civilisations, the ruler was the dominant trader. If trade collapsed, that tended to both increase the dominance of wealth-through-violence while making it harder for any particular ruler to (re)establish control over a wide area—due to a lack of sustaining surplus to pay for the necessary extensive control. Collapse of an extensive, trade-managing (and so protecting) rulership often being the main cause of the collapse of trade in the first place.

The more centralised and territorial the generation of surplus is, the more it will attract attempts to seize it (hence the long history of territorial wars). This extends to our own period: having export wealth dominated by easily controlled primary production encourages both autocracy and civil conflict (pdf). Living in a society where wealth-through-the-means-of-violence, where centralised control of surplus, is not dominant is both historically rare and desirable.

It is impossible to achieve mass prosperity without getting out of the Malthusian constraint wherein increased food output merely leads to, and is consumed by, increased population. To put it another way, to evade the Malthusian constraint, the social niches people occupy have to be larger than subsistence. The more such social niches spread down the social scale, the more general prosperity becomes.

Ever since the rise of hierarchical societies, there have been social niches which were larger than subsistence; they were the niches of elites. Indeed, as Peter Turchin points out, one of the perennial problems of hierarchical societies is precisely the size of elite niches. If the elite increases in size faster than output, then competition for elite niches will ensue. That process has been one of the great drivers of history. (For example, the tendency for the ruling clan of pastoralist empires to breed enthusiastically likely helps explain the tendency of such empires to break up after a few generations as too large an elite fights over too few elite niches.)

For elite niches to occur in a society within the Malthusian constraint, a surplus has to be extracted from those lower in the social pyramid. To be on top of a social pyramid is to be on top of a process of surplus extraction. A process which continues in post-Malthusian societies. This is obvious enough in developing world kleptocracies (pdf), but is hardly unknown in developed democracies.  Jon Corzine (CEO of MF Global, which has just gone bust in one of the largest bankruptcies in US corporate history) is an excellent example of someone living on top of the surplus pyramid:

based on his long years in the financial business, from CEO of Goldman Sachs to his current job as chief executive of the failing MF Global, Corzine is proof positive that on Wall Street you don’t have to be very good at your job to get paid a lot of money, which is why hatred of fat cats remains a bipartisan pastime—and will for the foreseeable future.

Pushing risk downwards
A standard way to live on top of the surplus pyramid is to push risk down the social pyramid. At its most brutal, it involves pushing the risk of starving downwards. But it can happen even in societies which have escaped the Malthusian trap. Consider this comment by the Rt Hon. Vince Cable MP, UK Secretary of State for Business, Innovation and Skills in a generally excellent speech about parallels from the 1930s for our times:

[Read the rest at Skepticlawyer or at Critical Thinking Applied.]

Trust, network and framings

Scott Sumner and Noah Smith have been having an argument about China and culture. Scott's original post was here, Noah replied, Scott replied to that. This is a comment I posted on both blogs.


My general working principle is that culture-as-explanation is the last refuge of the analytically bereft.

The success of the overseas Chinese in SE Asia can largely be explained by trust and networks. (Think Jews in the diamond trade.) You get linked dialect or even common-ancestral-village networks where reputation information flows very speedily. In a situation where the default attitude of rulers to commerce was to fleece it, and the general environment was low trust, networks of trust extending across rulerships had strong advantages. Their success was also more acceptable because it was not threatening to local rulers (Chinese could not aspire to political office).

One sign of this is that the overseas Chinese are not nearly as economically important in high trust societies. The overseas Chinese do fine in Australia, but not extraordinary in the way they do in SE Asia.

(Michael Backman wrote a report for DFAT's East Asia Analytical Unit years ago Overseas Chinese Business Networks in Asia which covered this.)

Chinese culture has been agrarian, with cities and commerce for a long time. The necessary framings are built into people's outlooks.

Which is the point where I will concede culture matters. Folk coming from a hunter-gatherer culture lack the relevant framings and have real difficulties adjusting to modern commercial-industrial life.

Deepak Lal's division of culture into its material and cosmological aspects (pdf) (short summary here) captures this element (and why language groups can seem to matter: they come with attached framings).

What you call 'culture' I tag as trust, networks, and framings. More analytically tractable.

Why have contracts?

This was originally provoked by a question and answer here.


One of the most productive questions ever asked in economics is: “why do firms exist?” Why are not all economic agents sole traders? Alternatively, why is there not one big firm? Why, indeed, do firm structures vary so noticeably across industries?

The question was famously posed by Ronald Coase and he answered it with what became known as transaction costs. (A useful summary and appreciation of his work is here [pdf].) In effect, firms existed to minimise transaction costs: if it is cheaper to do a transaction in-house, then it is. If it is cheaper to do purchase a good or service externally, then it is. Firms are alternatives to coordination by the price mechanism. In a sense, they are areas of the suppression of the price mechanism. (Original article is here [pdf].) This was very productive question because it transformed organisational and institutional analysis -- many subsequent Nobel prices in economics were awarded for work based on use of transaction costs.

But is a firm defined by a transaction costs boundary? Or is it, as Yoram Barzel has argued, defined by the range of the guarantee of the equity capital? By the range across which expenditure to match obligations is guaranteed (and, if the guarantee fails, bankruptcy occurs). Firms then become mechanisms to deal with both risks and transaction costs. It is the intersection of comparative transactions costs and risk coverage that sets the boundary of the firm. Noting that it is existence of a realm where it is beneficial to replace the price mechanism (Coase’s point) that creates the range of expenditures needing the equity guarantee (as identified by Barzel) in the first place.

Coase’s analysis in itself does not explain why firm ownership is purchased and why the owner is the recipient of the residuum (the net income of the firm, whether positive or negative after all expenditures are paid for): adding Barzel’s analysis does. While Barzel's analysis does not identify why there is a range of transactions needing the equity guarantee in the first place (as Coase's analysis does.)

So, why do contracts exist? Why are not all transactions just on-the-spot swaps?

Lots of transactions are, after all. Not only are there spot markets, but retail markets are dominated by such on-the-spot swaps, where prices are free to move between transactions.
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Contracts exist for the same reasons firms exist, to lower transaction costs and manage risks. Contracts structure, and thereby permit, economic interactions that extend beyond a caveat emptor swap on the spot. A contract is any agreed transaction or series of transactions across time. So, any purchase which is not on a caveat emptor basis has some contractual element, as there is an obligation across time. (So even spot markets can have contractual elements.)

This is easiest to see with regard to labour markets. While spot markets for labour have existed, they tend to be relatively rare. Generally, people providing goods and services they do not make or provide themselves need to use labour with some regularity, and labour with specific skill sets and characteristics (such as reliability). A contract offers income to the provider of the labour on the basis of providing particular skill sets and personal characteristics. The promise of future income (to the labour provider) and future use (to the hirer of the labour) gives the hirer of the labour reason to engage in necessary training (even if only in the procedures of the firm) and a reasonable expectation of the labour being available. The hirer can then have a reasonable expectation of providing the goods or services he can then offer to customers.

The point can be extended to any good or service that is a regular part of the production process.

So, contracts exist to manage interactions across time. They are more than simply repeated games (such as one has with a regular customer/purveyor: though these can involve built-up expectations which can become implicit contracts). Contracts structure any interactions where there is a delay between provision and payment. So, ordering a meal in a restaurant is a contract, since you are promising to pay at the end of the meal. Even if payment for an on-the-spot swap is immediate, if a transaction is not caveat emptor there will be some continuing obligations about quality which make the transaction a contract.

In common law, a contract is a matter of offer and acceptance (i.e. mutual assent) and consideration. That is, a contract involves mutual agreement for some benefit (typically, an exchange of benefits). The mere matter of assent and benefit simply makes it a transaction: it is having explicit or implicit operation over time that makes it a contract.

Contracts reduce transaction costs – in particular, you do not have to keep searching for providers, negotiation costs are reduced (particularly if standard contracts, whether customary or statutory, are used) – and they reduce risks: you can act on the basis of reasonable expectations, with means of redress if there is a failure to provide as promised, making planning ahead easier. Since time-range transactions are so common, contracts are ubiquitous in human economies. So much so, that customary contracts evolve to an extent that people are not even conscious of being engaged in an (implicit) contract, as in purchasing a restaurant meal. By creating a structure one that allows transactions that operate across time (that is, loosen the time constraint) a contract also allows much more complex interactions than would otherwise be practical.

Having high levels of social trust and effective contract law enforcement greatly increases the range of transactions that it is reasonable to engage in. The biggest single economic advantage to high levels of social trust may well be the expanded ability to engage in contractual (i.e. time-range) transactions.

While there is some minimal trust element in on-the-spot swaps, there is so little that even black markets can engage in them easily. To engage in time-delay transactions generally requires an enforcement/recourse mechanism. This accounts for much of the overt menace in black markets, since such enforcement have to provided by the purveyor themself. (The rest of the menace and violence comes from the need to privately enforce property rights, making them much more “up for grabs”, and to deter assisting the state to enforce its ban of those transactions.)

So, a contract is a way of reducing transaction costs and managing risks thereby permitting transactions that have some element across time. Which leads rather naturally into the notion of a firm as a nexus of contracts.

Unlike firms, contracts are not generally suppressions of the price mechanism: typically, they are ways of extending its operation – that is, they bring a wider range of possible transactions into the market. What is distinctive about the contracts of a firm is that they provide the basis for alternatives to the price mechanism in coordination and their operation is within the guarantee of the equity capital. Noting that firms are a nexus of contracts does not, of itself, appear to add anything to the combined Coase-Barzel analysis of firms outlined above.

It is more that firms are a particular nexus of contracts. That is, firms and contracts are both ways of reducing transaction costs and managing risks: it is just that a firm uses contracts to create a specific realm of coordination and equity guarantee. Contracts are the mechanism, the firm is a particular conjunction of the use of contracts.

Housing bubbles and social mercantilism

A two-part essay on the problems of social division and failures of urban planning and management using Sydney and Melbourne as "compare and contrast" examples is here:

Since 1990, owner-occupied and investment property credit has expanded its share of total credit from 23 per cent to 58 per cent. (Business credit has dropped from 63 to 34 per cent.) Australians have been taking on large amounts of debt to invest in houses whose prices are largely a product of quantity controls: Australia has become a country highly leveraged on regulatory approval

and here:

Sydney’s land policy in particular is based on the social mercantilist model—with the inequality, conflict, inequity and corruption that model is inherently prone to. Melbourne can be thankful that its better social dynamics have ameliorated the ill-effects of the same disastrous ideas.

The author should have made it a bit clearer that you can have housing bubbles without quantity controls, they just make them more likely (and possibly more severe).

Trust, power and status

Continuing my critique of the "corporations as great threat" nonsense, one of the basic confusions one sees is the equating of pro-market with pro-business with pro-corporate.

The important distinction here is between free enterprise (allowing commerce to flow freely due to low transactions costs: particularly minimal barriers to entry and well-defined and enforceable property rights) and private enterprise (making money from privately-owned assets). "De-regulation"—lowering barriers to entry and other transactions costs—restrains the power of corporations because it maximises the level of competition they face. It is regulatory interventions that raise transactions costs (including barriers to entry) that typically increase corporate power by reducing the competition they face. So, being in favour of low transaction costs (particularly barriers to entry) is not about "trusting" corporations, it is about not trusting them. Indeed, minimising the need to trust power-holders (including, of course, officials).

What I object to about the "corporations as great threat" nonsense is precisely its notion that there are institutions and power-holders that are worthy of trust because they are inherently virtuous (in deliberate contrast to corporations, whose portrayal as inherently vicious makes anti-corporate politics clearly the path of virtue). That is the wrong dynamic. The question is: what restrains power, what makes it responsive to the wishes of others?

But, of course, if one is in the status-and-power game, it is much preferable to express things in terms of the wickedness of others and so the (stated or implied) virtue of "people like me"—particularly "people who think like me" since then agreement becomes a matter of selling a sense of virtue, and one with minimal cost.

Purported monopolies of virtue are no better (and, indeed, can be rather worse) than other monopolies.