Righteous rage

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

Conflicted history

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

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

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

Revealing rage

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

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

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

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

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

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

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

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

Hence a murderous attack on a 14 year old girl.

Culture jihad

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

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

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

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

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

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

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

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

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

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

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

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

Signals and framing

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

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

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

Titus destroying the Second Temple.

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

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

[Cross-posted at Skepticlawyer.]

Thompson troubles

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

Easy tax targets

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

Earl Thompson

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

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

Hoping to acquire some moveable wealth

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

Missing the past

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

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

Guilding the lily

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

Guild members using their fixed capital

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

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

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

Guild heraldry showed who they were protecting

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

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

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

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

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

Missing the present

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

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

Missing both

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

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

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

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

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

is simply bizarre. Referring to (pdf):

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

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

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

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

Note

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

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

[Cross-posted at Skepticlawyer.] 

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.]