Monthly Archives: July 2015

“The collective pursuit of important aims”

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Alfred Marshall in [amazon_link id=”B00882NQLM” target=”_blank” ]Elements of the Economics of Industry[/amazon_link]: “As a cathedral is something more than the stones of which it is built, as a person is something more than a series of thoughts and feelings, so the life of society is something more than the sum of the lives of its individual members. It is true that the action of the whole is made up of that of its constituent parts; and that in most economic problems the best starting point is to be found in the motives that affect the individual…. but it is also true… that economics has a great and increasing concern in motives connected with the collective ownership of property and the collective pursuit of important aims.”

[amazon_image id=”B00882NQLM” link=”true” target=”_blank” size=”medium” ]The Economics of Industry: By Alfred Marshall and Mary Paley Marshall (Classic Reprint)[/amazon_image]

(Marshall was also absolutely insistent on the importance of economists writing clearly in language other people could understand, the issues being of such importance to everyone.)

Europe’s former glories

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[amazon_link id=”0691139709″ target=”_blank” ]Why Did Europe Conquer the World?[/amazon_link] That’s the title of a new book by Philip Hoffman of CalTech. His answer is a very neat development of part of Jared Diamond’s famous [amazon_link id=”0099302780″ target=”_blank” ]Guns, Germs and Steel[/amazon_link] and Paul Kennedy’s equally famous [amazon_link id=”0006860524″ target=”_blank” ]The Rise and Fall of the Great Powers[/amazon_link].

[amazon_image id=”0691139709″ link=”true” target=”_blank” size=”medium” ]Why Did Europe Conquer the World? (The Princeton Economic History of the Western World)[/amazon_image]

[amazon_image id=”0099302780″ link=”true” target=”_blank” size=”medium” ]Guns, Germs and Steel: A short history of everybody for the last 13,000 years[/amazon_image]  [amazon_image id=”0006860524″ link=”true” target=”_blank” size=”medium” ]The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500-2000[/amazon_image]

Hoffman is not impressed by the germs part of the story, but does believe a combination of technological advances in weaponry, the ability to turn resources into tax revenues to fight wars, and competition between European states constitute a good explanation for the literal and cultural conquest of so much of the world by Europeans.

However, historical contingency also played a huge part in his telling of the story, the contingency of the long Dark Ages that kept European states of a similar size to each other, without a single hegemon becoming much larger than its rivals. This turned the competition described by Kennedy into a tournament – and an appendix models this formally. Rulers were in a contest for a big enough prize – glory or land – and incentivised to use resources – revenues that they could raise at low political cost especially as financial innovations came along in the modern era – to pour into new military technologies based on gunpowder to get an edge over each other. War was frequent, and there were few obstacles to adopting the new technologies.

Having set out the model, the book shows quite persuasively why only the European states met these tournament conditions. For example, China was much larger than neighbouring states and used its resources on old technologies to fight the horsemen of the steppes. India had plenty of rivalrous states but was unable to raise revenues at a low enough political cost because the raising of tax revenues was decentralised to local rulers.

Hoffman’s argument makes sense to me, although I’m sure historians could find some of the generalisations too sweeping. This book is a very interesting addition to the flourishing history of the world genre, including Ian Morris’s enjoyable [amazon_link id=”1846681472″ target=”_blank” ]Why the West Rules for Now[/amazon_link] as well as Diamond and Kennedy. The tournament model is not a complete explanation. For instance, it does not fully explain things like the origins and role of financial innovations or scientific discovery. However, this is a terrific example of the insight you can get from a simple model.

[amazon_image id=”1846681472″ link=”true” target=”_blank” size=”medium” ]Why The West Rules – For Now: The Patterns of History and what they reveal about the Future[/amazon_image]

Government by gang

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America has more prisoners, some 2,240,000, than any other nation on earth – only China gets anywhere close; of the total, there are about three African Americans or Hispanics for every white. All round, the American criminal justice system is an ugly scar on the nation. President Obama said as much when he visited a prison last week, the first sitting US President to make such a visit.

David Skarbek’s [amazon_link id=”0199328501″ target=”_blank” ]The Social Order of the Underworld: How Prison Gangs Govern the American Penal System[/amazon_link], is a fascinating account of what happens inside the country’s huge and violent prisons. It uses the analytical tools of institutional economics – notably Douglass North’s and Elinor Ostrom’s explanations of how groups collectively organise themselves – to probe the internal gang-run pecking order in prisons, their drugs-based economies, and their links to external gang activity.

[amazon_image id=”0199328501″ link=”true” target=”_blank” size=”medium” ]The Social Order of the Underworld: How Prison Gangs Govern the American Penal System[/amazon_image]

The bottom line of Skarbek’s analysis is that “gangs thrive because of a demand for governance.” He traces the change from a prison social order based on conformity to social norms (the ‘convict code’), before the 1970s, to one run wholly by the gangs, with clear hierarchies and detailed rule books. Loyalty to the gang – all race-based – has to be total, on pain of death, and life-long. The gang structures connect those in prison to the outside drugs economy as well. The trigger for this shift in social order was the big increase in the prison population from the mid-1970s: “Norms will be effective at providing governance when the inmate population is relatively small, but as it grows norms will break down.” In addition to the size factor, the growth in the prison population meant a big increase in the proportion of new, inexperienced prisoners who did not know the norms, and many of them younger men who did not care, and were often more violent. Inmate violence rose dramatically in the early 1970s.

Prison officials were unable – in the large new facilities being built or in the old and increasingly over-crowded ones – even to observe what was happening, never mind control it. The gangs filled the governance vacuum. “Gangs are quasi-governments.” (Skarbek also quotes Will Baumol’s reversal of the point – governments are quasi-gangs.) What’s more, the gangs play the community assurance role in the contraband trade that has been documented among other trading communities – by [amazon_link id=”0521480442″ target=”_blank” ]Avner Greif[/amazon_link] for example. “All members of a gang are responsible for each member’s actions.” Somebody who cheats on a deal will be punished by his fellows.

Interestingly, there are no gangs in female prisons, and women’s prisons are not racially (self-)segregated either. Skarbek allows the absence of testosterone to play a role, but argues that the main explanation is that women’s prisons are much smaller and with far fewer women incarcerated. The social order that emerges there is sorting into small ‘families’.

The book ends with some wider reflections on the importance of understanding informal economic and social institutions. I couldn’t agree more. A third of the world’s population live in countries with collapsing states. Governments are often ineffective when they exist. The world’s shadow economy is huge. Even in well-governed, stable states, there are swathes of economic life that do not touch government. “To understand aggregate economic and social outcomes, we must understand the extent to which people rely on extra-legal governance.” Inside America’s prisons, there is a formal governance vacuum but economic exchange thrives and the violence is strictly controlled by the gang leaders.

From institutional economics, the conditions for informal governance to be effective are known: enough social or cultural homogeneity; small enough for reputation to leverage good behaviour; simple, easy-to-monitor economic exchanges, with stakes that are not too high; high self control, patience; and repeated exchanges. Yet as Skarbek shows even in the unpromising conditions of the prison world, effective governance can emerge.

How could America reform its prisons and reduce the power of the criminal gangs? Skarbek suggests making prisons smaller and safer, and incarcerating far fewer people. The unwinnable “war on drugs” and tough mandatory sentencing fuelled the increase in prisoner numbers, which created the power of the gangs.

This is a terrific book. Along with Diego Gambetta’s [amazon_link id=”0691152470″ target=”_blank” ]Codes of the Underworld[/amazon_link] (& his earlier [amazon_link id=”0674807413″ target=”_blank” ]The Sicialian Mafia[/amazon_link]), it is a model example of how to use economic analysis to highlight the illegal world, without falling into the trap of economic imperialism. [amazon_link id=”B00NBDJG76″ target=”_blank” ]The Social Order of the Underworld[/amazon_link] would be a great case study for a course on institutional economics. It is also a must-read for anyone concerned about America’s absolutely shameful record on criminalising and imprisoning young, non-white men.

In remembrance of times past

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Norton is publishing Ben Bernanke’s book [amazon_link id=”039324721X” target=”_blank” ]The Courage to Act: A Memoir of a Crisis and its Aftermath[/amazon_link] in October. Mervyn King is also due to have a book out before too long. There have already been a few insider memoirs of the crisis – such as Alastair Darling’s [amazon_link id=”0857892819″ target=”_blank” ]Back from the Brink[/amazon_link] and Bernanke’s earlier [amazon_link id=”0691165572″ target=”_blank” ]The Federal Reserve and the Financial Crisis[/amazon_link] – but these titles from key central bankers will be must-reads, given their pivotal role in averting – by hours? – the closure of the payments systems and economic collapse in late 2008.

[amazon_image id=”039324721X” link=”true” target=”_blank” size=”medium” ]The Courage to Act: A Memoir of a Crisis and its Aftermath[/amazon_image]  [amazon_image id=”0691165572″ link=”true” target=”_blank” size=”medium” ]The Federal Reserve and the Financial Crisis[/amazon_image]  [amazon_image id=”0857892819″ link=”true” target=”_blank” size=”medium” ]Back from the Brink: 1000 Days at Number 11[/amazon_image]

All the more so if one thinks there is a small chance of the whole thing happening again. After all, trade growth and growth in Asian economies is tanking, the yield curve has inverted, there’s the Greek crisis and its insolvent banks. Thank goodness the banks haven’t been selling confected derivatives, and there are no asset price bubbles. Oh, wait.

Not all economists are neoliberal, honest

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It was because of a tweet linking to her LSE lectures that I decided to read Wendy Brown’s [amazon_link id=”1935408534″ target=”_blank” ]Undoing the Demos: Neoliberalism’s Stealth Revolution[/amazon_link]. My relationship with the concept of neoliberalism is an uneasy one, in that I don’t really know what it means. Often, radical writers use it to mean ‘most of economics’ – Philip Mirowski’s Never Let A Serious Crisis Go to Waste is a good example of this –  making an exception only for certain Marxist or otherwise unimpeachably heterodox economists. I understand the idea well enough to know [amazon_link id=”178360610X” target=”_blank” ]Yanis Varoufakis[/amazon_link] is not neoliberal. However, writing off all the rest of economics makes it an unhelpful concept in my book. Of course there are ideologically right wing economists but there is a wide range of views about both politics and economics within the profession.

[amazon_image id=”1935408534″ link=”true” target=”_blank” size=”medium” ]Undoing the Demos: Neoliberalism’s Stealth Revolution (Zone Books Ner Futures)[/amazon_image]

I thought Brown’s book was going to be subtler. Here is her definition: “neoliberalism is not about the state leaving the economy alone. Rather, neoliberalism activates the state on behalf of the economy, not to undertake economic functions or intervene in economic effects, but rather to facilitate economic competition and growth, and to economize the social, or as Foucault puts it, to ‘regulate society by the market’.” She adds that neoliberalism entails “the dramatic curtailment of public values, public goods and popular participation in political life.” This definition makes sense to me – and makes neoliberalism a political ideology, one that uses its claim about the primacy of markets to extend a certain political order into more and more areas of life. It is similar to Michael Sandel’s argument in [amazon_link id=”0241954487″ target=”_blank” ]What Money Can’t Buy[/amazon_link].

However, Brown goes on to list all the neoliberal economists who include Milton Friedman, Friedrich Hayek, Gary Becker – but also Joseph Stiglitz. Wait – Joe Stiglitz in the same camp as Becker?! Barack Obama also gets labelled as neoliberal, along with Reagan and Bush. So this is back to vacuous.

It’s a shame because the argument that the primacy of the market has been extended into inappropriate domains needs to be taken seriously. People regard ticket scalping as unfair – this includes many economists – so those of us who do economics have to respect the fact that some values other than economic efficiency might have to win out. Freedom, civic cohesion, fairness are all important values. Where it is appropriate to prioritise efficiency, or to use market processes to achieve either efficiency or other outcomes, should always be a matter of public and political debate. Most of the economists I hang out with – applied micro people – think it will depend on both people’s political choices and on the exact circumstances: the US trade in SO2 emissions works well, the EU market in carbon emissions does not; [amazon_link id=”B00ODG9VUM” target=”_blank” ]Alvin Roth[/amazon_link]’s matching markets for kidneys or medical jobs are magical (and no money changes hands). My kind of economists tend to be pragmatists, unlike those in politics who argue the market is always best.

There are some real dilemmas. Later in the book, Brown gives short shrift to the idea that ‘governance’ is ever more important than politics, and argues that independent, technocratic bodies such as central banks should not take decisions with political consequences – and no doubt the many critics of the ECB and the right-wing critics of the Fed would warmly agree. It does not seem so obvious to me. Central banks take ‘better’ decisions when they are independent in the specific sense that growth is less volatile and inflation lower. Yet of course they need legitimacy – answering to parliament, fulfilling a remit set by the government. And the Greek crisis has indeed demonstrated that central banking is political at times of great stress. Perhaps Brown is right but I don’t think she argues the case well, when there are areas of policy in which expert advice or decisions made by technocrats delivers good outcomes. Surely this is debatable.

Anyway, [amazon_link id=”B00YDJ33RG” target=”_blank” ]Undoing the Demos[/amazon_link] is an interesting book even though I ended up disagreeing with much of it. I will say that whenever anybody next tells me economics is an abstract, wholly theoretical subject, I will make them read this. But it still helped me understand Michel Foucault’s almost totally incomprehensible [amazon_link id=”1403986541″ target=”_blank” ]The Birth of in Biopolitics[/amazon_link], which I read recently. And I do think it’s important to push back against the political stance that disguises ideological projects with the claim that market are always right.