Monthly Archives: February 2016

The capitalism we deserve

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The idea that it’s harder to write at length than concisely is so familiar that it has become a cliché, but it is surely true that if writing a history of capitalism then number of pages could be a help rather than a hindrance. Historian Jürgen Kocka has written [amazon_link id=”069116522X” target=”_blank” ]Capitalism: A Short History[/amazon_link] at 169 pages. What’s more, it spans the centuries from China during the Han Dynasty through the Arab empire and the European Middle Ages to global financial capitalism today.

[amazon_image id=”069116522X” link=”true” target=”_blank” size=”medium” ]Capitalism: A Short History[/amazon_image]

The point of the book is stated most clearly in the very last paragraph:

“Every era, every region and every civilization gets the capitalism it deserves. Currently, considered alternatives to capitalism are hard to identify. But within capitalism, very different variants and alternatives can be observes and even more of them can be imagined. It is their development that matters. The reform of capitalism is a permanent task. In this the critique of capitalism plays a central role.”

The unstated aim of the book, I think, is to address the critics – generally speaking, these are the people who talk about ‘capitalism’, whereas capitalists talk about ‘the economy’, or something else. Kocha seems to me to be saying that a system of exchange based on markets is deeply embedded in human society and should be regarded as reformable but essential. He argues that capitalism is linked to financial innovation and therefore long pre-dates industrialisation, and one should not conflate the two. Double entry book-keeping, promissory notes, futures trading were all key for the formation of capitalism. And this financial development was closely linked to state formation.

Kocha therefore disagrees with the Marxist line that production and the organization of work are intrinsic to the definition of capitalism – although he accepts that, “Preindustrial commercial traditions of capitalism, wherever they persisted, significantly promoted the breakthrough to industrialization.”

If you’re neither a Marxist not a critic of capitalism in general (as opposed to some of its specifics today), this is a mildly interesting debate but not one to affect the blood pressure in either direction. On the other hand, there are some nice insights, and it is after all a short book, ideal for a train journey or flight. Describing the capitalism we would like to deserve would take rather more pages.

Finance, not business

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In Umberto Eco’s [amazon_link id=”1910701084″ target=”_blank” ]Numero Zero[/amazon_link]:

“He buys up, let’s say, just two per cent of shares in a major newspaper, a bank, a major television network.”

I let out a whistle. “Two per cent is a hell of a lot! Does he have that kind of money?”

“Don’t be naive. We’re talking about finance, not business. First buy, then wait and see where the money to pay for it comes from.”

[amazon_image id=”1910701084″ link=”true” target=”_blank” size=”medium” ]Numero Zero[/amazon_image]

 

Coase in theory and Coase in practice

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While out and about yesterday, I read a little book from the IEA that I’d only dipped into before, [amazon_link id=”0255367104″ target=”_blank” ]Forever Contemporary: The economics of Ronald Coase[/amazon_link], edited by Cento Veljanovski. It’s a useful introduction to Coase (although he wrote so clearly that there’s no excuse for not tackling his classic papers, The Nature of the Firm and The Problem of Social Cost.)

[amazon_image id=”0255367104″ link=”true” target=”_blank” size=”medium” ]Forever Contemporary: The Economics of Ronald Coase (Readings in Political Economy)[/amazon_image]

The book has chapters providing a biography and a general overview, and then several looking at the applications of Coaseian thinking in different areas such as water, environmental protection, public goods provision, financial markets and even the sharing economy. It starts with the Coase theorem: that when property rights are clearly assigned and there are no transactions costs (such as those involved in acquiring information, negotiating, monitoring compliance etc), then there are no externalities leading to a divergence between private and social costs: the parties involved will negotiate their way to the efficient outcome. ‘Externalities’ are symmetric, he argued: if you claim a right to clean air, you are costing me the opportunity to pollute. Who compensates whom will depend how the property rights are assigned. If you indeed have your clean air right, I will have to bargain with you to pay you for the pollution; if I have the right to produce emissions, you will have to pay me to desist.

Coase made it clear he took the existence of transaction costs very seriously, and argued that every situation had to be carefully assessed to determine the most welfare-enhancing course of action. He certainly challenged the market failure framework established by Pigou, still used to consider the rationale for public policy interventions. Coase has often been taken to say more generally that it’s always best to leave it to the market, because people can bargain their way to solutions – and that is certainly the interpretation this volume puts on him, as you would perhaps expect from the IEA.

I think one has instead to take Coase at face value, and in each situation look at the incentives people face and the transaction costs involved in private bargaining and in the public sector alike – this determined empiricism is why I like Coase so much. As the essay here by Stephen Davies notes: “The boundaries of what is possible in this regard have shifted over time.” The useful bibliography of Coase’s work shows how seriously he took his own conclusion that you have to look in detail at each industry, its history and specificities before pontificating; as is well known, he described anything else as ‘blackboard economics’. Indeed, the people who arguably took him most seriously were the later Nobel winners, Elinor Ostrom and Oliver Williamson, who each in their won way focused on the detail of the institutions that exist to co-ordinate individual actions.

In a nice case study, Davies looks at how turnpike roads – toll roads- were the common means to expand Britain’s main road network in the late 18th and early 19th century. They were an example of club goods – non-rival in consumption, but excludable. Later of course in the UK roads came to be considered a pure public good to be provided by the state. Now we have one toll motorway, and some talk of more. Other countries, including statist France, have many toll roads. There is no right answer.

The book ends with a chapter on the sharing economy, a very interesting essay on the implications of a large decline in certain transactions costs.

There won’t be much here that is new to people who are already familiar with Coase, but – with the caution about its free market slant – it is a clear and accessible guide for students. And available free online as a pdf.

Capitalism and the law

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My previous post – the ten books a well-educated social science student ought to have read – generated a lot of terrific comments with other suggestions, which I’ll mull over and compile into an alternative list at the weekend.

Meanwhile, I’ve read [amazon_link id=”0674504917″ target=”_blank” ]The Great Leveler: Capitalism and Competition in the Court of Law[/amazon_link] by Brett Christophers. I greatly admired his previous book, [amazon_link id=”1444338293″ target=”_blank” ]Banking Across Boundaries[/amazon_link], and this new one has the same compelling combination of analysis and historical detail. The theme this time is capitalism as a constant balance between competitive markets and market power, these two forces applied by laws and their enforcement. Anti-trust laws are enacted or enforced with greater rigour when monopoly power gets out of hand. Intellectual property laws are strengthened after periods of cut-throat competition. In contrast to those – often Marxist – writers who have seen a single direction of travel toward ever-greater monopoly power, Christophers argues here that there is a cycle. He cites [amazon_link id=”0853450811″ target=”_blank” ]Kalecki[/amazon_link], but also Marx’s dialectics: “Monopoly produces competition, competition produces monopoly,” Christophers quotes Marx as writing in a letter of 1846.

[amazon_image id=”0674504917″ link=”true” target=”_blank” size=”medium” ]The Great Leveler: Capitalism and Competition in the Court of Law[/amazon_image]

The book starts with three chapters setting out Christophers’ analytical framework and explaining in more detail the dynamic to and fro between more and less market power for businesses. It is very interesting to see an analysis of this kind in terms of the legal framework. While law has hardly been ignored by economists, this big picture, historical perspective provides much food for thought. As Christophers puts it in the introduction, modern political economy has tended to focus more on the sphere of production, whereas competition and IP law concern the sphere of exchange. Yet many of the flash points in public policy today concern exactly competition and intellectual property, precisely because the basic productive structure of the economy is being changed by technology. The two spheres meet.

This means [amazon_link id=”0674504917″ target=”_blank” ]The Great Leveler[/amazon_link] is an important contribution to understanding some of the most acute modern policy – and political – questions. The analysis of the first half is followed by two chapters looking at the historical experience of the US and UK from the late 19th century, and a final chapter on 21st century monopoly. Recent decades have seen the phase of the cycle where enforcement of competition diminishes and enforcement of IP protection increases. Christophers links this to the Chicago School of economics, with its powerful impact on public policy on both sides of the Atlantic. He sees little sign that this has changed even now: “Post-Chicago developments have certainly entailed meaningful changes in antitrust thinking and practice, but such changes ultimately amount to small beer compared to the changes that the Chicago revolution itself heralded.” The ‘post-Chicago’ work of economists such as Jean Tirole, Christophers argues, have concerned specific business practices or mergers rather than the framework of competition law as a whole.

As for policy approaches to intellectual property, there is little sign of any recent redressing of the balance, for all the forceful concerns many people – academics and regulators – have voiced about excessive protection, from the TRIPS clauses to copyright madness. Indeed, this chapter argues that strong IP protection was deemed pro-competitive by Chicago-flavoured thinkers (I’m afraid Christophers does use the adjective ‘neoliberal’, although it obscures rather than clarifies matters, given that so many non-economists use it to describe all economists, as if there were no differences of opinion or political philosophy in my professsion). He underlines the irony that ‘pro-market’ can mean either pro-competition (citing early Mont Pelerin economists such as Lionel Robbins) or ‘pro-business’ (ie anti-competition), as – he argues – many law-and-economics  ‘neoliberals’ are today.

The book concludes: “Political economy never sits still.” This is a terrifically interesting book, one for anybody interested in political economy, or just in the narrower canvas of law and economics.

There’s no doubt the plates are shifting again now, although who knows where they will take us – the political and economic forces undermining the post-1980s structure are powerful, yet there is no alternative intellectual framework, in contrast to the preparedness of the early Chicago School in the mid to late 20th century. I was much struck by Daniel Stedman Jones’s account in [amazon_link id=”0691161011″ target=”_blank” ]Masters of the Universe[/amazon_link] of the systematic preparation of that earlier generation of economists to change the public philosophy – decades-worth of research and influencing. It’s clear – especially after reading [amazon_link id=”0674504917″ target=”_blank” ]The Great Leveler[/amazon_link] – that the balance ought to tilt back now away from monopoly protection toward competition enforcement, as the dominant model of capitalism is self-undermining. But who knows how or whether that will come about? Christophers ends with Lenin’s prediction that the future is capitalist monopoly on the international stage, monopoly imperialism. I have more confidence in self-correcting mechanisms. We will see.

PS. Christopher May, much cited in The Great Leveler, is the author of [amazon_link id=”B00ZY8G016″ target=”_blank” ]The Rule of Law: The Common Sense of Global Politics[/amazon_link], published in paperback last year. I haven’t read it, but it offers an explanation of why global politics so often seems to turn on legal issues. “In accessible terms, Christopher May argues that we can no longer merely use the idea of the rule of law without question but rather must appreciate its multifaceted and contested character if we are to begin to understand how and why it is now seen as a ‘good thing’ across the political spectrum,” according to the blurb.

[amazon_image id=”B00ZY8G016″ link=”true” target=”_blank” size=”medium” ]The Rule of Law: The Common Sense of Global Politics by Christopher May (2014) Hardcover[/amazon_image]