Economics

Change the 1%??

I've been listening to an audio-book version of Thomas Piketty's Capital in the Twenty First Century, and I've been very interested in the fact that Bill Gates has chosen to blog about the book. I've commented on his post and on others' comments a number of times, including this today:

I think another of the important things Piketty does is to refocus attention on Wealth rather than Income. I read this today, from a 1967 book (Ferdinand Lundberg's The Rich and the Super Rich) quoting a 1940 US Government Report (the Temporary National Economic Committee's Investigation of Concentration of Economic Power):

"The ownership of the stock of all American corporations is highly concentrated. For example, 10,000 persons (0.008 percent of the population) own one-fourth, and 75,000 persons (0.06 percent of the population) own full one-half, of all corporate stock held by individuals in this country." 
As for shares held by non-individuals, I think we can assume that the stock held by foundations and trusts, although its dividends might be pledged to foundation goals, tends to strengthen the "stakeholder" control of the families who fund the foundations. 

Two conclusions you might draw from this. 1.) As Piketty implies, the 1% is not a new issue. And 2.) The name of the game may not be stirring up a grass-roots revolution, but convincing more members of the 1% that their best interests are served by a slightly more egalitarian society.

The Enemy Market?

There's an article today in the Wall Street Journal by the Motley Fool's Morgan Housel, called "An Open Letter to Millennials: The Market is Your Friend." People born between 1980 and 2000, Housel says, seem to prefer to keep most of their money in cash. The previous generation was more likely to invest in longer-term securities such as stocks or mutual funds. "An investor born in January 1980 who invested $1,000 in the stock market on his 18th birthday would have had just $1,030 when he turned 30," Housel admits (it's worth remembering that a Gen-Xer or a Baby-Boomer had exactly the same investment performance over this period, but apparently they reacted with less disgust and distrust than Millennials).  Housel is very concerned, and provides a link to a Vanguard Stock Market Index Fund that his readers might want to consider.

This strikes me as funny in a couple of different ways.

First, Housel is one of the geniuses behind the Motley Fool, which in my opinion is one of the silliest investment websites around. Not silly in the hip "Fool" way they want to be, though. Their investment advice just isn't that good. Sure, it's better than Jim Cramer or Seeking Alpha -- but that isn't saying much. Basically, they're wrong as often as they're right. And it's all about selling info and sponsor's products.

Take the Vanguard Stock Index Fund (VTSMX) Housel recommends. It's doing pretty well right now. It's actually at it's all-time high. Wait a minute. It's buy low, sell high, isn't it? So maybe this isn't the moment to jump in.

If you had invested a thousand bucks in this fund in March of 2000, you would have bought in at about $35 per share. Today, that stake would be worth about $50 per share, and your initial $1,000 would be worth about $1,400. And there would have been some dividends that you might have chosen to reinvest automatically, so you might have slightly more. Sounds pretty good, right?

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Timing is everything, though. If you had needed the money in March of 2003, you would have gotten $19 per share, or $543. If you had needed the money in March, 2009, you would have received $474 back on that initial investment of $1,000. What?

For most of it's lifespan, this Vanguard fund has been in the toilet. There was a moment, just before the stock market crash associated with the 2008-9 financial crisis, when the fund was worth more than your break-even $35 per share. And since January of 2013, it's been on a pretty steady uptrend to its current $50 per share. So this is the performance that singles this fund out to be the one Housel recommends to wary Millennials?

Personally, I'd wonder whether the Millennials are onto something? But here I have to admit I'm a bit biased. Decades ago, when I was a fresh-faced college grad myself, I worked as a Registered Rep. and then as a Registered Principal for a mutual fund company. That means I was one of the guys responsible for running a field office, supervising reps, making sure people were investing appropriately and the company was meeting its fiduciary duties, etc. I came out of that experience with a strong suspicion that on the whole, mutual funds are not a great investment for regular people. They're great for fund managers and salesmen like Housel, because if you can arbitrarily choose the start and end-points on that chart, you can make it look like a great investment. For example, if you had bought $1,000 of VTSMX in March, 2009, you'd have tripled your money and would be sitting on over $3,000 today.

The problem is, real life usually gets in the way of ideal timing. Congratulations to Millennials for figuring this out.

What Moves Markets?

Since I’m sort-of on the subject, today I’ll look at stocks.

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Take Pandora (P), a company that provides streaming music over the web. If you look them up, you’ll find that Pandora stock has ranged in price this year from a high of $40.44 per share (last March) to a low of $17.55 (earlier this month). At the current price of about $18.43, the company has a market capitalization of about $3.83 billion. And the stock has a “Beta” of 1.76, which means it is nearly twice as volatile as the overall market.

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Or take Netflix (NFLX), which provides both in-the-mail and streaming movies. Netflix stock has been as low as $299.50 per share (last April) and $489 (in early September). At its current price of just about $347 per share, the company is worth just about $21 billion. And Netflix has a “Beta” of 1.15, which means its price moves follow those of the overall market very closely.

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Pandora, according to NASDAQ.com, is 99.51% institutionally owned. 289 organizations hold over 207 million shares out of a total of about 208 million. The three largest holders are T. Rowe Price (mutual funds), Wells Fargo (Trusts and mutual funds) and Vanguard (mutual funds). These three companies alone account for over 44 million shares, or nearly a quarter of Pandora. In addition there are a handful of insiders (usually executives or  founders of the company) who (according to Form 4 Insider Trade documents) seem to own about half a million shares each (the numbers don’t add up exactly because they’re from different sources, and there may be some double-counting if insider shares are held in trusts). So basically, nearly all of Pandora stock is controlled by insiders or financial institutions.

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Netflix is 91% institutionally owned. 520 organizations hold about 55 million shares out of a total of about 60 million. The three biggest holders are Capital Research Global Investors, T. Rowe Price, and Vanguard; all mutual fund companies (Capital Research also manages portfolios for private clients). There are also several insiders (several of them Silicon Valley hedge fund directors) with million-share stakes. So once again, Netflix is pretty much fully owned by insiders and institutions.

I didn’t cherry-pick these two companies. Of the hundred-fifty or so technology companies I follow, these ownership percentages are pretty typical. But let it sink in. In the technology sector at least (and I strongly suspect in other sectors as well), the market is dominated by institutional investors. Given this fact, how do we explain they type of volatility we see in stocks like Pandora and Netflix?

Mutual funds, remember, are supposed to be long-term investments. And stock prices are supposed to represent the shifting consensus of the free market regarding the value of a company and its prospects for earning money for shareholders. Can we explain the 160% variation in Netflix’s price (from low to high) or the 230% range of Pandora’s, by supposing that a couple of hundred fund and trust managers really changed their minds about the long-term prospects of these companies that significantly?

There does seem to be a fair amount of buying and selling. Of the 289 institutional owners of Pandora, 131 increased their ownership positions and 127 decreased their positions last quarter, while 31 institutions held stable. But most of those companies were only making incremental changes. Only 37 institutions bought into Pandora from zero, and only 34 sold out completely. The picture is similar for Netflix. 244 institutions increased holdings a bit and 210 decreased a bit, while 66 holders stayed pat (on holdings of 44 million shares). Only 64 holders bought in from zero, and only 36 sold out — and this activity only amounted to a couple million shares. So again, how do we explain the volatility of these stocks?

Another question. If the players are all professionals, who is the audience for all the news and opinion flooding the web about these companies and the market? The Motley Fools I mentioned yesterday, the Seeking Alpha guys, Jim Cramer screaming on TV; who is it all for? Is the stock market just another NFL? A game hardly anybody in America really plays, but everybody watches and obsesses about their fantasy teams? Today’s news on Netflix, for example, includes a press release declaring that a brokerage firm downgraded its rating on Netflix shares from “Buy” to “Hold” and that the stock is down over $10 per share as a result. Really? The portfolio managers at Capital Research, T. Rowe Price, and Vanguard really care that much what some analyst has to say, that they’re all going to panic and hit the sell button?

On the other hand, look at those charts again. Even if the stocks are not appreciating overall, there are peaks and troughs that are fairly regular and , you might even say, predictable. There’s clearly money to be made if you can buy at the bottom and sell at the top. Then you can wait for the next bottom and buy in again. And gee, wouldn’t there be even more potential for profit if you could somehow anticipate — or even influence — those peaks and troughs?

12/2 Update: Okay, I've done a little more reading. apparently, buried in the list of institutional holders along with the trust departments and mutual funds, are exchange traded funds ETFs. Unlike funds, ETFs are valued in realtime, which means that the stocks carried in them are subject to amplified variability. This explains both why stocks with almost complete institutional ownership swing as wildly as they do, and also why they swing
together. The point isn't that when there's bad news about Netflix, that Yahoo and Amazon owners fear their companies are also in trouble. The point is that news triggers selling of the ETFs that hold Netflix, and they also hold Yahoo and Amazon.

Logic & Inequality

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Say you lived in a make-believe nation with a population of a million people. Everybody worked, produced, and got a basic living wage, let's call it $X. So to feed everybody and keep the lights on, the nation produced and consumed a million times $X, or in other words, a GDP of $X million.

Now let's say the nation was smart and hardworking and productive, so that it actually produced a GDP $500 million greater than the subsistence wage of $X million. That would be great! GDP per capita for each of the million citizens would then be $X plus $500. That's a happy nation, right?

Well, maybe it is, and maybe it isn't. At first glance it might not seem to make a lot of difference from an economic perspective, how that extra money was divided up. If the structure of employment (the industries, goods, and services that made the nation that extra money) allowed each of those citizens to make an extra $500, or if it allowed only ten people to make $50 million each, the result would be the same, right? Either way it adds up to $500 million of extra GDP, above and beyond that basic living wage. And either way, when you divide it across the whole population, it still seems to equal the same amount of extra GDP per capita. So what's the big deal?

The big deal, actually, isn't economic at all. The big deal is moral. But let's skip by that for a moment, and just deal with the economics. Let's imagine that before the "bonus," everybody is earning the basic subsistence wage in this imaginary nation. The extra $500, if it's evenly distributed, allows a million people to move up a little bit from subsistence toward the middle class and eat a little better. Maybe to go on a vacation. To fix their house or buy new clothes. If it happened often enough, they'd be able to think about sending their kids to a good college or trade school. To consider replacing the old beater with a new car. Or start a small business. And to maybe put some money away against a rainy day or for retirement. A million people, improving their lives while plowing that money back into the economy.

On the other hand, let's say ten rich people each got $50 million. What kind of stuff are they going to buy? Well, probably luxury items, right. Not your basic food-shelter-clothing. How much of that stuff does anybody need? At some point, there's going to be money left over, right?

Okay, an argument you hear a lot is that the extra, unspent money is invested, and that's how the rich create new wealth and grow the economy. There's some truth to that. Rich people can decide to use that surplus money to start a business and make something. Or they can endow a library or a symphony orchestra. Or they can buy a big boat. After all, it's their money.

But it's also true that all the money the aspiring middle class people spend also goes back into the economy. It's used to make the stuff the middle class people buy and to build the businesses that make that stuff. And if we believe in the laws of supply and demand that are the basis of economics, the
right stuff is getting made, because it's the stuff a million people are going into the market and buying.

Actually, if the money is split up in $500 chunks for everybody, more of it probably ends up circulating back into the economy. More money flowing in means more goods and services. That's economic growth. This is why it's better to have a big middle class than to have a really rich 1%.

Wait! Before you object, please notice that I haven't said anything about the way the money was made. The issue here isn't whether the rich came by their money honestly through real value-adding effort or dishonestly through cronyism and government favors. Or whether the middle class earned their money by the honest sweat of their brows or by coercive collective bargaining. The question I'm addressing here is simply, is it better to have an economy with incomes more evenly distributed? Or to have a few super-rich people and everyone else living at subsistence?

I think from the perspective of cold economic logic, more equal is better. Can we at least agree on this?

Engaging the Other Side

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When I was a young undergrad studying economics, I attended a summer seminar at the Foundation for Economic Education (FEE) at their headquarters on the banks of the Hudson River. My views have changed a bit since then, and I was recently reminded of FEE by another blogger and visited their website. There's a Freeman article posted a couple weeks ago called "Adventures in Economic Fairyland." It claims that "practitioners of economics not only use numbers to mislead the public; they use both theory and data to self-deceive." The author (unnamed) admits "no social scientist can operate free of his own values and biases." The assumption of the article, however, seems to be that FEE does a better job than other organizations at keeping these biases in check.

The article asks us to consider a list of statements they say are "accepted as common knowledge." These are:

  • Government spending make-work programs got the United States out of the Great Depression.
  • Scandinavian countries are proof that you can have high taxes and income redistribution without negative economic effects.
  • International trade makes some countries richer and others poorer.
  • Encouraging consumer spending stimulates the economy.
  • Minimum wages have a net positive effect on employment and on the living standards of the poor.

The implication is these are all myths with no basis in reality, used by unscrupulous economists to advance a (socialist) agenda. But where's the evidence that government spending had no effect on the Depression? Why is it illegitimate to ask what elements of the Scandinavian economies (where among other things, the gap between executives and regular employees is much narrower) mean, and why they differ from our own? Why must we assume that international trade lifts all boats? How are we to imagine that consumer spending, which increases the velocity of money if nothing else, doesn't have an effect on the economy? And what do we understand by "net positive effect" and why is the "net" perspective more true and important than the local, individual effect (which may be much different)?

FEE says most economic myths have common features, and they list ten factors they consider hallmarks of these myths. One they don't mention is framing the question in a way that leads inexorably to the desired answer. I think each of the myths they seek to debunk in the list above is an example of this careful framing. Let's take the shortest statement: "Encouraging consumer spending stimulates the economy." There are several assumptions buried in this statement, about who is doing the encouraging, about the time horizon over which we're measuring results, about the alternatives to such spending, and about the desirability of such stimulation. It might be true to say that "consumer spending stimulates the economy." But one might still object to the "encouraging," if for example it's the government that's encouraging spending on credit to boost the year-end numbers, or the mortgage industry of 2007 encouraging homeowners to refinance at 100% of valuation and buy a plasma TV with the proceeds. Although it might not be the same person objecting, in those two examples.

Looking at FEE's list of ten common features as a friendly outsider, I'd suggest to them their estimation that their counternarratives lack these features is a little less true than they suppose. But I also believe feature #4: "They seem motivated by good intentions." And I think it's time for well-intentioned people on both sides of these issues to engage with each other and stop supposing the other side is either stupid or evil. So I'm going to start reading and responding to
The Freeman and other FEE publications. We'll see what comes of it.

Who Owns America? Part 1

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Gerald F. Davis contributes three game-changing ideas in his 2009 book Managed By the Markets and a pair of articles that followed it. They are:

  1. The structure of corporate ownership has changed. Today, mutual funds hold the majority of corporate shares. Fidelity, Vanguard, and BlackRock are the largest owners of all the biggest companies. But unlike the trusts of old, these mutual funds exercise loose control.
  2. In America, the social safety net (health insurance, old age pensions, workers comp, etc.) was for decades provided by corporations. This meant that unlike many other industrial economies, the government didn't need to do it. But it also means that when corporations stopped, there was no safety net.
  3. Globalization, the OEM model, and the shareholder value movement have caused the collapse of the traditional American corporation, leaving a vacuum that needs to be filled if the US economy is going to recover.

There's a lot of detail in the book and two articles (they are "A new finance capitalism? Mutual funds and ownership re-concentration in the United States," European Management Review, 2008 and "After the Corporation," Politics and Society, 2013). I'm going to take my time ruminating over them. Beginning, I think, with the most recent.

"After the Corporation," as the name implies, argues that "our current problems of higher inequality, lower mobility, and greater economic insecurity are in large part due to the
collapse of the traditional American corporation." This claim might at first seem counterintuitive. After all, many critics of the present scene are accustomed to blaming American corporations for all our ills. Especially those big paternalistic corporations of the "Wonder Years." Davis says this is not accurate.

"Public corporations as we know them are a distinctly twentieth-century phenomenon in the United States," Davis reminds us. He says "there were fewer than a dozen manufacturers listed on major US stock markets in 1890. Most public corporations were railroads, whereas even the largest manufacturers (such as Carnegie Steel) were organized as private partnerships." This is in keeping with the 19th-century understanding of the corporation as an organization chartered by the state to provide a needed public service (railroads, hospitals, universities), not a for-profit business. The change from that 19th-century notion to our present understanding of the corporation as a legal, immortal
person is an important change -- but not one Davis concentrates on. What he does focus on is the fact that "During the subsequent fifteen years [1890-1905], bankers on Wall Street--most prominently J. P. Morgan and his firm--organized mergers of dozens of dispersed regional companies into a relative handful of oligopolistic corporations able to serve markets on a national scale, with their shares traded on stock markets. US Steel, organized in 1901, was the first billion-dollar corporation in the United States, combining nearly every major steel producer (including Carnegie) into a single public corporation."

It's not necessary to suppose that this consolidation into national corporations encompassing entire industries was the only possible outcome. It was the outcome  J. P. Morgan chose, for his own reasons. And if it wasn't inevitable, it's also fair to ask if it was optimal. But that's not where Davis is going, so I'll leave it for another day.

The biggest effect of this corporatization, Davis says, was the concentration of employment. "At the turn of the twentieth century, 42 percent of the US labor force was dispersed among six million farms. By the time of World War II, almost half of the private labor force worked in manufacturing--overwhelmingly in public corporations such as General Motors and General Electric--and by 1970 nearly one in ten workers were employed by the twenty-five largest corporations." Today the percentage of Americans working in manufacturing has shrunk to less than 9%. Millions of jobs have been lost as productivity increases have made it possible to make more with fewer workers and globalization has made it possible to outsource manufacturing to lower-wage regions of the world. The problem is, this has left  manufacturing workers (once the biggest segment of the broad middle class) with nothing to do.

The prevalence of big corporations was less pronounced in Europe. Even today, Davis notes, Germany has fewer than 600 publicly traded companies -- fewer than Pakistan. But because US employment was so concentrated in corporations, they became the providers of health insurance and retirement income for most American families -- services that elsewhere were provided by governments. In other words, it wasn't that Americans had no welfare state. It's just that the benefits weren't provided by the state. They were provided by corporations (although often with the support of the state through tax incentives). "US households," Davis concludes, "and the US economy were uniquely dependent on the public corporations."

And of course, everything changed when we transitioned from a manufacturing economy to an information economy. Even the computer industry itself was not immune, Davis observes. Computer and electronics companies have "shed 750,000 jobs in the United States since 2000, even as Apple's products have become ubiquitous and its stock market value has surpassed one-half trillion dollars. Meanwhile Foxconn, which assembles most of Apple's products, employs more than one million workers in China."

Apple's value-add is perceived to be primarily intellectual property and branding, which is the model of the new economy. In Apple's case, there's truth to this claim. Its products are cooler than others. And it does maintain a proprietary operating system on all its products which claims to offer a superior user interface and experience. Is this equally true for all the other companies such as Nike who have moved to this model? Or is a big part of the new American economy just based on inflated values resulting from advertising?

More on this, and on Davis's arguments, soon…

Who Owns America? Part 2: Funds & Markets

There are several books I'm reading or planning to read, that have tracked the American economy and focused on ownership and control of major corporations. Among them are C. Wright Mills's The Power Elite, Ferdinand Lundberg's The Rich and the Super-Rich, and the Temporary National Economic Committee's Investigation of Concentration of Economic Power. After reading Davis's Managed By the Markets, I'm adding Brandeis's Other People's Money and  Berle and Means's The Modern Corporation and Private Property.

I ran across an interesting passage yesterday in Lundberg's book, in a chapter called "Oligarchy By Default." In a discussion of corporate control, Lundberg says "Big stockholders could, it is true, meddle into the affairs of corporate management and, theoretically, could insist upon strict social-minded policies. They do not do this, usually, not because they are of the despicable temperaments pictured by C. Wright Mills and others but because they are indifferent, diffident or are afraid to disturb a smoothly running profitable operation."

This reminded me a bit of Davis's description of the changes in corporate ownership over recent decades. Davis says that after the phase of early-twentieth century finance capitalism, when bankers like J.P. Morgan "exerted their dominance of industry through networks of directors" on the boards of subject companies, we moved into a more dispersed ownership model. Davis says according to Berle and Means, by the early 1930s "44% of the largest 200 corporations were under effective management control." This was the period of "managerialism" we associate with the golden age of big American industrial corporations.

Even more recently, Davis says, the pendulum has swung back in the other direction and ownership has been concentrated in the hands of about a half-dozen giant mutual fund companies. Although the company shares are technically owned by investors in the funds, in practice buying, selling, and voting these company shares is done not by individual investors but by fund managers. And it's a lot of shares. By 2010, Davis says, "75 percent of the largest 1,000 corporations' shares were held by institutions, not individuals." A single company, BlackRock, "owned at least 5 percent of the shares of more than 1,800 US corporations…with more than $3.5 trillion in assets under management, BlackRock was the
single largest shareholder of one in five corporations in the United States."

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To show how much has changed in recent years, when I was in the mutual fund business we were mainly selling an "Income Fund" based on corporate bonds. We were thrilled when our sales efforts pushed the fund's assets over the $1 billion mark, because at the time only a few funds like Fidelity's Magellan were that big. BlackRock was started in 1988, the year after I got out of the investment industry (and into computers). It now manages $3.5 trillion -- which just for comparison is more than the GDP of any country other than the US, China, Japan, and Germany.

So, partly because millions of guys like me were successful moving people out of savings accounts and CDs and annuities, into funds, and later at building 401k plans and Variable Life policies around funds, there are now five companies (BlackRock, Fidelity, Vanguard, Dimensional Fund Advisors, T. Rowe Price) that own 5% or more of over 3,700 US-listed corporations. This is a concentration of ownership not seen since the days of J.P. Morgan. But according to Davis, it's ownership without control.

Although the fund companies could choose to use their big blocks of voting shares to pack boards of directors and influence company policies, Davis says they don't do this for two important reasons. First, because many of these big corporations are not only investments for the fund companies, but clients. 401k plans and pensions make up a huge percentage of the fund companies' revenues, so they avoid alienating their customers, which they would do it they  supported shareholder activists against management. Second, Davis says that unlike the bankers a century ago, the funds don't generally invest for the long term. Turnover of these shares is very rapid -- which is somewhat ironic, since the funds themselves are sold to their customers as long-term investments.

In any case, mutual fund managers generally vote with corporate management. So they're basically a huge, unbeatable rubber stamp on whatever management wants to do. According to Davis, "Nearly all shareholder proposals [which are usually activist calls to divest from a particular country or industry, to change corporate rules, to support other "stakeholders" or even to appoint independent directors] failed to achieve a majority of votes; and those that did were generally merely advisory." This separation of ownership from control begs the question, who is really running the show? Who is setting the corporations' agendas and making key decisions? Davis answers that at least in the case of many newer companies, founders, venture capitalists, and early investors often hang onto control even when the company launches a public IPO.

"Many companies that have gone public in recent years," Davis says, "violate the most basic ground rules of corporate governance under shareholder capitalism by giving the founders super-voting rights." For example, Google founders Page and Brin enjoy ten votes for every Google share they hold, ensuring that along with their ally Eric Schmidt they control 59% of the votes. Mark Zuckerberg owns about 28% of Facebook, but he also owns a majority of the votes. And Groupon's three founders retained 150 votes per share. The clear message here is that the fortunes of the companies are tied directly to the visions of just a few key people; the rest of the shareholders are only along for the ride.

And actually, Davis says, most of these new corporations didn't go public to raise funds anyway. They had more than enough money to operate. The IPO was about "cashing out" the founders, early investors, and VCs. So basically, the equity markets aren't really a source of corporate finance anymore at all. They're a combination of casino and compensation tool for insiders.

Who Owns America? Part 3

One of the things that that really strikes me as strange is the way free-market enthusiasts always distinguish between business and government. I sort-of get it: if you read the old classics by Henry Hazlitt or Ludwig von Mises or if you read Atlas Shrugged, you get the impression that free enterprise and government bureaucracy are worlds apart. But let's remember, these economists were talking about a world they grew up in, a hundred years ago. And Atlas Shrugged, despite being the book many libertarians (don't want to admit they) got most of their ideas about the ideal economy from, is fiction!

For me it comes down to size. Big corporations are as distant from control by regular people (as workers, as consumers, as neighbors with rights) as big governments. In
Managed By the Markets, Gerald Davis begins his chapter on the golden age of corporations with the observations that:

Exxon Mobil's 2007 revenues of $373 billion matched the GDP of Saudi Arabia, the world's twenty-fourth largest economy. Wal-Mart has more employees than Slovenia has citizens. Blackwater Corporation has a larger reserve army than Australia. The individuals that run such corporations wield more influence over people's lives than many heads of state. In some respects, corporations transcend or even replace the governments that chartered them: states are stuck with more-or-less agreed land borders, but corporations are mobile, able to choose among physical and legal jurisdictions…Moreover, corporations can fulfill many of the functions of states: they can have extensive social welfare benefit programs for employees…Indeed, some American multinationals look more like European welfare states than does the US government.

A couple of observations here. First, as Davis has mentioned repeatedly, it was precisely because the giant corporations that once employed the American middle class offered "social welfare" bundles like lifetime employment, career ladders, job training, old-age pensions, and health insurance, that government didn't have to. America has a much smaller public commitment to social welfare not only because we have a greater commitment to "freedom," but because
we didn't need the state to step in. The problem now is that the giant corporations that provided these benefits have disappeared, and many of the people thinking about this issue are stuck in a "Happy Days" mindset. We're making policy as if the corporations are still there. Many of the names are there. There's still an AT&T, a GE, and a General Motors -- but if you look at them, they're more like brand names than companies. AT&T once employed over a million people in the US. That's down to a quarter million. GE's own website asks, "Did you know that manufacturing jobs were the largest sector of employment in 1960, yet today the category has fallen to 6th place?" Even General Motors has shrunk from employing over 600,000 people in 1960 to fewer than 200,000 today.

But there are new companies like Google and Apple to pick up the slack, right? Not according to Davis:

The combined global workforces of Google (32,467), Apple (63,300), Facebook (4,000), Microsoft (90,000), Cisco (71,825), and Amazon.com (56,200)—317,792 as of the end of 2011—are smaller than the US workforce of Kroger (339,000). Notably, a recent survey of college graduates under 40 found than one in five listed Google as their most preferred employer, followed by Apple and Facebook. They might as well have chosen the NBA as Facebook, given the firm’s miniscule employment, and Apple’s recent surge in net jobs is almost entirely attributable to the roll-out of its retail stores, where most of its current employees work.

So it really is down to Wal-Mart. Davis quotes David Bell, who said the "paradigmatic corporation" of the first third of the 20th century was US Steel, followed by General Motors in the second third and IBM in the final third. Today it's Wal-Mart, a flat organization with thousands of small units, minimal benefits and no career ladder -- but employing 1.4 million people, "more than the dozen largest manufacturers combined." But what about small business? The government, chambers of commerce, political candidates -- everyone seems to always be saying this is where the real story is. Where the American dream still operates. According to
Forbes, there are 28 million small businesses and another 22 million self-employed entrepreneurs. Half the working population they say.

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But the definition they use of small business is anything with fewer than 500 employees. A Wal-Mart store with 300 employees (which is average) thus qualifies. Yeah, the guy who runs the Taco stand in the photo Forbes used definitely counts. But so does the McDonalds franchisee down the street from him. According to the Bureau of Labor Statistics, the percentage of the workforce employed at firms with fewer than 50 employees holds pretty steady at about 28% to 29%. So the question is, do the cheery infographics hide more than they reveal?

Davis concludes his most recent article ("After the Corporation") with a call for localism. He says, "Local solutions for producing, distributing, and sharing can provide functional alternatives to corporations for both production and employment...the technology for locavore production is already here; what is needed is the social organization to match the tools that we have in hand, or will have shortly." I think he's probably right. "The stunning productivity," he says elsewhere, "of the agriculture and manufacturing sectors—the roots of post-industrialism—should be a cause for celebration." This is true -- at least as long as it's sustainable. A lot of that farm productivity and industrial globalization is based heavily on cheap energy. But even if energy remains cheap, important questions remain to be answered. The first is, what do people do to earn a living? People are much less mobile than corporations -- and I suppose that immobility is the key difference between today's global corporations and government. Corporations can leave -- governments by definition stay home with their citizens and pick up the pieces.

FEE Quotes Weber, Misses Point

Yesterday FEE posted an excerpt from Max Weber, under the title "Politics is Violence." While I think I get their point, and I even agree that the ways contemporary governments -- including our own -- use their powers is a big problem, I think the article oversimplifies the issue in a way that supports a core libertarian narrative about the difference between government and business.

In a 1918 article titled "Politics as a Vocation," Weber says:

"Today, however, we have to say that a state is a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory.

"Note that 'territory' is one of the characteristics of the state. Specifically, at the present time, the right to use physical force is ascribed to other institutions or to individuals only to the extent to which the state permits it. The state is considered the sole source of the 'right' to use violence."

The problem is, there's a disconnect between the first and second statements. The "human community" and the agency of the humans in that community of the first paragraph disappears from the second, and the state is reified. That is, the state becomes a monolithic agent -- a "person" with one particular outlook and agenda. I don't think this reflects reality, where "the state" can be better understood as an ongoing, never-ending negotiation between its members. Name me a state that speaks with a single voice, where there is no dissent, no disagreement on ends or means. And since this is so, the question of violent means is much more complicated than FEE is trying to suggest.

Also, in the real world, although "the state" may
claim a monopoly on violence, it is clearly not the only agent of violence. So really, what's the point of retreating into a hundred-year old theoretical argument about abstractions that didn't reflect reality then or now?

Clichés About Rich & Poor

FEE posted another in their series debunking "Clichés of Progressivism." This installment is called "The Rich Are Getting Richer and the Poor Are Getting Poorer." The author of this particular essay is Max Borders, editor of FEE's magazine, The Freeman. Borders begins with a little thought experiment. He asks what would you do, if you could go back fifty years and rig the economic game in favor of the rich?

Borders answers his question with the five policies FEE has been complaining about since I visited them in the summer of 1982: the minimum wage, crony favors, over-regulation, welfare, and inflation. Borders says "you have probably noticed that every one of the policies above has been implemented to varying degrees since the Great Society. And yet
the poor have still not gotten poorer." [his emphasis] So the thesis of his argument is 1.) these factors are the important ones when we discuss economic change over the last 50 years, and 2.) let's ignore whether the rich have gotten disproportionately richer, and talk about the poor.

First, the debate is far from over among economists and historians that Borders's five factors are the most important. To give just a single example, in the past fifty years we've seen a dramatic shift from a "managerialist" approach to corporate governance to a "shareholder value" approach at the same time we’ve seen an ownership shift (to where mutual funds like BlackRock, Fidelity, and Vanguard own the majority of all publicly traded companies) and increasing globalization (where jobs and capital cross borders much more easily than people). This is a complicated change (see the books and articles of
Gerald F. Davis for details), and it's not one that it's easy to apply the "blame game" to. Borders's five factors all have the advantage of allowing him to point the finger of blame at someone. Reality is more complex, and while we can cheer some of the results of change, we might want to think about their costs -- and what we want to do about them.

Second, Borders claims that the pie has gotten bigger and as a result the poor are better off than they were. His source for this claim is
Michael Shermer, a professional skeptic with an academic background in psychology and the history of science. There are plenty of actual economists like those working at the Bureau of Economic Analysis whose work suggests that economic growth has largely left middle-income Americans behind, but even if we take Shermer's skeptical counter-claim seriously we ought to examine it closely. His numbers compare conditions in 1979 with 2010. Anybody remember the economy in 1979? Furthermore, are we talking about nominal dollars here, or real dollars after inflation? And, in a period when taxes were becoming increasingly light on the rich and onerous on the middle class, are we looking at pre- or post-tax dollars?

 
growth

In his discussion after the data, Borders makes a series of points that have themselves become clichés. First, he asks if you'd rather have "50 percent of a million or 20 percent of a billion?" His implication is that the poor are just envious. But there are other implications of extreme inequality he ignores. Access to political power, the level of overall consumption, even the composition of the goods and services produced change as the ownership of the "pie" shifts. Henry Ford famously observed that in order for the Model T to be a success, his workers needed to be able to afford the product they were building.

Borders then draws an oversimplified picture of his opponents' point of view. He suggests the "distribution" argument assumes the pie is static -- assuming that as long as it's growing, no problem! But this is silly: an economy growing by building a lot more F35 fighter jets is a lot different from an economy growing by producing goods and services to meet the needs of regular people. Further, he claims that the "distribution" choice is between "meritocracy" and "social justice." It's really not. No intelligent critic of the system is saying what Borders claims we're saying. What we ARE saying is that these simplistic straw-man arguments are a diversion -- what we really ought to be doing is understanding that in complex dynamic systems we can't anticipate all the consequences. We can no longer hang onto the static, Newtonian determinism that informed the thinking of the classical economists (including the Austrians).

Borders goes on to revisit the claim that "egalitarians" just don't appreciate the fact that the rich are "smarter investors, cleverer innovators, or better organizers." Again, no one ever denied this -- but the rich
continually fail to acknowledge the social infrastructure, access to capital (inheritance), and the uneven educational playing field that not only allows them to stand on the shoulders of others while they pretend to be self-made men, but also actually reduces the amount of innovation and competition we might otherwise enjoy.

There's an aside about "fair shares," where the editor says "
I often ask this question of a redistributionist in the presence of another person and ask the former to specifically tell me how much is his ‘fair share’ of what the other person in our presence has earned. I’m still waiting for a satisfactory answer." This is out of place, I think. It's just a little too dickish and bullying for this article.

Borders widens his view to the global and rightly observes that "In only 20 years, extreme global poverty has been cut in half." He attributes this to freer global markets, which in this oversimplified context means his side gets to take credit. But again, globalization isn't that simple and isn't simply the result of laissez faire. There have been winners and losers. As a middle class has risen in China on globalized technology jobs, an earlier middle class in America has fallen. To the extent that these people are much less mobile than the capital that's redistributing these jobs (even if the economic outcome is increased global efficiency), and to the extent that especially in America, corporations used to provide the social safety net (a career ladder, long-term employment, old age pensions, health insurance -- again, see Gerald F. Davis's
recent work), it's legitimate to ask what governments (which could be viewed as voluntary associations of people, and should at least be recognized as sharing the geographic limitations faced by most people, relative to capital) can do to respond to these uneven changes.

Borders concludes by suggesting "Progressives should be honest." I agree, but I think in this case FEE is in as much danger of cliché as their opponents. His final point, that "redistributing wealth is just slicing the pie differently, at the risk of shrinking the pie," might be compelling if it were the issue at hand. Actually, the issue is trying to get beyond nineteenth-century economic dogma, honestly assessing the effects of changes as the economy becomes more global, and deciding what combination of private and public actions we can take to increase the benefits and decrease the penalties for as many people as possible.

Even Ayn Rand Knew Catching Rivets is Cool

It's no secret that Russian-American author Ayn Rand's books are some of the formative texts of today's Libertarian movement. The two best-known are her novels The Fountainhead (1943) and Atlas Shrugged (1957), both of which are set in story-worlds resembling mid-twentieth century  America. Both stories portray brilliant, iconoclastic individualists struggling against the sucking vortex of middle-brow collectivism.

Leaving aside the issue of extreme romanticism masquerading as realism (and obvious comparisons with Russian literature in the 19th and 20th centuries), one of the things that has always struck me about the place the books have taken at the heart of the free-market cause is how often Rand's ideas are deployed by the suits against the workers, when it's clear that even she understood the most romantic characters of all were people who worked.

We could argue about the best moments of
Atlas Shrugged, but right up there on everybody's list you'll probably find the big bonding scene between Hank Rearden and Francisco D'Anconia where Hank rushes out to deal with a steel furnace break-out but Francisco beats him to the furnace and begins expertly throwing clay to stop the hole. This is a technique that only someone who had learned the trade from the bottom up would know, and Hank's opinion of the millionaire playboy changes completely when he realizes that Francisco has skills.

Another element of Rand's stories always puzzled me. When Howard Roark has his first important conversation with Gail Wynand, he says his favorite job in his youth was "catching rivets on steel structures." The image of Roark catching rivets actually appears earlier, as part of the opening exposition, when the Dean of Roark's college remembers he "
had seen him, last summer, on his vacation, catching rivets on a skyscraper in construction in Boston; his long body relaxed under greasy overalls, only his eyes intent, and his right arm swinging forward, once in a while, expertly, without effort, to catch the flying ball of fire at the last moment, when it seemed that the hot rivet would miss the bucket and strike him in the face."

rivets-copy

I had a hard time believing that people actually caught rivets in the way Rand described, but in the internet age it's easy to check. There's a Life Magazine story from Sept. 26, 1949, describing a rivet-throwing championship held in Mechanicsburg, Pennsylvania. The article says:

After the rivets has been heated in forges until they were white-hot, the tosser picked them up with tongs and threw them upward while his partner, delicately balanced on an I-beam, tried to catch them in a metal cone. Although the contest continued long after dusk--in which the rivets looked like tracer bullets and were about as dangerous--none of the steelworkers fell or was burned. (The trade, which pays about $2.75 an hour, has a national mortality rate of 5 to 10 workers per month.)

Don't you think it's a bit ironic that the most romantic thing Rand can say about her elitist heroes is that they can do the dangerous jobs of low-paid skilled workers? Francisco's steel-puddler skills and Roark's rivet catching grant them immense instant cred. What would American capitalism look like today, if free-market advocates demanded their heroes be able to walk the walk instead of just talking the talk?

Banking befpore Lincoln

I've mentioned a couple of times over the last week or so (maybe no one noticed) that I don't think Economic and Banking Historians have told the whole story of how banking changed in America during the Civil War. The reason I've become so interested in this subject is that while digging through the archives, reading about one of the "Peppermint Kings" of my dissertation, I discovered that he had his own bank. And then I discovered that his uncle and his brother had a bank too. So I thought there might be something going on just prior to the beginning of Lincoln's consolidation of currency and banking. I'll have more to say about that soon -- I'm currently banging away at the dissertation. There's a very definite rural/urban fight involved, I think. In the meantime, here's some cash I found in the archives. Actually, banknotes from Hiram Hotchkiss's personal bank. Ironically, the image engraved on the notes is not Hiram, but his rich uncle Calvin, who had his own bank with Hiram's brother Leman and was pretty annoyed when he discovered his picture was on his nephew's money. But Hiram was considered a bit shifty, and Calvin was solid as a rock (see, there's a story here...).
hghnote hghnote6 hghnote4 hghnote3

The Elite Stay Elite

The Son Also Rises: Surnames and the History of Social Mobility
Gregory Clark, 2014


I just finished reading a book that claims social mobility in modern America is basically the same as in modern Sweden, and that both are in fact just about the same as in sixteenth-century England. Everywhere, Gregory Clark says, persistence of social status is much higher than we normally suppose. Where most sociologists estimate persistence in the range of 40%, Clark puts it between 75% and 80%. And as mentioned, he says it has never really changed throughout history and that it's the same pretty much everywhere. As a result, the descendants of the victorious Normans  of 1066 are still disproportionately represented in the British Parliament, and the famous but tiny Pepys family has sent many more than its share of young men to Oxford and Cambridge.
 
First, I've gotta say that it doesn't really come as a surprise to me that the elite stay elite or that it can take 20 or 30 generations for a family at the top of the heap to "revert to the mean." Although Clark says it's statistically improbable for the Pepys clan to have continued to send more than its share to the best British schools, I don't think it's socially improbable at all. In fact, it's the outcome I expected.
 
The interesting thing about this book, though, is that Clark posits (without ever really coming right out and saying it) a genetic component to elite status and persistence. Rather than saying that the Pepys boys were accorded special privileges at elite British schools or that the sons and grandsons of hereditary MPs were more likely to be elected to Parliament, Clark says there's something called underlying social competence, and that it is inherited.
 
Hang on, what? Clark says that elite status is in the genes? Well, not exactly. What he says is that there's an unknown cluster of characteristics that, taken together, make a person socially "competent," and that these characteristics seem to be inherited. Although Clark's equation has a term built in for dumb luck, he thinks the randomness is much less than we normally believe it to be. If you're looking for a marriage partner, Clark says, don't trust the status of the individual alone. It might be luck. Look at the status of the whole family, and you'll get an indication of your potential partner's "competence" genes.
 
I haven't been able to find any reviews of this idea by historians (and just a couple by economists), possibly because the book was only published in 2014 and the glaciers of academic reviewing haven't ground it down yet. However, Richard V. Reeves of the Brookings Institution wrote a three-part take-down called "
The Good, the Bad, and the Ugly" in March 2014. Reeves, who also recently wrote a long essay supporting the rags-to-riches perspective of Horatio Alger, says Clark's perspective is racist. Or at least genetically deterministic, which he suggests is basically the same thing. Clark responded that he wasn't being racist, some of the elite groups he tracks in the book are in fact of African descent. But Reeves has a point. "Racism is not History," he says. Yeah, the guy from Brookings is saying the effects of slavery and the rest of America's racist history are still being felt. Wow.
 
Clark's main point isn't really about race, though. He uses adoption and twin studies to suggest that there's an element to life success that isn't explainable by nurture. Even if that effect isn't as complete as Clark implies (I think he brushes by some of the caveats and exceptions in the studies he cites a little to quickly), it's a challenging idea.
 
The problem is, there's not enough to grab onto. The 11 herbs and spices remain secret -- we never find out what mental, emotional, physical, or other characteristics make a person "socially competent." And it's hard to believe that the factors that made people successful in the sixteenth century are all the same as those that make people successful today. Nor is there any real explanation of how particular families got to the top of the heap in the first place. The mobility equation takes center stage, and we don't really get to look under the hood at the social factors that could have led to success and then sustained it. This is unfortunate, because since Clark hasn't really identified the machine working behind the scenes, it's entirely possible that the effects he's measuring to derive the equation are in fact social rather than biological.
 
When Clark says the social mobility in Sweden is as low as in America or early-modern England, he's not saying that inequality is the same. The penalty of being at the bottom in a welfare society like Sweden is obviously much lower than it was in England or is in the US (I wonder if the lesser downside of low social mobility in Sweden doesn't have something to do with it continuing?). Clark does suggest that in a society like the US where Reeves's Horatio Alger dream is pretty much an illusion, we ought to think harder about our safety net.
 
Clark's numbers suggest that a person's status at birth can predict a lot about their life chances. That's a slap in the face to the American Dream. But let's think about it. If he's right at all -- even if we have no idea why he's right and disagree with the theory he advances to explain it -- then we really ought to be doing more to make it less painful to be average or poor in America.

The Growth Economy Begins

Walter LaFeber
The New Empire: An Interpretation of American Expansion, 1860-1898
1963


It’s interesting, given Walter LaFeber’s reputation as a critic of American Empire, that he refaces this book by saying “I have been profoundly impressed with the statesmen of these decades [the last of the 19th century]…I found both the policymakers and the businessmen of this era to be responsible, conscientious men who accepted the economic and social realities of their day, understood domestic and foreign problems, debated issues vigorously, and especially were unafraid to strike out on new and uncharted paths in order to create what they sincerely hoped would be a better nation and a better world” (ix). This sincere appreciation on LaFeber’s part for the people whose decisions he will be criticizing so thoroughly, suggests his story is much more subtle than the standard good guys vs. bad guys approach taken in many texts (and unfortunately, often by critics of the establishment).

Similarly, LaFeber begins his first chapter by debunking the myth of antebellum isolation. “Between 1850 and 1873,” he says, “despite an almost nonexistent export trade during the Civil War, exports averaged $274,000,000 annually; the yearly average during the 1838-1849 period had been only $116,000,000” (1-2). So while it is true, LaFeber admits, that “until the 1890’s the vast Atlantic sheltered America from many European problems,” the fact that we were not drawn into European wars does not mean that many Americans (especially businessmen and financiers) were not intimately connected with the continent. The histories of businesses such as J.P. Morgan's Anglo-American financial empire are ample proof that American businessmen considered themselves players on the Atlantic stage. Even my western New York Peppermint King, Hiram Hotchkiss, made his name by taking his peppermint oil to London's Crystal Palace in 1851 and getting a first prize medallion with Queen Victoria and Prince Albert's images on it! These long-standing connections had important implications in politics and diplomacy, as the twentieth century began.

1851PrizeMedalLabel copy

LaFeber says William Henry Seward “deserves to be remembered as the greatest Secretary of State in American history after his beloved Adams. This is so partially because of his astute diplomacy, which kept European powers out of the Civil War, but also because his vision of empire dominated American policy for the next century” (25). “Grant, Hamilton Fish, William M. Evarts, James G. Blaine, Frederick T. Frelinghuysen, and Thomas F. Bayard assume secondary roles,” LaFeber says (24). He notes also that Seward suggested “Mexico City was an excellent site for the future capital of the American empire” (28). This is interesting, not only because it implies some type of U.S. annexation of Mexico, but because Mexico City has
nearly always been the largest city in the Americas. It was in 1490, and again in 1600, 1800, and 2000. Seward also predicted that “Russia and the United States may remain good friends until, each having made a circuit of half the globe in opposite directions, they meet and greet each other in the region where civilization first began” (30).

LaFeber’s point is that American empire was seen by nearly every influential contemporary as an inevitable result of the economic changes of the late nineteenth century. LaFeber says there was very little pressure to “occupy every piece of available land in the Pacific,” but I’d add there was clearly pressure to
control many of those islands and their resources, as shown by the Guano Islands Act of 1856. There was also a general understanding that “Latin-American and Asian markets were vitally important to the expansive American industrial complex” (416). The machine, late-nineteenth century policy-makers seem to have realized, needed to be constantly fed with both raw materials and new markets. The growth economy had begun.

Digging into the Market Transition

From Market-Places to a Market Economy Winifred Barr Rothenberg, 1992

Two things to note: First, WBR is a professor of economics at Tufts University.  Second, this book is substantially a compilation of a series of articles that appeared (partly) in Agricultural History and (mostly in) The Journal of Economic History.  Some of Rothenberg’s opinions about the “moral economy” model appear in a review of Hahn and Prude’s Countryside in the Dec. 1987 Reviews in American History, titled “Bound Prometheus.”

Through extensive primary research and mathematical modeling, Winifred Barr Rothenberg came to the conclusion that the “capitalist transition” began around 1750, and was substantially underway in rural Massachusetts by 1800. While she performs a little sleight of hand navigating between a tight, economist’s definition of capital and markets, and the expansive, politically charged language used in the historians’ market transition debate, Rothenberg uncovers some really valuable data which helps advance our understanding of events, wherever we stand on the “social vs. market” historiographical spectrum.

Economically, Rothenberg rests her evaluation of whether markets are operating on a combination of two related ideas. “Synchronicity and convergence in the behavior of prices,” she says, “is an acknowledged diagnostic of the role of market forces in their determination” (xiv). As transportation and communication improvements allowed farmers to participate in distant markets and to use price cues from those markets as guides in their local exchange relationships, Rothenberg says “markets embedded within and constrained by values antithetical to them within the culture” evolved into “the 'disembedded' market whose values penetrated and reinvented that culture” (3).

Rothenberg is drawing from and commenting on a long lineage of sociological, economic, and cultural critique, in a way that seems unnecessary and overly polemical. She borrows the word “disembedded” from Karl Polanyi, with all its political baggage. The idea that price synchronicity defines a market economy is Braudel’s, while the concept of convergence Rothenberg adds to it comes from Alfred Marshall (20-1). As she’s pulling these two ideas together, Rothenberg considers and rejects Marc Bloch’s suggestion that a market exists when people don’t simply buy and sell, but “live by buying and selling” (20). How would you measure that? she asks. A good question, but difficulty measuring the effects of an idea doesn't disprove it. And her assumption that price convergence led to a radical change in the culture's understanding of markets has a long lineage -- but that fact doesn't prove its validity, either. So the question is, does Rothenberg prove this point with her data?

I’m less interested in the general question of when “market-place economies” become “market economies,” than with how the market expanded into rural Massachusetts. The breakdown of Puritan strictures against usury seems likely to be a part of this change, as Rothenberg suggests. But if this is caused by the introduction of “the fundamental assumption of modernity...that the social unit of society is not the group, the guild, the tribe, or the city, but the person,” how did that work?  (quoting Daniel Bell,
The Cultural Conditions of Capitalism, which maybe I should look at for an answer. 15) It’s all well and good to observe that “the market (for better or worse) objectifies some of the culture’s most cherished values,” but Rothenberg seems to say it also created these values, without resorting to cultural or intellectual history or mentalités.  This is important, because if we can agree on the values (for example, “the sovereignty of the individual,” 16), we can then begin examining what happened and asking if events and actions were consistent with these ideals?  Did “market” ideas matter?  Did they direct change?  Or did they just serve as rhetorical cover for other processes and other goals?

In any case, Rothenberg finds some great material! Here’s George Washington to Arthur Young, Dec. 5 1791: “The aim of farmers in this country is, not to make the most from the land, which is or has been cheap, but the most from labour, which is dear: the consequence of which has been, much of the ground has been scratched over, and none cultivated or improved as it ought to have been” (25). Throughout the book, Rothenberg shows that farmers’ actions can be understood as economic decisions (and often sophisticated and reasonable ones) reflecting more knowledge and understanding of their environment and options than they are normally credited with having. This is extremely helpful, even if I don’t go as far as she does in rejecting the influence of other sources of information and values on farmers’ decisions.

The moral economy model, as Rothenberg sees it, involves four basic features. Its members, being risk averse (because the whole point of the moral economy is the extremely tenuous nature of early modern existence) prefer “minimizing expected losses over maximizing expected gains” (reminds me of Cronon's application of Liebig's Law in
Changes in the Land. 29). Individualism is “subordinated to community norms,” and “The two institutional pillars of the market system--the rule of contract and private property--are conspicuously absent” (quoting Platteau regarding third world villages, which I think raises a question about the relevance of this type of atemporal sociological comparison. 29). There may, she says, be a “two-tier system in which exchanges within the village...are insulated from exchanges with the outside world...The ‘prices’ at which goods exchange within the village are mere ‘cultural constructs,’” Rothenberg concludes, as if prices arrived at by “market outcomes” were not.

“Indexes of individuation” are linked to the 1740-45 religious upheavals of the Great Awakening, Rothenberg says, because both are caused by “the breakdown of community solidarity [that] in turn can be traced to rapid population growth” (38). Even if she misses the influence of irreligion and anti-religion in the early nineteenth century, it's nice to see an appraisal of the Awakenings that doesn’t treat religious motivations as free-standing, causeless causes. Similarly, she not only lists the many difficulties of studying persistence (for example, varied and changing town dimensions that make it difficult to compare two towns or to compare the same town in different time periods), she also asks the important question, “what in fact does persistence measure?” (40) Is it a measure of community harmony? Or of the expense and difficulty of leaving?

“The capacity to produce surpluses,” Rothenberg says, “is often treated as so necessary a condition to trade that the moral economists infer the absence of marketing solely from calculations that the local resource base would have been insufficient to produce surpluses” (46). This is the “principal misconception in the historical literature on markets,” because it implies that households and communities evolve from self-sufficiency to market involvement, which in many cases (illustrated by the cobbler’s bare-foot children) is untrue. Based on her data, Rothenberg argues “that ‘time’s arrow’ may very well have gone from marketing to self-sufficiency” in rural Massachusetts (49).

Rothenberg’s specific arguments about market activity and productivity gains in Massachusetts seem reasonable, for the most part. But there are some lapses. She spends several pages relating hog slaughter weights to corn prices, for example, before admitting that in this period “Corn is not in fact the basic feed of hogs” (106). However, through most of the economic analysis I didn’t feel that she was going wildly off the tracks.  But I also didn’t feel particularly compelled to abandon a “social” perspective that could accept this data and integrate it with other, non-market factors Rothenberg believes she is refuting.

“Local markets relayed the shocks [of the national and world economies] as changing relative prices,” Rothenberg says, “and resilient farmers responded by shifting from grains to hay, from hay to dairying, and finally from agriculture to commerce and industry” (113). The interesting thing is, the increases in agricultural productivity and the  diversification of rural capital investment that made these changes possible seem to date from the years between the end of the Revolution and Jefferson’s election. This doesn’t necessarily contradict Joyce Appleby’s claim that the Jeffersonians were pro-commerce, but it suggests they were riding a wave not of their own making.

“Central to such a [rural capital] transformation must have been the development of an effective mechanism for increasing the liquidity of the regional economy,” so that the gains farmers were accumulating were free to move within (and to leave) the local agricultural economy. I think my own Upstate New York data suggests that one may have led to the other. The requirements for this change, Rothenberg says, were “institutional elements” allowing “credit instruments [to] become more fully negotiable,” an “increasing size and widening geographic spread of individual credit networks,” and sufficient “liquidity of financial instruments and therefore the propensity of rural wealthholders to substitute them for physical assets” (114). I think this is exactly the role played by my miller/storekeepers in the 1840s, aided by the New York State Banking system. Ironic that the R.G. Dun reporters considered one of them a complete deadbeat. Does that suggest the Dun guys were a little conservative? Their clients were urban creditors, after all. I wonder if anyone has written about this?

Rothenberg’s discussion of negotiability picks up right where Morton Horwitz left off, so it’s lucky I read them back to back. It doesn’t seem unreasonable to accept both Rothenberg’s conclusions on when and how credit and negotiable notes penetrated rural markets, and Horwitz’s suggestion that legal changes were producing a “capitalist” political/economic regime for the benefit of the rich. In fact, Rothenberg’s data shows “The very rich appear to have been borrowing in order to lend, using their acreage...to underwrite their borrowing while at the same time shifting the composition of their assets out of farming and into commercial paper. The very rich were coming into the capital market on both sides. And they alone were emerging as net creditors” (143). In other words, a widening of the gap between the wealthy and their neighbors preceded the industrial transformation often blamed for it.

The final chapter on productivity is surprising because Rothenberg finds evidence that “Massachusetts farmers were moving away from cereals to specialize in hay...in advance of significant western competition;” in fact “by 1801” (221). This would seem to support the view that
demand from what Bidwell (1921) calls a “home market” may have driven productivity growth, but may have begun much earlier than previously supposed.  The earlier beginning of significant demand, increases in productivity, and the resulting returns to rural farmers could have financed the New England industrial revolution, just as Rothenberg suggests. But New England farmers would have been agents of this change rather than victims of it. Additionally, rural demand for “outside” goods may have been encouraged by the increased reach of storekeepers and peddlers into previously remote hinterlands. The Revolution seems like the second major mobility-enhancing event in the eighteenth century; the Seven Year War may have been the real beginning. And the story of Shays’s Rebellion is enhanced (but not completely rewritten, since Leonard Richards has already improved on David Szatmary’s account) if an increasing upland/lowland disparity of farm prosperity adds to the other social and financial factors already cited as causes of that conflict.

How Historians and Economists differ

jer_3d
Martin Bruegel
“The Social Relations of Farming in the Early American Republic: A Microhistorical Approach”
Naomi R. Lamoreaux
“Rethinking Microhistory: A Comment”
Journal of the Early Republic 26, Winter 2006


I’ve been reviewing mostly books on this page, which I think is most appropriate since relatively few people have the types of academic access that makes journal articles easy to find and read. But there’s no denying that academics still rely on articles to break new stories and (possibly more interesting) to fight over evidence and interpretation. One of the big battles in Early American History that impacts Environmental History and that has been fought primarily in journals is the question of the “Market Transition,” which at its core may really be a fight over the meaning and importance of Capitalism in American History.

In the first of a recent pair of articles that takes the debate on the market transition to a wider and much more interesting place, Martin Bruegel argues that the economic determinism represented by most business histories can and should be counteracted by a very detailed, microhistorical approach to the tasks and relationships necessary to running an early nineteenth-century farm. Bruegel criticizes histories that simply reduce “the scale of observation to illustrate the local impact of larger processes,” suggesting that they simply “normalize” peculiarities and thus validate the “general hypothesis” held prior to observation (525). In contrast, he says, microhistory “deepens and enriches the analysis of economic transactions” by providing “a more circumscribed, grass-roots focus [that] suggests…the malleability of conventions” (552).

Economic Historian Naomi Lamoreaux responds by suggesting that attempts like Bruegel’s verge dangerously on “antiquarianism” (a term she uses frequently, 555). Speaking for economists, Lamoreaux says she does “not see why making an analysis more complicated should necessarily be considered a good thing” (556). While at first glance, Lamoreaux’s suggestion that historians writing narratives are doing the same thing as economists building models might strike historians as annoying and just, intuitively,
wrong; I think it’s incumbent on historians to think about this and articulate the differences.

Lamoreaux suggests that in order to lead to new knowledge, acts of “complication” must not only show us how the previous “simplification” failed to account for something both real and
important, but they must then arrive at a new re-simplification that incorporates this new insight (557-61). Lamoreaux deploys Paul David’s elaboration of Robert Solow’s famous growth model to illustrate her point, in a way that I think illustrates both the validity of her point, and a fundamental gap between the interests of economists and those of historians. Her point is that economists have recently begun to understand that “Many economic phenomena are…’path dependent’ in that they are conditional on the particular sequence in which events unfolded” (558). This is important, because in addition to what might seem like a belated acknowledgement by economists of contingency and the Second Law of Thermodynamics, it means in Lamoreaux’s words, “that contingency matters—that history matters” (557-8). And maybe it means that economists realize there’s a difference between models and the way things actually work out in the real world. That’s good news for historians who want to work with economists, but Lamoreaux’s argument also highlights the main difference between the two fields.

“The words
exogenous and endogenous are economic jargon,” Lamoreaux says, “but they capture an essential feature of all narratives. There is always an inside and outside to a story; there is always something external to the dynamics of a story that sets its events in motion” (558). This may or may not be true, but I suspect it is nowhere near as relevant to the historian as it seems to be to the economist. Lamoreaux argues that the two important elements of any story are the “equilibrium growth path” and the “external shocks” that can alter it. Shocks are usually big events, occasionally big people. “They are unlikely to be induced by the actions of people who are relatively powerless. If that is the case, however, what is the role for microhistory? What is the role for history written ‘on the ground’?” (559)

I think the answer is obvious to historians. But again, I think we have to spell it out. So here’s my answer, as it occurs to me today at least:

History can’t afford to, and most historians couldn’t bear to, reduce the past to a series of equilibrium growth paths and exogenous shocks. We’ve been in that trap before. The path dependency and contingency we see have infinitely more variables than those sought (and therefore usually found) by economists. Historians should take college-level statistics and econometrics courses, so they can understand the way economic models are constructed. No matter how much they strive to be empirically descriptive rather than normative, the fact that they put the equation at the center means that the assumptions, caveats, exceptions are all pushed to the margins. All of Environmental History, viewed this way, is basically an exploration of things economists have regularly dismissed as “externalities.”

And then there’s temperament. The economist wants to simplify: wants to find rules that can be projected into the future. To predict. Most historians I know would prefer to complicate a picture than to “clean it up.” Sometimes this introduces trivialities—but from whose perspective? Is it fair to say that everybody who fails to be big enough to be an “external shock” is irrelevant? Irrelevant to whom? Most historians, I think, are not interested in returning to a whiggish world where only elite white men have agency. In the end, I think it comes down to two things. Epistemology and markets. What do you think is important in the nature of reality? Waves, or particles? And, who do you think you’re working for?

Hornborg's Power of the Machine

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The Power of the Machine: Global Inequalities of Economy, Technology, and Environment
Alf Hornborg, 2001

“Like all power structures,” Hornborg begins, “the machine will continue to reign only as long as it is not unmasked as a species of power.”  If only it was so easy.  We may realize that the emperor is naked, and he may be embarrassed. But that doesn’t stop him from being the emperor.

This isn't Environmental History, despite the title. It's more a cross between economics and philosophy. And the argument is not backed up by any historical claims or evidence, it's completely theoretical. But Hornborg went on to write and collaborate on books that do call themselves EnvHist, so I thought I'd look at his argument. Turns out, Hornborg’s analysis is built on two big ideas. The first is his definition of power as “a social relation built on an asymmetrical distribution of resources and risks” (1). When I read this, the image that came to my mind was Beowulf. Risks can either be taken or imposed. When you take a risk, you accumulate honor and become a hero. When you impose a risk on someone else, you accumulate power.

The second is the idea that beyond the cultural construction or idea of “the machine,” there are
actual machines. And Hornborg says “the actual machine contradicts our everyday image of it.” Hornborg believes “the foundation of machine technology is not primarily know-how but unequal exchange in the world system, which generates an increasing, global polarization of wealth and impoverishment” (2). We believe machines embody progress and an escape from Malthusian disaster. But they don't feed themselves: “We do not recognize that what ultimately keep our machines running are global terms of trade. The power of the machine is not of the machine, but of the asymmetric structures of exchange of which it is an expression” (3).

The way machines concentrate resources from the periphery into the center while seeming to be making something out of nothing, is by keeping our attention firmly focused on the spinning gears and flashing lights in that center. To prove his point, Hornborg cites the Second Law of Thermodynamics and Ilya Prigogine’s elaboration of it in his theory of Dissipative Structures. Increases in order, which Hornborg calls negative entropy or negentropy, are only possible locally, and are fueled by energy  taken out of the wider environment. “Any local accretion of order,” Hornborg says, “can occur only at the expense of the total sum of order in the universe” (123). In the case of biomass, the energy to create this order is taken from sunlight by photosynthesis. This isn’t a completely efficient process, but it hardly matters on a human scale (so far). Where the entropy law becomes really important, though, is in the creation of what Hornborg calls “technomass” out of non-renewable resources. This is not only a zero-sum game, Hornborg says, but it has distributional implications that are “systematically concealed from view by the hegemonic, economic vocabulary” (3).

“Industrial technology,” Hornborg says, “depends for its existence on not being accessible to everyone.” Industry presupposes cheap energy and “raw material” inputs and high-value outputs. Entropy insures that there isn’t enough to go around. “The idea of distributing [technology] evenly among all the peoples of the world would be as contradictory as trying to keep a beef cow alive while restoring its molecules to all the tufts of grass from which it has sprung” (125).

What are the historical implications of this bleak argument? Well for one thing, once machines and the exchange relationships they represent “assumed the appearance of natural law…the delegation of work from human bodies to machines introduced historically new possibilities for maintaining a discrepancy between exchange value and productive potential, which in other words means encouraging new strategies for underpayment and accumulation” (13). Why? Because while it is relatively easy to recognize the basic justice that an individual owns his own work, it’s harder to say who should own the work of the machines built with (cheap) resources and (cheap) labor bought far from the high-priced central markets.

This was the thing that Marx missed, either because it was harder to see in his time, or because (as Hornborg suggests) he “fetishized” machines and expected them to solve the historic problem of the proletariat (there’s a whole chapter redefining Marx’s theory of fetishism and applying it, but I'll save that for another time). At some point, Hornborg says (I'd say pretty early on), global growth became primarily based on “
underpayment for resources, including raw materials and other forms of energy than labor.” Hornborg replaces Marx’s labor exploitation with resource exploitation as the central factor in capitalist accumulation. This change is a great bridge from a traditional Marxist critique of capitalism, to a “green” critique. Money values may increase and the illusion of global economic growth may temporarily hide the zero-sum nature of the game, but in the long run “what locally appears as an expansion of resources” turns out to be “an asymmetric social transfer implying a [hidden] loss of resources elsewhere” (59).

Another implication is that, historically and “still today, industrial capitalism is very far from the universal condition of humankind, but rather a privileged activity, the existence of which would be unthinkable without various other modes of transferring…resources from peripheral sectors to centers” (60). This should impact discussions of the “market transition” in history just as it affects our understanding of contemporary economic development.

The other major implication, for me, is that locality is key. In nature, systems tend to regulate themselves. “As long as a unit of biomass is directly dependent on its local niche for survival, there will tend to be constraints on overexploitation and a long-term (if oscillating) balance. Industrial growth, however, entails a
supra-local appropriation of negentropy” (123). The concept of mobile, impersonal capital breaks this local ecology, and creates what Hornborg calls “a recursive (positive feedback) relationship between some kind of technological infrastructure and some kind of symbolic capacity to make claims on other people’s resources” (61). When capital can begin to be accumulated far from its source, we’re on our way to a world where “the 225 richest individuals in the world own assets equal to the purchasing power of the 47 poorest percent of the planet’s population.”

But one could also respond to this by saying Hornborg takes the thermodynamic argument too far. It's a compelling metaphor, but it needs some measurement attached to it. Sure, all order is temporary and a battle against entropy. But we have a more benign name for that than the ones Hornborg uses. We call that life.