Saturday, August 10, 2019

How to create an ethical country, if not the world: Part 2 review of Paul Collier’s “The future of capitalism”

This is the second part of my review of Paul Collier’s “The future of capitalism”. The first part is here.

In this review of Collier’s policy recommendations, I will break the discussion into three parts, following Collier’s own approach: how to make companies more ethical, families stronger, and the world better.

Ethical firm. Collier argues that, in order for companies to be seen as ethical and to offer their workforce meaningful jobs, companies should include workers in management, give much more power to the middle-level management, and do profit-sharing. These are all well-taken recommendations, and I believe, like Collier, that they would increase companies’ profitability in addition to providing “better” jobs. The question however is how many companies nowadays can afford to provide such meaningful and (relatively) stable jobs because of fast-evolving changes driven by globalization. Nevertheless the idea is correct.  

Collier then moves to what may be the most intriguing recommendation in the book and that goes beyond the usual “let’s have higher and more progressive taxes”. He looks at the big divide between the successful global cities (like New York and London) and their left-behind hinterlands. The success of metropolises  comes from economies of scale, specialization, and complementarity (gains of agglomeration). People can specialize because the demand for specialized skills is high (the best tax accountants are located in New York not in small dilapidated cities). Companies can enjoy economies of scale because the demand is high and specialized workers benefit from complementarity in skills from other workers with whom they are in close geographical and intellectual contact.  

So who are the main winners from metropolises' success, asks Collier? People who own land and housing (as housing prices skyrocket) and highly skilled professionals who, after paying higher rents, still make more in  global cities than elsewhere. Collier’s suggestion then, based on his work with Tony Venables, is to tax heavily these two groups of people, i.e., to introduce supplemental taxes which would be geographical: tax housing and high income individuals living in London.

How to help hinterland catch up? Use the money collected in London or New York to give subsidies to large cluster-like companies (like Amazon) if they set they businesses in the left-behind cities like Sheffield or Detroit. One can quibble with this idea but the logic of the argument is, I think, quite compelling, and the taxation suggested by Collier has the advantage of going beyond the indiscriminate increase in taxes for all. We are talking here of targeted taxation and targeted subsidies. This is the lieu fort of Collier’s book.

Ethical family. I am less enthusiastic about the suggestions in this area. Here Collier is at his most conservative although that social conservatism is masked under the cover of scientific studies that show that children living in “full” families with two heterosexual parents are doing much better than children living with one parent only.  

Collier almost implies that (say) mothers should stay in unloving or abusive relationships so that there would be both parents present in the family. Such families should, according to Collier, be given support and for all children public pre-K and K education should be free (very reasonable). Collier also very persuasively describes manifold advantages that the children of the rich receive, not only through inheritance but through intangible capital of parental knowledge and connections. This type of social capital inheritance is not a well-researched topic and I hope this changes since its importance in real life is substantial.

Collier displays clear preference for “standard” families and even some “social eugenics” as when he criticizes UK policy that provides free housing and since 1999 extra benefits for single mothers to have encouraged “many bear children who will not be raised well” (p. 160).

The argument that parents should sacrifice themselves (regardless of the psychic cost) for children is also dangerous. It leads us to a family formation of the 19th century when women often lived in terrible marriages because of social pressure not to be seen as abandoning or not caring for their children. This is neither a desirable nor a likely solution for today. An ethical family should consider interests of all members equally, not subjugate the happiness of some (mostly mothers) to that of others.

Ethical world. Collier has surprisingly little to say about the ethical world. His ethical world is a world largely closed to new migration which Collier rejects based on a not unreasonable view going back to Assar Lindbeck and George Borjas of cultural incompatibility between the migrants and the natives. Interestingly, Collier does not quote either of these two authors nor any others. (The book is directed at the general audience so the mentions of other authors are extremely rare except when it comes to Collier himself and a few of his  co-authors).

It is slightly disconcerting that Collier who has spent more than three decades  working on Africa has almost nothing to say about how Africa and African migration fits into this “ethical world”. There are only two ways in which  he addresses migration.

First, migrants or refugees should stay in countries that are geographically close to the source countries:  Venezuelans in Colombia, Syrians in Lebanon and Turkey, Afghanis in Pakistan. Why the burden  of migrants should be exclusively borne by the limitrophe countries that are often quite poor is never explained. Surely, an ethical world would require much more from the rich.

Second, he argues that the West should help good companies invest in poor countries in order to increase incomes there and reduce migration. But how is this to be achieved is never explained. It is mentioned almost as an afterthought and is considered deserving of two sentences only (in two different parts of the book). This is in contrast with a detailed explanation, discussed above, of how governments should encourage and subsidize large companies to relocate to second-tier cities. Could a similar scheme be designed for investments in Africa? Nothing is said.

Further, where does it leave African migrants crisscrossing the Mediterranean as I write? There are no geographically close countries where they could go (surely not to Libya) nor can they wait for years in Mali for the Western companies to bring them jobs.  Again, nothing is said on that. It is not surprising that Collier is very supportive of Emmanuel Macron whose anti-immigration policy is quite obvious, and of Danish Social Democrats that are in the process of creating a kind of national social democracy with new laws that practically reduce immigration to a trickle. Collier favors Fortress Europe although he does not say so explicitly.

In keeping with his anti-immigration stance, Collier argues that migration is not an integral part of globalization.  Why –in principle- goods, services and one factor of production (capital) should  be allowed to move freely while another factor of production (labor) is to remain stuck is not clear. Surely, the fact that trade is driven by comparative advantage and migration by absolute (p. 194) is not the reason to be against migration. On exactly the same grounds, one could be against movement of capital too.

In conclusion, I think that the recommendations regarding the “ethical firm” and metropolis-hinterland divergence are spot on; the recommendations on “ethical family” are a combination of very perceptive and sensible points, and a view of the family that at times comes from a different age, and almost nothing is said about an “ethical world”. This latter is a big omission in the era of globalization, but perhaps Collier was solely interested in how to improve nation-states.

Thursday, August 8, 2019

Nostalgia for a past that never was; Part 1 review of Paul Collier’s “The future of capitalism”

Paul Collier’s new book “The future of capitalism” is a very hard book to review. It is short (215 pages) but it covers an enormous area, from social and economic interpretation of the past seventy years in the West, to pleas for “ethical” companies, “ethical” families and even an “ethical” world, to a set of proposals for reform in advanced economies.

The most uncharitable assessment would be to say that, at times, the book comes close (I emphasize “close”)  to nationalism, “social eugenics”, “family values” of the moral majority kind, and conservatism in the literal sense of the word because it posits an idealized past and exhorts us to return there. But one could also say that its diagnosis of the current ills is accurate and remarkably clear-sighted. Its recommendations are often compelling, sophisticated and yet common-sensical.    

I have therefore decided to divide my review in two parts. In this part I will explain the points, mostly methodological and historical, on which I disagree with Collier. In the second part, I will discuss the diagnoses and recommendations on which I mostly  agree.

Pragmatism. Collier positions himself as a “pragmatist” battling both (1) ideologues: Utilitarians, Rawlsian (who are accused, somewhat strangely, of having introduced identity politics) and Marxists; and (2) populists who have no ideology at all but simply play on people’s emotions. All three kinds of ideologies are wrong because they follow their script which is inadequate for current problems while populists do not even care to make things better but only to rule and have a good time. It is only a pragmatic approach that, according to Collier, makes sense.

Pragmatism however is an ideology like any other. It is wrong to believe oneself exempt from ideological traps if one claims to be  a “pragmatist”. Pragmatism collects whatever are the ruling ideologies today and rearranges them: it provides an interpretative framework like any other ideology. Pragmatists are, as Keynes said in a similar context “practical men who believe themselves to be quite exempt from any intellectual influence, [but] are usually the slaves of some defunct economist [or ideologue; my addition].”

Adam Smith. The second building block of Collier's book is based on his interpretation of Adam Smith. The interpretation he advances has become more popular recently and tries to “soften” the hard edge of the Adam Smith of the “Wealth of Nations” (self-interest, profit, and power) by a more congenial  Smith from “The Theory of Moral Sentiments”. This is an old debate that goes back almost 200 years  (“Die Adam Smith Frage”).

There are, I think, if not two Smiths, then one Smith for two sets of circumstances: in TMS, it is the Smith for our behavior with family, friends and community; in the WoN, it is the Smith of economic life, our behavior as “economic agents”. I discuss this in “Capitalism, Alone”. David Wootton in "Power, Pleasure and Profit" very persuasively makes the same point. And  even Collier says exactly the same thing on page 174, towards the end of his book, but in the early parts he argues that the Adam Smith of TMS applies to economics as well.

Now, for an economist only the Smith from the WoN matters. Economists do not claim (or should not claim) to have particularly valuable insights regarding how people behave outside of economics. So it is fully consistent for economists to use a model of Smith’s homo economicus who is pursuing monetary gains only, or more broadly, his own utility only. That of course does not exclude, as Collier and some other writers (e.g., Peter Turchin) seem to believe, cooperation with others. It is obvious that many of our monetary objectives are better achieved through cooperation: I am better off cooperating with people at my university than setting my own university. But whether I do one or the other, I am pursuing my own selfish interest. I am not doing things for altruistic reasons—which perhaps I might do in my interactions with family or friends.

My point in “Capitalism, Alone” is that under hyper-commercialized globalization Smith’s economic sphere is rapidly expanding and “eating up” the sphere where the Smith of TMS applies. Commodification “invades” family relations and our leisure time. Both Collier and I agree on that. But while I think that this is an inherent feature of hyper-commercialized globalization, Collier believes that the clock can be turned back to an “ethical world” which existed in the past while somehow keeping globalization as it is now. This is an illusion and  leads me to Collier’s nostalgia.

Social-democracy. In Collier’s view of the Golden Age (1945-75), social-democracy that brought it about did this for ethical reasons. In several places he repeats more of less this breathtaking sentence “[Roosevelt] was elected because people recognized the New Deal was ethical” (p. 47). He argues that the origin of social-democracy lies in a (nice) co-operative movement, not that the reforms in capitalism after WW1 and WW2 were the product of a century of often violent struggle of social democratic parties to improve workers’ conditions. It is not because ethical leaders decided suddenly to make capitalism “nicer” but because the two world wars, the Bolshevik revolution, the growth of social-democratic and communist parties, and their links with powerful trade unions, exacted the change of course from bourgeoisie under the looming threat of social disorder and expropriation. So it is not through the benevolence of the right that capitalism was transformed, but because the upper classes, chastised by past experience, decided to follow their own enlightened self-interest: give up some in order to preserve more. (For similar interpretations, see Samuel Moyn, Avner Offer,)

This difference  in the interpretations of history is important because Collier’s view applied to today basically calls for ethical rulers—to somehow appear. This is why at the end of the book he discusses how leaders of political parties should be elected (not by party members or primaries, but by the elected representatives of their parties).  My interpretation implies that unless there are strong social forces that would push back financial sector excesses, tax evasion, and high inequality nothing will be changed. What matters is not ethics or ethical leaders but group/class interests and relative power.

The facts. And finally the Arcadia of the trente glorieuses when Collier holds that moral giants strode the Earth, companies cared about workers, families were “full” and “ethical”, never really existed, at least not in the way it is described in the book. Yes, like many others I have pointed out that the trente glorieuses were very good years for the West both in terms of growth and surely in terms of narrowing of wealth and income inequalities. But they were no Arcadia and in many respects they were much worse than the present.

The period of Collier’s “ethical family” in which “the husband was the head” (p. 103) when every member (allegedly) cared for each other, and several generations lived together,  was a hierarchical patriarchy that even legally forbid any other types of family-formation. (I remember that in my high school in Belgium, only fathers were allowed to sign off on pupils’ grades or school absences. Not mothers.)

In the USA, the Golden Age was the age of social mimicry and conservatism, widespread racial discrimination, and gender inequality. When it comes to politics, it is often forgotten that during the Golden Age, France was basically twice on the edge of a civil war: during the Algerian war and in 1968. Spain, Portugal, and Greece were ruled by quasi-fascist regimes. Terrorism of RAF and Brigate Rosse came in the 1970s. Finally, if these years were so good and “ethical” why did we have the universal 1968 rebellion, from Paris to Detroit?

That imagined world never was, and we are utterly unlikely to return to it; not only because it never was but because the current world is entirely different. Collier overlooks that the world of his youth to which he wants people to return was the world of enormous income differences between the rich world and the Third World. It is for that reason that the English working class could (as he writes) feel very proud and superior to the people in the rest of the world. They cannot feel so proud and superior now because other nations are catching up. Implicitly, regaining self-respect for the English working class requires a return to such worldwide stratification of incomes.

The book is thus built on the quicksand of a world that did not exist, will not exist, and on a methodology that I find wanting. 2020s will not be the imagined 1945, however loudly we clamor for it. But this does not mean that the analyses of current problems and the recommendations are wrong. Many of them are very good. So I will turn to them next.