Sunday, November 27, 2016

A secular religion that lasted one century

Death of Fidel Castro made me think again of the idea that I had for a while about our lack of understanding of what is the place of communism in global history of mankind.  We have thousands of historical volumes on communism, and similarly thousands of volumes of apologia and critiques of Communism, but we have no conception of what its position in global history was—e.g. whether colonialism would have ended without communism, whether communism kept capitalism less unequal, whether it promoted social mobility, or made transition from agrarian to industrial societies in Asia much faster etc.  As Diego Castaneda mentioned in today’s tweet, we probably will not be able to assess communism for a while, probably until the passions that it arose have died down.

Death of Fidel Castro is a useful marker because he was the last canonic communist revolutionary: the leader of a revolution that overthrew the previous order of things, nationalized property, and ruled through a single party-state. We can pretty confidently state that no communist revolutionary  in that canonic mould that was so common in the 20th century, from Lenin, Trotsky, Stalin, Mao, Liu Shaoqi, Tito and Fidel will arise in this century. The ideas of nationalized property and central planning are dead. In a very symmetrical way, the arrival of Utopia to power that began in glacial Petrograd in November 1917 ended with the death of its last actual, physical, proponent, in a far-away Caribbean nation, in November 2016.

Let me go over some grossly simplified ideas that, perhaps one day, I will expound more fully in a book format.

What was communism? It was the first global secular religion. Its appeal was truly global, both geographically and class-wise: it drew to itself sons of daughters of the rich as well as of the poor, it appealed to the Chinese and Indians no less than to the French or Russians. Like Christianity and Islam, it asked from its followers self-sacrifice and self-abnegation. Like Christianity (as was of course noticed) it had its prophet, dead in semi-obscurity, whose subversive works were propagated by foreigners using the communication means provided by the hegemon whom they tried to undermine and destroy. Unlike capitalism, it was heavily ideological. While the ideology of capitalism is pretty light (and often malleable and pragmatic), the ideology of communism was inflexible. The system took its ideology seriously, no less seriously than (again) Christianity and Islam. But taking it so seriously led to the many splinter movements, doctrinal disputes,  conflicts and killings—again similarly to the transcendental religions.

Although communism was ideologically an economics-based movement whose objective was creation of a classless society of abundance, its features are particularly difficult to understand within the narrow economistic confines. For it combined extreme concentration  of political power with large economic equality:  modern economists like Acemoglu and Robinson cannot  understand that nor fit it in their scheme. Most people today cannot either since they believe that the objective of all political power must be economic.

Communism  promoted  and achieved social mobility but that mobility often came with a cost: workers escaped from low-paying and hard-working occupations in order to become much better paid bureaucrats bossing around those workers who failed to “escape”. It thus created something akin to a class society although it promised to abolish classes. In its most degenerate form, it created monarchies, like in North Korea and to some extent in China (with princelings).

Why did it fail? In the most general terms, it failed because it opposed two strong human impulses: to be free (in expressing opinions and doing what one likes) and to own property. Both were the desires created or ratified by the Enlightenment. In the pre-modern past, majority of people took political oppression and absence of own property as given. But communism was not a movement arising in the Middle Ages, but in the modern era, a true inheritor of the Enlightenment.

Because it was a secular religion, it promised to deliver the goods on this Earth, which is a fact susceptible of empirical observation. The goods were freedom of labor from the oppression by those who possess property (which it delivered only in part) and economic abundance (which it did not deliver).  It increasingly failed to provide economic advancement largely because the nature of technological progress changed: from large centralized network industries to much more decentralized innovations.  Communism could not innovate in practically anything that required for success acquiescence of consumers.  It thus provided tanks but no ball-point pens, spacecraft but no toilet paper.

Will it come back? We cannot tell it for sure, but today the chances of a comeback of non-private property and centralized coordination of economic activity seem nil. Capitalism, defined as private property of capital, wage labor and decentralized coordination, is for the first time in human history  the only economic system that exists across the globe.  It could be monopoly capitalism, state capitalism or competitive capitalism, but the principles of private ownerships are as accepted in China as in the United States.

However some ideas of communism, including the religious ones, will always appeal to groups of people: its egalitarianism, internationalism and expectation of self-sacrifice are as intrinsically human as are the impulses it tried to suppress (quest for freedom and property). It will thus permanently find partisans among those who find the greed and acquisitive spirit that inevitably undergird  capitalism too distasteful.  But seen from today’s perspective, such groups appear condemned to forever remain on the margins of societies, creating their own communities or penning little-read treatises.  Exactly where they were in the latter part of the 19th century.

Thursday, November 17, 2016

Labor theory of value: a primer

This is a different post from my normal posts. It is a primer and I must ask indulgence from many readers for whom this is all too well-known and obvious.  Why do I write it then? Because recently I was several times surprised by the casualness with which people talk of “labor theory of value” apparently implying thereby that it is some weird concoction where the price of a good should simply be proportional to the number of hours one has put in producing it. I have heard it from non-economists and it has not truly surprised me; but I have heard it from economists too and thought it was odd. So I decided to write this 1200-word primer.

According to Marx, in a non-capitalist market economy products are exchanged at the rate that corresponds to the “socially necessary labor” embodied in them, or differently put, labor necessity for their production. Start with a simplified situation where there is not capital.  Then, if, on average, product A requites 8 hours of labor and product B,  4 hours, the exchange rate will be 2B for 1A. Note that as products are exchanged at average (“socially necessary”) labor inputs, an inefficient producer that spends 10 hours of work to produce A will not be paid for 10 hours, but for 8. The reverse holds for a very efficient producer. So, producers are not just paid for their labor input regardless of how efficiently they work or organize production.

The introduction of capital, owned by the producers, brings us to Marx’s “petty commodity production”. Its key characteristic is that independent producers compete with each other but that each uses only his own labor (that is, there is no hired labor) and owns the means of production. It is very similar to the early American colonists. Capital, according to Marx (and also to Quesnay, Smith and Ricardo) simply contributes to the value through its depreciation, while only labor creates new value added. The equilibrium price is equal to w+d+s where w=wage, d=depreciation, and s=surplus value or profit. This is where labor theory of value and neoclassical theory of value part ways since according to the latter s is the marginal product of capital while for Marx it is simply part of labor contribution that is in excess of wage. It is the famous “surplus value”  produced by labor. It arises, Marx argued, from the unique feature possessed by labor, namely that its contribution to value is greater than the value embodied in goods that are necessary to compensate laborers fully for the expense of energy used in production of the goods. (Put very simply: you work 10 hours to produce goods worth $10, but you need bread, wine, meat and olive oil worth only $5 to be brought back to the same state of satisfaction that you were in before you started to work.) Of course, here in petty commodity production, where each producer owns his means of production, the distinction is immaterial because s belongs to him anyway. There is thus no exploitation which will appear only when hired labor is used, is paid w, and s remains in the hands of the capitalists.

Which indeed brings us to capitalism. Marx has noticed that the price structure of “petty commodity production” cannot be maintained in capitalism since different branches of production would earn different rates of return on their capital, and the feature of capitalism (as every neoclassical economist knows) is a tendency for profit rates to converge across lines of production so that the production of every type of good is, in equilibrium, equally profitable (obviously adjusted for risk).  However, with the pricing structure given in the previous paragraph, labor-intensive branches would produce lots of surplus value (since there are lots of people working there) and as the surplus value becomes capitalists’ profit, the ratio between s and total capital will be high. The opposite will hold in capital-intensive branches of production.

So, the equilibrium prices in capitalism must be different. These are, according to Marx, the “prices of production” that have the following structure: w+d+rK where r=economy-wide average rate of profit. Thus in equilibrium every branch of production earns the same rate of return on capital (K) employed there and of course each unit of labor is paid the same. Prices of production are exactly the same as the long-run Marshallian or Walrasian equilibrium price.

The conversion from the value-based prices under “petty commodity production” to the prices of production under capitalism has led to the famous “transformation problem” that has kept generations of Marxist economists busy. This was the problem quickly noted by Marx’s critics at the publication of the third volume of “Das Kapital”, starting with Achille Loria (whom few would have remembered today had he not been given the pride of place and opprobrium by  Engels in his Introduction to the Third volume) to Bohm Bawerk. Marx was criticized for inconsistency and for inability to show that prices are determined by value (=labor) under capitalism. The literature on the transformation problem is immense, but interested reader may consult the definition of the original problem by Bortkiewicz, and then classical solutions by Sraffa, Morishima etc.

Now, if Marx, Walras and Marshall agree on the equilibrium price in capitalism, where is the labor theory of value? For Marx, it emerges only at the aggregate level where Marx posits that the sum of values will be equal to the sum of production prices. The former is an unobservable quantity so Marx’s contention is not falsifiable. It is therefore an extra-scientific statement that we have to take on faith.

But there are, I think, three  important points to take away from this brief review of Marxian labor theory of value.

First, that Marx’s capitalist equilibrium prices are the same as Walrasian or Marshall’s long-run prices.

Second, that we are clearly very, very far from derisive statements that labor theory of value means that people are just paid for their labor input regardless of what is the “socially necessary labor” required to produce a good.

Third, and in my opinion the true contribution of Marx in this area, is to have insisted that the equilibrium price cannot be independent of the relations of production, that is, of who owns capital and in some cases (slavery) labor too. Two identical economies, but one composed of small-scale producers who own the means of production, and another capitalist, will have different relative prices. This, I think, is an important point for our understanding of pre-modern societies.

It is also important when we study the interaction of capitalist and pre-capitalist modes of production (as for example, during colonization) because the difference in equilibrium prices under different ownership structures means that even if the endowments of two societies (capitalist and pre-capitalist) are the same, relative prices will be different. Thus when India and England begin to trade (even had their endowments been the same), some Indian goods would have been cheaper, and others more expensive, than English. This, in turn, means that when we deal with societies whose ownership structures are different, opportunities for trade do not depend solely on the differences in endowments but also on the differences in the mode of production. This last point is nowadays often forgotten.

Tuesday, November 8, 2016

The Ancient World and our world: review of Mary Beard’s “Confronting the classics”

I enjoyed tremendously Mary Beard’s “Confronting the classics”. Beard is the most engaging writer, her style is fresh and open, and she treats the ancient and the modern world as a continuum which to today’s reader makes the ancient world closer and more easily understandable. It is a book, I believe, directed both to dilettante  amateurs of ancient history and to the professionals in the field. The reason for the latter is that the book is a collection of some thirty Beard’s reviews of books on the ancient world written by her peers. Thus, I guess, the original reviews were very likely to have been written for and read by the top professionals in the field.

Beard covers what I would call  the “high-school antiquity”, that is the antiquity that most of us have studied in the high school, which includes the Peloponnesian Wars, Alexander the Great, The Roman republic and the Punic Wars, and the peak of the Roman Empire. She brings, at least for me, a very fresh look at a number of people and issues (I will mention some below), but I feel a bit of a regret  that she has not engaged, at least not in this book, with less well-known and more difficult periods, especially with the crisis of the 3rd and 4th centuries and the rise of Christianity.

I would like to focus this review on three issues: methodology, role of the individual in history, and a bit of economics (as you would expect).

An overwhelming impression that one retains from Beard’s book is how fragmentary our knowledge of the ancient world is, and how despite a seeming abundance of material evidence (objects of art and daily life, writings, skeletons etc.) many questions  will probably never be answered.  This fundamental lack of knowledge allows Beard to question our received wisdom: was Hadrian really so much better than Nero?, was Alexander a military genius or an arrogant, drunken youth endowed with incredibly good luck (which might have run out had he not died young)?, and the perennial question of whether Caeser’s assassination was a tyrannicide.  

This lack of knowledge leads ancient historians to employ the methodology that Beard beautifully deconstructs in the most devastatingly negative review of any book in this volume, Anthony Birley’s “Hadrian: The restless emperor”. The methodology used by Burley and many others is “a combination of scholarship, conjecture and fiction”. Scholarship is based on a rather narrow interpretation of the evidence. But since that evidence, even for Hadrian, is scant (writings on his reign date for at least a century after it ended), the authors have to resort to conjuncture. The tell-tale terms are “seems”, “he must”, “it might be” “it was done in such-and-such way, no doubt”, “they would have been”, “presumably”, “the odds are” etc. Beard provides a number of such examples, and putting them together amount to a devastating indictment of the approach. And soon, after conjecture, fiction takes over. Why is this bad? Because, Beard writes, “the issue is that this veneer of scrupulous scholarship (“I shall claim nothing as fact that I cannot authenticate”) turns out to act a brilliant alibi for outright fiction”. (p. 173).

This made me think of the same approach used in economics. Since it has become impossible to claim causality between two phenomena unless extremely stringent criteria are satisfied, economists have taken to masking this fact by a legalistic use of language, very similar to what ancient historians do when they “conjecture” (that is, make up) things. The historians do not write that they have a proof that Hadrian walked along the Hadrian wall; they write that “he no doubt was expected to make on-the-foot review”. Of course, the objective is to tell the reader that indeed he did do such a review, but to cover oneself academically through the use of the conditional. Economists are given a Faustian choice of either not publishing anything since they fail to have a proof of causality, or publishing articles that go out of the way to claim that they discuss only “associations” while in reality they convey to their readers the impression that it is really of causality they are speaking. For if the writer really believed that he has uncovered only a mere association, what would be the use of such a finding? Thus both sciences resort to a massive cover-ups.

After I became so thoroughly convinced by validity of Beard’s critique, I started  paying  closer attention to the weasel words that she so aptly identified.  And, lo and behold, most of them were there when she too discusses events for which conjecture is the best we can come up with! I did not go back to the earlier reviews to look for such words, but in only two reviews following her demolition of Hadrian’s biographer, there are terms such as “almost certainly”, “most likely”, “we can only wonder” etc. So, it seems that even when we do know what should be done, we are, given the state of our knowledge, unable to follow our own rules---for otherwise we shall publish nothing at all.

Thus conjecture and perhaps fiction is best we can do in discussing Hadrian or Nero (or anybody else in the ancient world). It is here that Beard introduces some really interesting points. Alter showing the similarities between Nero and Hadrian (their peripatetic  careers,  admiration--kowtowing as some Romans would no doubt see it--- for Greek language and culture, unconventional behavior, love of luxury) she asks whether their rules were really so much different as we conventionally believe. Could not the ideas about the qualities of their rules have been largely conveyed  by the elite opinion that prevailed after their deaths? Since Nero was assassinated, the assassins had to claim that his rule was disastrous; Hadrian died in his bed, was succeeded by Antonius Pius, hand-picked by Hadrian, was deified and remained forever enshrined as a “good emperor”. But for the majority of the population (who did not seem to mind, or might have rather enjoyed, Nero’s extravagances), was there any difference?

The problem with ancient history is that paucity of evidence does not allow us (except in some obvious cases like the Gracchi or Caesar) to even so much as glimpse the social forces that were opposing or supporting various emperors. We thus end up in the unfortunate position of judging emperors solely by their, largely attributed, personal character. We have “good” emperors, and we have “bad” emperors. This is obviously a very simplistic view of studying history. However, this simplistic view has in popular culture gone further than explaining only the ancient history and today it informs most of our thinking about the contemporary world.  Demonization of individuals without any account being taken of the context within which they operate (all evils of Iraq are due to Saddam—we know now how accurate that view was, or of Syria to Assad, or of Russia to Putin, or of Iran to Ahmadi-Nejad (remember him?)) is made of the exactly the same materiel as Robert  Graves’ ubication of all the world’s deviousness in Livia (and Beard is scathing about Graves and even more so of the BBC adaptation). For  Rome perhaps we cannot do better since we know so little about the social conditions under Hadrian or Nero, but for the present world we surely can.  

Finally, let me come to economics which play a very small role in Beard’s reviews (and presumably in the books she reviews). I found most interesting her discussion of slavery in relation to Henrik Mouritsen, and Keith Bradley and Paul Cartledgge (eds.) books on the topic. There are two huge issues there. First, Rome is among all known societies with extensive slavery the only  one where manumission was practiced on an extensive scale. Beard believes that ¾ of the population were freedmen (liberati) or descendants of freedmen. We do not understand what led owners to such massive granting of liberty. Was it because holding people as slaves was uneconomical (in the old age), or because many developed personal relations with domestic slaves (sex and marriage)? But the former cannot explain the scale of manumissions of younger slaves, the latter cannot be something specific to Rome (nor can explain manumission of non-domestic slaves). So, according to Beard, we have no answer. It is surely something that economists should try to understand better, because in our explanation of why Rome never developed labor-saving machinery, the cheap labor of slaves plays a very important role. But the scale of manumissions bellies that interpretation.

Second, what was the social structure of a society where ¾ of the population were freed slaves or children of freed slaves? Here, I think a modern comparison with the role of immigration in the United States may be useful. While being an immigrant does carry a stigma in today’s US, that stigma is minimal (compared to Europe) because almost every American born person has a parent or a grand-parent who was an immigrant. Then stigmatizing others for something very close to what oneself is, is indeed difficult and makes the societal acceptance of an otherwise “negative condition” easier. In addition, as much as freedmen were proud of having done well after being freed (as we can see from the inscriptions on their funeral monuments), so the number of migrants who have done well further reduces the generality of the stigma.

The fact that I could write yet another review, perhaps of equal size, of Mary Beard book show sufficiently how much both fun and useful it is. Now, I cannot wait to read her “SPQR: A history of ancient Rome”.

Sunday, November 6, 2016

The long shadow of 1989

As I was reading a new EBRD report on the life in transition, my attention was drawn to two remarkable facts, one positive, another negative, that came out of a detailed survey-based analysis. On the negative side, the generation born around the early 1990s, which has now reached its maturity, has on average a height of about 1 cm less than the previous generation. The explanation is not only, the report argues, in suddenly plummeting incomes (Russian incomes decreased more than the US income during the Great Depression), but in additional factors, like parental stress, alcoholism and drug abuse, and all kinds of pathologies that made people unable to take care of their families.

The good news is that the happiness gap between Eastern and Western Europe has closed. East Europeans are no longer systematically unhappier (in terms of self-reported happiness) than their Western counterparts.  What greater unhappiness there exists in the East is due to the differences in income; moreover, in an ironic twist, the gap was also in part closed because of the unhappiness hysteresis in the West, where the effects of the Great Recession led the population to a lower happiness path.

Both the height loss and the happiness stories illustrate well the importance to people’s lives of traumatic events like the economic collapse during the transition or the Great Recession. Sometimes, it seems that the real trauma of such events is felt more acutely once they are past.

And in a fitting reminder of these events, I read Simon Kuper’s today’s piece in the Financial Times on the diverse fortunes of Merkel, Putin, Kaczynski and Orban who were all, in different places and positions in 1989, and whose 1989  experience very much influences their today’s beliefs and policies. Their varying personal stories are well known and need no retelling here, and whoever is interested in them, may read Kuper ’s article.  

What I found interesting in Kuper’s article are two points which were very seldom found in Western press at the time of the 1889-90 revolutions and even less frequently afterwards. The first is recognition that the 1989 revolutions were essentially nationalist revolutions, or revolutions of national self-determination. Kuper is acknowledging this in reference to Viktor Orban and Jaroslaw Kaczynski, but the same point can be made with respect to all then activists and later post-communist leaders. Even Yeltsin’s revolution was a peculiar nationalist revolution where the core nation decided it wanted to get out of a federation. A quarter century before Brexit, Yeltsin did the same thing: he was a nationalist “Russexiter”.

For the other leaders, from the Baltics to the Balkans, nationalism as the main ideology was self-evident. In no small measure, they despised internationalism because it was part of communist ideology.  Thus, the return to nationalism in the East, which coincides with the nationalistic turn taken by Western Europe too, came very naturally to the leaders issued from the 1989 revolutions. It is also coming easily to the second-generation leaders who are indeed the products of heavily nationalist and at times clerical education in their countries.

It is useful in that context to mention that West’s (and especially American) support to anti-communists during the Cold War was primarily directed toward nationalist activists who seemed, due to the power of the siren song of nationalism, particularly able to organize an effective opposition to the communist rule. There were two groups of activists who were supported: those whose objective was national liberation from Soviet domination, and those whose objective was national emancipation that required the break-up of the countries where they lived. The second of these obviously had much more dramatic consequences because it involved wars, both in Yugoslavia and in much of the territory of the Soviet Union. A return of nationalism of the Orbans and Kaczynskis today is just another instance of a “blowback”, not dissimilar from that of the Taliban in Afghanistan.

The second interesting point by Simon Kuper is the recognition, through the lives of the four politicians, of diversity of experiences triggered by the transition. This was hardly recognized as the triumphalism of the 1989-90 made it appear that it was all one great festival of freedom and good humor. But it was not—and especially it was not for multiethnic societies which were divided according to ethnic or religious principles. Sizeable minorities, who either were of mixed backgrounds or had identities associated with the country that was now divvied up, were left totally unmoored. (To complete the irony, the break-up according to nationalist principles in the East took place while the West celebrated the dawn of a new age of multiculturalism.)  

I know of many people, myself included, who for several decades had one national identity, and then within months had to start believing they had another one. Anyone who thinks it is a simple process and that people can, at the drop of a hat, start believing the opposite of what they believed for several decades is deluding himself. Anyone who believes that countries are lego-blocks that can be, with ease, put together or broken  apart, is deeply wrong. Just look at the Scottish referendum, Brexit and Catalan strive for independence.

The India-Pakistan Partition in 1947 was and remains a defining moment in the lives of many Indian and Pakistani families, regardless of the fact that it is now almost 70 years old. The break-up of countries (or unification, in the case of Germany) likewise remains a defining moments for many people who had lived through the 1990s in Eastern Europe. Despite my pro-federalist and pro-Yugoslav feelings at the time, I am glad—today—that Yugoslavia no longer exists because I became convinced that managing it would have been impossible. Of all the books on the break-up of Yugoslavia, the most influential for me, was AJP Taylor’s “The Habsburg Monarchy”. It shows the failure of all constitutional arrangements between 1809 and 1914 that tried to solve the famous “nationality problem” in the Empire. Each arrangement solved one problem at the cost of opening another one. Taylor ends the book by pointing out that success or failure of Tito’s Yugoslavia will answer that perennial question of whether it is possible to have a multiethnic federation in Eastern Europe. We know the answer today.   

But the opinion about the inevitability of the break-up that we may hold today, cannot make us forget not only how traumatic and bloody the process was, but also how many of the newly-created countries, from Ukraine to Bosnia, remain utterly fragile and, it seems, permanently suspended over the precipice of yet another war. And how the past extends its long shadow over the present.