Monday, September 24, 2018

Hayekian communism

You think it is a contradiction in terms, a paradox. But you are wrong: we are used to think in pure categories while life is much more complex; and paradoxes do exist in real life. China is indeed a country of Hayekian communism.

Nowhere is, I think, wealth and material success more openly celebrated than in China. Perhaps it was stimulated by the 40th anniversary of the opening up which is this year, but more fundamentally, I think, it is stimulated by the most successful economic development in history.  Rich entrepreneurs are celebrated in newspapers, television, conferences. Their wealth and rags-to-riches stories are held as examples for all. Ayn Rand would feel at home in this environment. So would Hayek: an incredible amount of energy and discovery was unleashed by the changes that transformed lives of 1.4 billion people, twice as many as the combined populations of the “old” EU-15 and the United States. People discovered economic information that was inaccessible or unknown before, organized in a Schumpeterian fashion new combinations of capital and labor, and created wealth on an almost unimaginable scale (certainly, unimaginable for anyone who looked at China in 1978). 

At a large banquet in Beijing, we were presented first-hand stories of five Chinese capitalists who started from zero (zilch! nada! ) in the 1980s, and became dollar billionaires today. One spent years in countryside during the Cultural Revolution, another was put in prison for seven years for “speculation”, the third made his “apprentissage” of capitalism, as he candidly said, by cheating people in East Asia (“afterwards I learned that if I really wanted to become rich, I should not cheat; cheating is for losers”). Hayek would have listened to these stories, probably transfixed.  And what news would he have loved better than to read in today’s Financial Times that the Marxist society at the Peking University was disbanded because of its support of striking workers in the Special Economic Zone of Shenzhen.

But there is one thing where Hayek went wrong. These incredible personal (and societal) successes were achieved under the rule of a single party, Communist Party of China. Celebration of wealth comes naturally to Marxists. Development, widespread education, gender equality, urbanization, and indeed faster growth than under capitalism, were the rationale, and sources of legitimacy, of communist revolutions as they took place in the less developed world. Lenin said so; Trotsky confirmed it when he canvassed for large-scale industrialization; Stalin implemented it: “We are fifty or a hundred years behind the advanced countries. We must make good this difference in ten years. Either we do it, or we shall be crushed”.

I remember, as a precocious high-school student in Yugoslavia, how I scanned the newspapers for the indicators of industrial growth. Since Yugoslavia was then among the fastest growing economies in the world, I was deeply disappointed when the monthly growth rate (annualized) would fall below ten percent. I thought ten percent was the normal growth rate of communist economies: why would you care to become communist if you would not grow faster than under capitalism?

So the celebration of growth—new roads, new super fast trains, new housing complexes, new well-lit avenues and orderly schools—comes naturally to communists. Not any less than to Hayekian entrepreneurs. (As an exercise in this, read Neruda’s beautiful memoirs Confeso Que He Vivido where he exudes enormous pleasure at seeing Soviet-built dams.) The difference though is that the Hayekinans celebrate private success which also helps society move forward; in communism, success too was supposed to be socialized.

But this did not happen. Collectivist efforts worked for a decade or two but eventually growth fizzled out and the efforts flagged. Cynicism reigned supreme. It was left to China and to Deng Xiaoping to stumble (in the immortal phrase of Adam Ferguson) on a combination where the rule of the communist party would be maintained but full freedom of action, and social encomium, would be given to individual capitalists. They would work, become rich, enrich many others in the process, but the reins of political power would firmly remain in the hands of the communist party. Capitalists will provide the engine and the fuel, but the party will hold the steering wheel.

Would things be even better if the political power too was in the hands of capitalists? This is doubtful. They might have used it to recreate the Nanjing government of the 1930s, venal, weak and incompetent. They would not work hard but would use political power to maintain their economic privileges. It is one of the key problems of US capitalism today that the rich increasingly control the political process and thus skew economic incentives away from production and competition into creation and preservation of monopolies. Much worse would likely have happened in China. It is precisely because the political sphere was largely insulated from the economic sphere that capitalists could be safely kept busy with production, and at arm’s length (as far as possible because the party is exposed to growing corruption) from the politics.

How did China stumble on this combination? There may be many reasons including millennial tradition of being run by imperial bureaucracies, the historical alliance --even if it got unraveled—between the Communist patty and Sun Yat-sen’s KMT (an alliance the like of which never existed elsewhere in the communist world)—but one cannot but ask oneself, could it have happened elsewhere too? Perhaps. Lenin’s New Economic Policy was not much different from Chinese policies of the 1980s. But Lenin saw NEP as a temporary concession to capitalists—because he believed that socialism was more progressive and thus “scientifically” generated higher growth. Perhaps it is only the failures of the Great Leap Forward and the chaos of the Cultural Revolution that chastened Chinese leadership and convinced Deng and others that private initiative was more “progressive” than social planning and state-owned enterprises. Lenin could not have seen that. It was too early.

I also wondered what Stalin would have made of China. He probably would have been glad that his name is still enshrined in the official pantheon. (In a large bookstore in downtown Beijing, the first row of books are translations of Marxist classics: Marx himself, Engels, Lenin..and Stalin. Very few people look at them. The next rows that display books on wealth management, finance economics, stock market investments etc. are much more popular.) Stalin would have been impressed by Chinese growth; by the extensive power of the state and the country (for sure, no longer a country to which he could send his advisors to help it technologically), by the party’s ability to control in a very sophisticated and unobtrusive manner the population.

Stalin would have loved economic success and the military power that comes with it, but would have probably been shocked by private wealth. It is hard seeing him coexist with Jack Ma. Hayek’s reaction would have been the opposite: he would have been delighted that his claims about the spontaneous market order have been vindicated in a most emphatic fashion, but would have failed to understand that this was possible only under the rule of a communist party.

No one would have been left indifferent by the most successful economic story ever. And no one would have fully understood it.

Sunday, September 23, 2018

1½ Adam Smiths

The recent book by Jesse Norman simply entitled “Adam Smith” is a pleasure to read. There are of course innumerable books on the founder of the  political economy, so why another one? Norman’s book is directed toward that, at times elusive, general educated reader, and has, in my opinion, three objectives: (i) to situate Adam Smith in his time, both intellectually and politically, (ii) to argue that there is a remarkable consistency between the Adam Smith of the Theory of Moral Sentiments, Lectures on Jurisprudence and the Wealth of Nations, and (iii) to show that most of neoclassical and laissez-faire appropriations of Adam Smith are at best one-sided, and in many cases downright wrong.

Point (i) is nicely discussed in the first part of the book (“Life”). We follow Smith, his education, early jobs and successes, friendships, intellectual influences, and his later fame all the way to his death. I think that placing Adam Smith in the tumultuous history of 18th century Scotland and England was a right decision. Political conflicts and  wars between the Jacobites and the Crown,  religious strife, the Union of 1707, US war of independence as well as the remarkable economic progress of Scotland that Smith witnessed first hand, must have all contributed to, or even formed, his view of the world. I wish Norman would have spent a bit more time in explaining for the readers not sufficiently familiar with Scottish and English history of the period what were the differences and interests of the various factions. I was unable to fully follow them and consequently to more exactly gauge Smith’s political position.

Smith as a person remains rather vague. Of course, his erudition and even temper are agreed by all who knew him. But Smith the man is still obscure. Most of contemporaries’  laudations cited by Norman (and other writers on Smith;  many of these praises are used and reused) are a bit too generic for the reader to feel what really were Smith’s virtues. The standard British approach at the time seems also to have been partial to flowery expressions of admiration which were often pro forma.

Smith does not seem to have helped too many people whom he knew—other than in his job as a paid tutor; his generosity is undefined—even if he did not die a rich man (and clearly must have given away some of the not inconsiderable wealth he earned). Moreover, the fact that on two occasions he failed to stand up for David Hume, his close friend and an early inspiration, is not exactly awe-inspiring. Norman mentions Smith’s uncharitable treatment of James Steuart in the WoN, and I would add not very generous treatment of Quesnay. (Surely in his economics Smith went far beyond the Physiocrats and could rightly be critical of them but he might have been somewhat less stinting in his praise of Quesnay—perhaps too because of personal relations that he entertained with him and from which he probably benefitted intellectually). Smith was, as Marx noted, rather economical in his citation of the predecessors or sources for his views.

Norman  is convincing in his task (iii). The cardboard Smith which is made the originator of the general equilibrium is really not the Smith of flesh and blood. I think that Smith’s own reaction to Walras and  Arrow-Debreu would have been that it is a nice result—which can be safely tucked in an annex and mostly forgotten.

I thus sometimes wonder if people who claim Smith as their inspiration have ever bothered to read him—beyond a few  quotes and select excerpts. And whether they realize that some of his most celebrated statements and metaphors (e.g. the invisible hand, capital’s preference for domestic market, coordination advantage of smaller groups, relative poverty [“whatever the custom of the country renders it indecent for creditable be without”]) are not central concepts around which his writing is organized but are merely mentioned in passing and when dealing with specific topics. Perhaps nothing illustrates better Smith’s empirical bent and inductive approach.

The belief that Adam Smith was an unqualified supporter of the free market, anti-labor and pro-capitalist, or was always in favor of small government is just so much at odds with his writings that one is bewildered as to how such a caricature ever took hold. Recently, however, not least thanks to Amartya Sen’s writings, the “real” Smith is much better known. Norman is here adding, I hope, the  proverbial last nail into the coffin of neoliberal caricature of Smith.    

Where I see things differently than Norman is in (ii), the so-called Adam Smith Frage. Norman is right to dismiss the extreme version of this argument, namely that there were two Adam Smiths, the young and idealistic one of the Theory, and the old and chastened one of the WoN: “The real Smith was not an intellectual turncoat who switched from altruism in The Theory of Moral Sentiments to egoism in The Wealth of Nations” (p. 324). Norman’s  main argument against that view is chronological. Smith worked on the expanded version of the Theory after completing WoN (and vice versa) while Lectures of Jurisprudence, written in-between the two more famous works, provide an unmistakable bridge. Therefore, Norman argues, empathy, impartial spectator, fatuity of wealth accumulation from the Theory, and self-interest and invisible hand from the WoN are all part of the same worldview and we are wrong to see the WoN as having been built, as George Stigler claimed “on the granite of self-interest”.  Norman works hard to convince us that everything, from empathy to self-love, needs to  be taken jointly.

I think he overplays his hand. I do not think that Smith was inconsistent, an “intellectual turncoat” or that there is a contradiction between the Theory and the WoN. I think simply that, in the two books, he dealt with two different aspects of reality. In one he approached the world as a moral philosopher; in the other, he approached the world as an economist. This is not inconsistent—it just reflects our normal separation of topics, or differently, a multi-faceted world. There was no point in a book on political economy, which is concerned, to quote Marshall,  with “the ordinary business of life”, in talking about religion, vanity of all things material or our sympathy for others. It would  have made the book odd and would not have been  useful. What did, after all,  East India Company have to do with any of these ideas? (I wrote about the almost universal “badness”, “the rule of evil men” that is so pervasive in the WoN here.)   

For our understanding of how an economy works the tools from the Theory are superfluous. Indeed, for the WoN to stand firm and tall, self-interest is enough. */ Smith displayed there I think a praiseworthy economy of assumptions.

I have to stop here for a moment to explain both why I believe that Adam Smith in the WoN used no tools from the Theory, and why it has become de rigueur to argue that we should use a much “broader” Smith than purely the Smith of  economics. The reason for the latter is the appropriation of the “narrow” Smith first by neoclassical economics and then by neoliberals. A way to “fight” against this is thought to reside in showing that Smith had a much more encompassing view of economics, embedded in society, in “reciprocity, cooperation and sympathy”. To show that—it is thought—we must combine the WoN and the Theory and prove there is only one Smith.  

But where I think this approach is wrong is that it meekly surrenders the Smith of the WoN to neoliberals and tries to change the discourse. I think on the contrary that the Smith of the WoN is indeed the Smith of self-interest as the motivating force alone (so I agree with neoliberals there) but that he is not an economist of the laissez-faire. Why? Because in example after example he shows that self-interest of some (large industrialists, monopolists, government officials, protected traders) is deeply pernicious for the society and has to be kept in check. He does not deny that self-interest motivates people in economics but he is not blind (as neoliberals are) to the fact that self-interest can produce at times disastrous results. The solution then is to direct self-interest in a way that it becomes socially productive rather than destructive and one does this by stimulating competition, being tough on tacit “restraint in trade” by large companies, breaking the monopoly of traders and of the East India Company, having the government provide goods and services others will not. All these  “progressive“  measures are justified by societal gain, not by a recourse to sympathy among the economic actors or any other tools from the Theory.

To conclude: the Smith of the WoN is, in my reading, indeed the one who believes that when we talk economics we talk self-interest almost exclusively,  but this does not imply –actually most of the time positively rules out—policies of non-intervention. Smith on this reading is what may be called a “center-left economist”. We do not need to “promote” him to the position of a sage or social philosopher in order to interpret him as “progressive”.

*/ Self-interest does not, of course, exclude cooperation. We cooperate because most of the time we cannot reach our objectives alone. Division of labor, to take Smith’s most famous example, is not based on our sympathy for others but on self-interest that can be best realized while cooperating with others.  Also, while self-interest is enough for economics it is not enough for a much broader “science of man” a project into which Hume and Smith, as Norman explains, were engaged.

Saturday, September 1, 2018

The Americas, armed trade and cheap energy: review of Kenneth Pomeranz's “The Great Divergence”

Yes, I am 18 years late. I have read quite a lot about Pomeranz’s “Great Divergence”, both laudatory and dismissive reviews, papers that continued in his footsteps and others that did not, but I have not read the original book. So I decided to correct the omission at the end of this Summer.

It is a great book. And it is not surprising that it became famous. It presents what was then (year 2000) a largely new view on the causes of the Great Divergence, proves methodically, one by one, insufficiency of all other plausible explanations, and presents a logically taut and cogent case for its own hypothesis.  

That hypothesis is by now so well known that I will just sketch it here in the briefest terms possible. Pomeranz argues that around 1750-1800 Western Europe, China and to a lesser extent India were at the same or similar levels of development in all relevant respects that could have led to the Industrial Revolution (technology, protection of property rights, development of markets, institutions in general, demography and family formation). If anything, China was ahead of Western Europe in being much more of a competitive  Smithian market economy: land was easier to sell than in Europe (p. 73), labor market was well-integrated with greater migration of labor (pp. 84-4, 90), state interfered less with merchants and granted them fewer privileges (p. 170), there were only two state monopolies (p. 196).

There is thus no apparent reason why only Western Europe would develop further while the  others stagnated or declined. The real reason was, Pomeranz argues, in the role played by the Americas that (i) provided the silver with which Europe could satisfy insatiable Chinese demand (as China was undergoing the process of remonetization) and thus provide wherewithal to pay imported Asian luxuries, and (ii) more importantly, grow food and cotton for which Europe had no sufficient land or climate.  Americas thus helped Europe remove the Malthusian trap, or more accurately, helped it avoid the cul-de-sac development into which China and India fell due to the lack of land on which to grow food for their increasing populations. In addition, England was helped by having access to relatively cheap energy (coal)—a fact which interestingly does not receive in the main text of the book the attention that later reviewers gave it.

The origins of the Great Divergence are thus not endogenous to Europe: they cannot be found in some features unique to Europe—be it culture or institutions, or the division of the continent in many warring states or more advanced technology—but are exogenous. Without the Americas, there would not have been (modern) Europe, nor the Industrial Revolution.

The book is not exactly fun to read. The problem does not lie in bad writing or misorganization. In fact, the writing is excellent and very clear. The problem lies in the fact that Pomeranz needed first to dispose of all alterative interpretations for the European take-off, that is to show that none of them can prove Europe’s “difference” from China decisively, and thus to convince us of “surprising similarities” between Western Europe and most of China around 1700-1750. But to do so Pomeranz had to rely on a multitude of very partial and fragmentary observations or bits of data (here, a piece of evidence about the cost of land in a town in China around 1770, there, a guessestimate of Chinese cotton production around 1720 based on information about the “usual” yields in somebody’s diary). None  of that makes for an exciting reading and had we better and more consistent data, both for Western Europe and China, most of this discussion could be safely relegated to annexes. But under that scenario, most of Pomeranz’s book would be in annexes. This makes of course for a very tedious reading livened up, however, from time to time, by some excellent observations or unusual facts.  

It is only when we come (in the third part of the book) to Pomeranz’s own hypothesis that the text picks up pace and becomes more engaging. Pomeranz‘s Introduction that runs to some 20 pages is also commendably lucid. I read it after having read the book (as I normally do, since I think that we can understand general line of an argument much better after having read the nitty-gritty) and for those who are do not agree with me and are interested in the main argument only, the Introduction may suffice.

Let me now mention two points I found interesting…and puzzling: armed trade and sources used. “Armed trade”, that is, trade carried in the shadows of the threat, or actual use, of force or even pure piracy was the European way to prevail in Asian trade (p. 182). State-linked (or coercion-intensive; both terms are Pomeranz’s) European capitalism was not only key for the conquest of the Americas but projected European power across the world, including in Asia. Pomeranz thus argues that whenever European refrained from the use of force, they failed to squeeze out Chinese merchants from Southeast Asia; only when they resorted to armed trade, did they take control. While European merchants worked with the state, or were themselves (like East India Company or the Dutch VOC) quasi states, the Qing China was uninterested in protecting its overseas traders, failing even to react to their massacres in Batavia and Manila (pp. 202-3).

But the question one can ask is, why was the trade war fought on what may be thought to be Chinese home-turf? Were there some reasons that uniquely enabled Europeans to project their power and to trade in Asia, and that prevented the Chinese to do likewise in the Atlantic or the Mediterranean? Was the willingness to use force the only reason? Thus while I find plausible or even convincing that the Dutch, Portuguese, Spanish or English could not outsell the Chinese in Indonesia or the Philippines except when ready to use force, I still do not understand what led Europeans to get there in the first place and prevented Chinese to send similar ships to the Atlantic. Was that something “endogenous” to Europe?

Second. It is striking how few contemporary Chinese sources we have (or are quoted in the book), compared to contemporary European sources, or even European travel writers in China (nothing similar exists in China: no Chinese travelers in Europe are cited). I suppose that Pomeranz who is a China scholar knew most of the then-extent sources. Further, we surely have more sources today than almost twenty years ago. There is an enormous archival research work going on in China. But the disproportion is, it seems, still large. If we take the period 1500-1700, there are thousands of documents, notes, memoranda, books and treatises in Western Europe that deal with economic matters. It does not seem that anything similar existed in China. And although researchers are finding new data in Chinese household stashes and archives, and that particular paucity of numbers may be alleviated, the paucity of scholarly discussion of economic matters is unlikely to be remedied because if such texts existed in China, we would have known of them by now. So the question is, if scholars or bureaucrats  in China were uninterested in matters economic, and scholars and bureaucrats in (Western) Europe were,  does not that too show that there were some “endogenous” differences?