This Is the End


Markets, Risk and Human Interaction

December 10, 2012

The Great Migration of the 21st Century

December 10, 2012
One lesson we should keep in mind as we recover in the aftermath of Sandy is that we are slow learners. Although the vulnerability of many of these communities is undeniable, we have resolved to rebuild the homes. That resolve will no doubt weaken if the region is revisited by similar disasters, and those displaced will be forced to move on. If climate change is at the root, that will happen. There will be a crescendo of such disasters, replaying thousands of times in populated areas across the globe. Hurricane Sandy thus has given us a glimpse into what will be the dominant theme of the twenty first century: forced migration.

Historically, migration has been driven by need, such as a disparity in economic situation, or because the migrating group reached the limits of the land given population growth. The migration may be into uncontested, virgin land; what is referred to as wave migration. Or it may be migration into other populated areas, which can lead to a new elite displacing the existing elite, to changes in status and a redistribution of wealth, but with the two societies existing side by side. A third type of migration, prominent in the barbarian period in the first millennium CE, is not based on economic need or population constraints, but on a nomadic culture pillaging the riches of the lands they invade. The first two are demand-pull, the third is supply-push.

I can envision any of these migration models playing out in the next century. Gradual migration and assimilation, or a gradual replacement of the indigenous population with a new elite, or one of invasion and warfare. Or wave migration; less likely but particularly interesting because the very effects of climate change will open up new, previously uninhabitable land even as flood and drought make other land uninhabitable. The plot of James Bond's “A View to a Kill” comes to mind; there the villain planned to trigger a massive earthquake that would plunge most of the California coastline into the sea, turning his holdings of inland desert into new, prime oceanfront real estate. Climate change and rising sea levels replaces the earthquake and villain with an alternative plot.

How bad can this sort of thing get?

The Last Great Migration: The Barbarians
There has been revisionist history over the past decades recasting the invasion of the barbarians; the use of the term migration in place of barbarian invasion is representative of this shift. And the barbarian invasions were a great migration. But it may be too early to discard the view, depicted in accounts of the time, that the feudal Europe we recognize emerged from the wave of a thousand years of invasion and ethnic cleansing.

The headline statement for this period is that the barbarians laid waste to everything, and over time forest and swamp intruded where there had been civilization. By the ninth century, there were miles of formerly populated countryside devoid of people, and those in one village lived their lives with little knowledge of other villages. In Spain the Vandals divided the country among themselves, but not before they destroyed the land. When the Goths conquered the Vandals, they fled from Spain, crossed the Straits of Gibraltar to Africa, and continued with unrelenting ruthlessness. A contemporary writer gives this account:

They carried their destructiveness into every corner of it; they dispeopled it by their devastations; exterminating every thing with fire and sword. They did not even spare the vines and fruit trees, that those to whom caves and inaccessible mountains had afforded a retreat, might find no nourishment of any kind. Their hostile rage could not be satiated, and there was no place exempted from the effects of it. They tortured their prisoners with the most exquisite cruelly, that they might force from them a discovery of their hidden treasures. The more they discovered the more they expected, and the more implacable they became. Neither the infirmities of age nor of sex; neither the dignity of nobility, nor the sanctity of sacerdotal office, could mitigate their fury; but the more illustrious their prisoners were, the more barbarously they insulted them. The public buildings which resisted the violence of the flames, they leveled to the ground. They left many cities without an inhabitant. When they approached any fortified place, which their undisciplined army could not reduce, they gathered together a multitude of prisoners, and putting them to the sword, left their bodies unburied, that the stench of the carcasses might oblige the garrison to abandon it.

The barbarians were equal opportunity destroyers. No matter what their station, those who survived their invasions uniformly found their living standards diminished as this migration proceeded. The Barbarians were rural and to some extent nomadic, mingling agriculture with hunting and herding. If the land became exhausted, they moved on to clear virgin land while the forest closed in behind them. They lacked many techniques for cultivating and preserving the land. They used slash and burn methods which quickly led to diminishing yields. Before the migration, under the late Roman Republic, the average yield in Italy was four times the seed. After the migration, in thirteenth-century England, yields were at least three times the seed. But in the barbarian age the largest harvests were twice the seed, the lowest ones fell below one and a half times the seed. This means that at least half of the cultivated area served to produce seed, a dearth in production compared both to what existed before and what would exist thereafter.

But, on the bright side...
The barbarians brought about some equalization for the lower classes. Social inequality grew dramatically during the Roman period; ancient Rome had rich aristocrats and well-off freeman farmers, but also had landless laborers and slave labor. The long depression of the barbarian age fostered the growth of a new, intermediate class that combined the now landless freemen and the freed slaves. This new social group became the serfs of Feudal society. The reduced efficiency in agriculture increased the demand for labor; there was work for every man. Indeed, labor often was in such short supply that the landholders had to bid for their services. So, strangely, the barbarians became a leveling force for society even as they broadly diminished the standard of living.

Anyone who lived through the life cycle of the baby boom knows two things about demographics. First, demographic cycles are slow but inexorable. And second, perhaps because they move so slowly, they are often ignored. It was obvious with the emergence of the baby boom post-World War II that over the course of the next five to ten years there would be a tidal wave of bodies coming into elementary schools, and that in ten to fifteen years that tidal wave would hit high schools, then colleges, then the housing market. Yet we lived through split sessions because schools were not built to accommodate this boom, even though there was more than adequate lead time. (And many of the schools that did get built then were torn down once the baby boomers move past school age, just in time to miss the next demographic wave – the children of the baby boomers).

Climate change will progress at an even slower, imperceptible pace. And unlike demographics, where the changes in birthrates are undeniable, climate change exists in a cloud of uncertainty. Not only do some question its existence, but even those who take it as a given cannot clearly project its course. The point is that we miss even the obvious risks if they move slowly enough, and the realities and effect of climate change remain less than obvious. And there are few risks that are as slow moving but substantial as those associated with climate change. The frog in the pot is the operative analogy.

Barbarians overran Europe as far as Scotland to the north and Portugal to the west; the land was carved up and administered by this new elite, with the original landholders displaced and the laborers becoming serfs. The Burgundians and the Visigoths took two thirds of their respective conquests, each Burgundian housed as a “guest” with the former landholder now living in a small part of his former estate. The Vandals seized the best land in northern Africa with no regard for the former inhabitants. The Lombards in Italy took a third of the land. The Franks took possession of much of the land in France.

The newly arrived became lords of their holdings, the previous tenants and farmers became their serfs. In the end this great migration gave us the Feudal Age, a social order that defined Europe for eight hundred years. What will appear a century hence, after the great migration on which we are soon to embark?

October 25, 2012

A Crack in the Foundation of Economics -- Readings

October 25, 2012
Last year I did a post on a mathematical error that has dictated the direction of important work in economics, and more especially finance. The discovery of this error, by U.K. mathematician Ole Peters, has slowly gained some recognition, though for some reason the journal where the original paper was published has not been willing to publish this correction.

At its root the error is obscure -- as would inevitably be the case for it to have persisted for so long and for its incorrect conclusion to be relied on by such luminaries as Paul Samuelson and Kenneth Arrow. But more has been published about it after my post which do a better job at explaining the problem and its implications. So for those who are interested -- and you will be interested if you think about how a portfolio grows over time, how the policy for a group relates to the results for individuals, or the implications (correct and mistaken) of the St. Petersburg paradox -- I am providing links to them here:

The first is an interview with Ole by Michael Mauboussin, and the second is a paper by a group at Tower Watson. It is significant that the bulk of the notice for this is coming from industry rather than academics, and that the core group that is providing notice is the affiliated with the interdisciplinary Santa Fe Institute.

September 18, 2012

Jorge Luis Borges and the Emerging Virtual Age

September 18, 2012
Perfect memory, complete knowledge, the creation of a personal, imaginary world, the nurturing of a virtual life, and living the double life of the real and the virtual; these, the trajectory of the virtual age, are the central themes in the short stories of the Argentinian writer, Jorge Luis Borges. Borges wrote in the first half of the twentieth century. He was a literary prodigy, works of his published while he was still a child. And, perhaps because he knew that he faced the specter of blindness in mid-life due to a genetic condition, Borges read voraciously and developed a command of literature, mathematics and history in his early years.

I have already discussed one of Borges' works, Funes the Memorious, in a previous post. Funes has perfect memory, a gift on the one hand but a curse on the other, because in reflexively recalling every detail of his current and past surroundings, activities, thoughts and conversations, he cannot reason abstractly. Sartre has pointed out that the process of thought, the pathway from knowledge to meaning, requires negation, i.e., willfully ignoring some aspects and focusing on others, and this Funes cannot do. I related Funes to the end result of the virtual age, where most all of our activities – and certainly our activities within the virtual world – will be indelibly committed to the cloud.

Here I will discuss other of Borges' works of fiction with the same objective of illuminating aspects of the virtual age, two in particular:
  1. We are creating and inhabiting our own virtual world. It most immediately appears in computer games and avatars, but it also appears with a bit more subtlety through our on-line image. Our Facebook selves are not our real selves, and our Facebook friends are not really our friends. Like the sultry-voiced grandmother as a phone sex worker, as we extend further out past a small circle of real friends we are to a greater and greater extent who we wish to be or who we think others want us to be in a virtual world. (My eight year-old daughter is a twelve year-old French girl in Poptropica).
  2. We are moving toward a world where there is perfect memory and unlimited knowledge. Knowledge of the world and our history through Wikipedia, of where we are and what we are doing through social networks. If something is put into the cloud, it might well be there forever. And when we inhabit our virtual selves we capture all of our history, because all that is virtual begins in the noosphere.
A number of books have discussed the social implications of the present state of the virtual age, none better than You Are Not a Gadget by Jaron Lanier, who, not just incidentally, popularized the term “virtual reality”. But a discussion of society in the virtual age requires more than a look at the world today. The term “age” suggests a longer-term process, and if it is indeed an age, we are just climbing over the cusp. The feudal age lasted from about 800AD to 1400 AD, the industrial age that started with the Industrial Revolution in the 1700s – actually glimmers of the industrial age extend back to the 1400's – has been with us for the better part of three centuries. If the virtual age really is an age of similar import, we can take the trends we see today and push them forward to an all but unimaginable extent. So rather than thinking of the virtual reality of today, think of something along the lines of Nozick's experience machine. Or, Borges' world of Tlon. And rather than thinking of the facts-at-your-fingertips of today's wikipedia, think of Borges' Aleph.

The reason to look at Borges' work in the context of the emerging virtual age is not to plot a path for the future in terms of science fiction. It is to see the implications on ourselves and society. For Borges, the intrusion of the fantastic world into the real leads to alienation; the gift of perfect memory and complete knowledge leads to stifling of our innate, human capacity for creativity.

A side benefit of using Borges' work as the substrate for this discussion is that it is a quick read. Many of the stories I will reference are ten pages or less.

Creating Our Virtual World
I will start with two short stories where Borges creates virtual worlds, where man inhabits a world of dreams and disquieting fantasy.

The Circular Ruin
The grey man kissed the mud, climbed up the bank with pushing aside (probably, without feeling) the blades which were lacerating his flesh, and crawled, nauseated and bloodstained, up to the circular enclosure crowned with a stone tiger or horse, which sometimes was the color of flame and now was that of ashes. This circle was a temple which had been devoured by ancient fires, profaned by the miasmal jungle, and whose god no longer received the homage of men. The stranger stretched himself out beneath the pedestal.

In The Circular Ruins an old man enters the ruins of an ancient temple, his goal to dream a man, to dream him in minute entirety and insert him into reality.” That is, to create his real offspring by virtual means, part by part through a painstaking process of dreams. In order to do so he himself moves further and further into this virtual world of dreams, to the point that he finally is only awake to the real world a few hours of the day. He dreams his son “entrail by entrail, feature by feature, in a thousand and one secret nights” until, finally, the dreamed one awakes.

The Dreamer is tormented by the fear that his son will discover he is nothing more than “a mere simulacrum,” and so it is with some relief, but also humiliation and terror that he discovers, some time later, that he also is an illusion, that someone else was dreaming him. As suggested by the title, there is a possibly endless recurrence of one virtual world being dreamed up within another one, each depending on the previous one for the shadow of its life. With the subjugation of the real into the virtual, The Circular Ruins depicts a gray world where there is an absence of time and of history.

Tlon, Uqbar, Orbis Tertius
The contact and the habit of Tlön have disintegrated this world. Enchanted by its rigor, humanity forgets over and again that it is a rigor of chess masters, not of angels. Already the schools have been invaded by the (conjectural) "primitive language" of Tlön; already the teaching of its harmonious history (filled with moving episodes) has wiped out the one which governed in my childhood; already a fictitious past occupies in our memories the place of another, a past of which we know nothing with certainty - not even that it is false.

For the imaginary inhabitants of Tlon life is no more than a subjective projection of the mind with no material existence. Indeed, there are no nouns in Tlön's language, only impersonal verbs and adjectives. For example: there is no word corresponding to the word "moon,", but there is a verb which in English would be "to moon" or "to moonate." What we might say as "The moon rose above the river" is for them "upward behind the onstreaming it mooned." They do not conceive that the spatial persists in time. The perception of a cloud of smoke on the horizon and then of the burning field and then of the half-extinguished cigarette that produced the blaze is considered an example of association of ideas. Because reality is strictly mental, the sciences on Tlön are all subordinated to one discipline: psychology.

As in The Circular Ruin, Tlon invades the real world with one of fantasy. But rather than taking a dream and making it a reality, on Tlon the reality pursues and is embraced by the dream. Rather than the real being created by the virtual as occurs in the Circular Ruin, in Tlon the virtual envelopes the real. In The Circular Ruin the dreamer created a son that at least apparently was real, in Tlon there is no material at all. Their world permeates the real world, the real world is yielding, disintegrating under its influence, its fictitious past replacing real history.

Much as you could do in virtual space where you can build whatever world, on Tlon there are numerous competing schools of metaphysics: one that negates time, another that thinks all existence a dream. That is, for all of its complexity and seeming randomness, Tlon is built by man, using man's rationality and with man as its deity. Because of this, once the world became aware of Tlon – through the work of a journalist (from Tennessee!) who exhumes all forty volumes of the lost Encyclopedia of Tlon – “Manuals, anthologies, summaries, literal versions, authorized re- editions and pirated editions of the Greatest Work of Man flooded and still flood the earth.” Almost immediately, reality yields on more than one account. The truth is that it longed to yield. How could one do other than submit to Tlön, to the minute and vast evidence of an orderly plant? It is useless to answer that reality is also orderly. Reality is based on divine laws which we never quite grasp. Tlön is surely a labyrinth, but it is a labyrinth devised by men, a labyrinth destined to be deciphered by men.

All things of Tlon sweep the world because "any symmetry with a semblance or order" – order which is possible in a fantasy world designed by man, but not in the unfathomable world – is preferred to the unfathomable nature of the real world. People forget their national pasts, studying Tlon history, learning Tlon languages, giving over their very existences to Tlon. Borges predicts that ultimately "English and French and mere Spanish will disappear from the globe. The world will be Tlon."

The notion of virtual and real enter from the outset of the story: One of the heresiarchs of Uqbar, the country from which the literature of Tlon originated, had declared that mirrors and copulation are abominable, because they increase the number or men. The mirror in a virtual sense; copulation in a real sense.

Related to the theme of the intersection of the real and virtual world is that of The Double: two people entwined as if they are one person, or one person appearing as two, occurs repeatedly in Borges' fiction. The Shape of the Sword, Theme, and The Life of Tadeo Cruz are examples of a man represented in ambiguous terms. In The Shape of the Sword, the same person is the betrayer and the betrayed; in Theme the same person is a hero and a traitor; and in The Life of Tadeo Cruz two people are as if they are one in terms of their experiences and personal characteristics. Manifest in these stories is the interplay of the real and the fantasy. Can the two be kept separate, is one real and the other an illusion, if one is lost is the other lost as well? The classic Borges' treatment of the double is his very short story, Borges and I.

Borges and I
I shall endure in Borges, not in myself (if, indeed, I am anybody at all), but I recognize myself less in his books than in many others', or in the tedious strumming of a guitar. Years ago I tried to free myself from him, and I moved on from the mythologies of the slums and outskirts of the city to games with time and infinity, but those games belong to Borges now, and I shall have to think up other things. So my life is a point- counterpoint, a kind of fugue, and a falling away―and everything winds up being lost to me, and everything falls into oblivion, or into the hands of the other man.

I am not sure which of us it is that's writing this page.

Borges and I is the culmination of the melding of the real and the virtual, where the real selves and the virtual selves can no longer be distinguished or set apart. The narrator, the “I”, is private, and in the lexicon of the virtual age, is the real. The “I” in this story enjoys the little things – the real things – of life: coffee, maps, the charm of old typefaces. “Borges” is the public version of the self, the version that is transmittable electronically and can be molded to meet the expectations of the broad virtual audience (and "friends"), that has no connection to the substance of life, but rather exists for the view projected to others.

The private man is the man who experiences, the public man is the one who projects an image. Ultimately, it is not just, as the final sentence of the story expounds, that the “I” and the “Borges” cannot tell who is doing the writing, but that neither can lay claim to be the real person. That is taken over by the collective conscientiousness of all the readers. When the “I” dies, little memory of him will remain; it is the public “Borges” that will be recalled.

All Information does not equal All Knowledge

The Library of Babel
When it was announced that the Library contained all books, the first reaction was unbounded joy. All men felt themselves the possessors of an intact and secret treasure. There was no personal problem, no world problem, whose eloquent solution did not exist―somewhere in some hexagon.
That unbridled hopefulness was succeeded, naturally enough, by a similarly disproportionate depression. The certainty that some bookshelf in some hexagon contained precious books, yet that those precious books were forever out of reach, was almost unbearable.

The Library of Babel contains an all but countless number of books stacked within its hexagonal rooms. Each book contains four hundred ten pages, each page contains forty lines, and each line can contain eighty characters. So each book has a total of 410 · 40 · 80 = 1,312,000 characters. There are 25 characters that can be used to fill the slots, twenty-two letters along with a blank space, a period and comma. (There are no numbers nor are there capital letters). The library contains a book with every possible combination of those characters. So any history (including a detailed history of the future), description of a place or person, philosophical discourse or religious tome will exist somewhere in the library. That is, subject to the constraints on the length of the books, the library contains all knowledge. More than that, it contains all possible knowledge. There is no action, no flight of imagination that has not already been inscribed in one of the books. To have command of the library is to have the attribute of God, knowing all that has occurred and will occur, knowing what is in the hearts of all mankind.
The problem is that this knowledge is not indexed, and the vastness of the library assures that the knowledge it contains will never be accessed. For every book that has content the librarian must traverse multitudes of books, one might have the letters mcv repeated from start to finish, or another with the exact same sequence, but ending in mvv. But even a book with seemingly random letters, there will be another book that can be taken as a dictionary which, in its random language, gives meaning to those letters in such a way that the former book leaps forth with meaning. And because there are many such dictionaries, the same text, meaningless to us, can have multitudes of meanings, some of terrible significance.
But even if you find a book that made sense, and even if it seems on point, you can never know if it is fact or fiction. For each book that is in some sense true and correct, there will be innumerable others that vary ever so slightly from that correctness, or are patently false: “the faithful catalog of the Library, thousands and thousands of false catalogs, the proof of the falsity of those false catalogs, a proof of the falsity of the true catalog, the gnostic gospel of Basilides, the commentary upon that gospel, the commentary on the commentary on that gospel, the true story of your death, the translation of every book into every language, the interpolations of every book into all books, the treatise Bede could have written (but did not) on the mythology of the Saxon people, the lost books of Tacitus.”
It is the juxtaposition of limitless knowledge with the fruitlessness of accessing that knowledge which is the core theme of this story. Just how large this library is is all but unfathomable. Indeed, a book has been written on the mathematical features of the library. Given that each of the 1,312,000 slots can be filled in any of 25 different ways, there are 25^1,312,000, or about 10^1,834,100, distinct books in the Library. (Actually, it is even more than that, because each book has a title on its spine, and perhaps for every book, it must appear with all possible titles. But we will leave this out of the calculation, because even without it, the number of books is about as large a number as we can contextually conceive). Our known universe could not contain even a minuscule portion of the books in this library. The known universe is about 10^27 meters across. If we take the universe to be a cube 10^27 on each side, and assume we can fit a thousand books in each cubic meter, then our universe could hold 10^81 · 10^3 = 10^84 books. If we were to do that, it is 10^84 books down, another 10^1,834,016 books to go. Even if we shrink the books down to the size of a proton, 10^-15 meters across, so we could pack 10^45 books in each cubic meter, the known universe would only hold 10^126 of these books.

The frustration that there is unbounded knowledge that is out of reach breeds superstitions, even gods and religions. There is a belief in what is called the Book Man. On some shelf in some hexagon, it was argued, there must exist a book that is the cipher and perfect compendium of all other books, and some librarian must have examined that book; this librarian is analogous to a god. “Many have gone in search of Him. For a hundred years, men beat every possible path― and every path in vain. How was one to locate the idolized secret hexagon that sheltered Him? Someone proposed searching by regression: To locate book A, first consult book B, which tells where book A can be found; to locate book B, first consult book C, and so on, to infinity...(In fact it can be shown that such a compendium cannot exists; the library itself is the only compendium).

Funes the Memorious
He knew the forms of the clouds in the southern sky on the morning of April 30,1882, and he could compare them in his memory with the veins in the marbled binding of a book he had seen only once, or with the feathers of spray lifted by an oar on the Rio Negro on the eve of the Battle of Quebracho. Nor were those memories simple—every visual image was linked to muscular sensations, thermal sensations, and so on.
No one has ever felt the heat and pressure of a reality as inexhaustible as that which battered Ireneo, day and night, in his poor South American hinterland. It was hard for him to sleep. To sleep is to take one's mind from the world; Funes, lying on his back on his cot, in the dimness of his room, could picture every crack in the wall, every molding of the precise houses that surrounded him.

Those on Tlon do not reason about reality because they do not live in the real world. In contrast, Ireneo Funes cannot reason because he is too bound up in reality; he is in incapable of breaking away from the onslaught of facts in order to think abstractly. Funes says to his interviewer, "My memory, sir, is like a garbage heap." His story is about the need to be able to forget, the paralyzing effect of perfect memory.
Except for his gift of perfect memory, Funes is frail in every dimension. Paralyzed and bedridden by the same accident that led to his indelible memory, he cannot do anything based on this gift; it remains tethered to his mental and hence virtual world. He knows everything that he has experienced, but cannot digest this knowledge. Unlike those in the Library of Babel, he is not frustrated and depressed by this disconnect between having everything at hand but in a useless form. Rather, he is the proto-web surfer, happy to frolic in the sterile virtual world, collecting and recalling facts without any further purpose. Still, he chooses to stay in a darkened room to contain the press of data on his mind. At the age of nineteen, Funes dies of pulmonary congestion, a physical mirror of his mental congestion. As far as stories about the perils of too much information go, this on ranks at the top.

The Aleph
Under the step, toward the right, I saw a small iridescent sphere of almost unbearable brightness. At first I thought it was spinning; then I realized that the movement was an illusion produced by the dizzying spectacles inside it. The Aleph was probably two or three centimeters in diameter, but universal space was contained inside it, with no diminution in size. Each thing (the glass surface of a mirror, let us say) was infinite things, because I could clearly see it from every point in the cosmos.

The infinite Aleph contains within its small sphere a simultaneous vision of millions of delightful and horrible acts, all occupying the same point. Looking at it is to have a god-like vision that the narrator can only compare to the descriptions of Persian mystics, Ezekiel's flight to prophesy, and Alain de Lille's description of a sphere whose center is everywhere and circumference nowhere. Yet the other-worldly Aleph is located in an improbably real-world setting, the basement – the nineteenth step up from the bottom of the basement, to be exact – of a condemned house in a run-down neighborhood. To gain this ineffable vision, the narrator must lie down on a tile floor in a narrow space more like a cistern than a basement, on a humble couch, in the company of a crate of empty bottles and a pile of burlap sacks. Taking one of the burlap bags as a pillow, the he stretches out, precisely situated on the couch in "something of a pit."

There are a number of points of irony in The Aleph in addition to that of finding the fantastic Aleph in such a comically real-world setting. One is that in spite of having free access to the Aleph, Carlos Argentino, the proprietor of the Aleph, still is a bad poet. (Though he does manage to be a prize winning poet). A second is that in the real world, absent the Aleph, the narrator holds to a sublime memory of dignity and beauty of his dearly departed Beatrice, but in the light of the Aleph he sees her less flattering post-mortal state of nothing but bones. The Aleph captures everything without filtering, and therefore shares the same limitations as Funes exhibits with his perfect memory. Again we come back to Sartre's notion of negation. There is no device in the Aleph for negation, and so Beatriz, who was remembered by a limited and generous memory now is also seen in the stark, present reality.

Note: I have taken from The Unimaginable Mathematics of Borges' Library of Babel for the numerical calculation of the vastness of the Library of Babel, and from Borges and His Fiction for literary interpretation of Borges's work.

September 10, 2012

The Great Labor Reset: Labor Laundering, Self-Sourcing, and Other Tales of Woe

September 10, 2012

In a recent post I discussed the potential for long-term, structural unemployment, the possibility that some of what we are seeing in the unemployment picture will not be resolved by an economic upturn. The focus of the post was on how robots and computers are increasingly replacing labor as a factor of production. One question, though, is why should we see this strongly manifest in the labor market now. The move toward robotics might be inexorable, but it also is gradual. So certainly it should not be the source of sky rocketing unemployment in the wake of the 2008 crisis. This gets to other effects of the crisis on the labor market.

The Great Labor Reset
The most opportune time to do a structural home renovation is after a fire has gutted the house. The crisis of 2008 did the same for the labor market. As much as anything else, the 2008 crisis provided the cover for making changes in the labor market that would have been fraught with institutional push-back in a normal environment. There are institutional barriers to outsourcing labor, reducing benefits and wages, and moving full time workers to part time, even if a purely neoclassical analysis suggests these changes can be absorbed by the supply and demand equations of the labor market. So some of what we have seen in terms of shifts in the labor market is not simply a reduction in hiring, but a change in the labor-employer contract that would not have sat well outside of the fog of war coming from the 2008 crisis.

Labor Laundering
One change in the labor market is what I call labor laundering. Many employers need to protect good will with their customers and cannot be seen as bullying workers. So they outsource their labor pool to contractors, most commonly operating in other countries, but also domestically through what are basically next-generation temp agencies. For example, warehouse packing is the sweatshop job of our time. The article “I Was a Warehouse Slave” gives a day-in-the-life view of these workers, effectively paid for piece-work, without benefits, with one-day notice job security, in physically grueling conditions. More than 20 percent of the American workforce is now “contingent” – temporary workers, as well as contractors and independent consultants.

Labor laundering only works if the workers are far removed from the customers, so that the consumers don't see how the sausage is being made. Which means it works better for remote, on-line retailing than when the workers are in the neighborhood store. Thus labor laundering gives the on-line retailers an advantage as far as labor is concerned.

Everything else equal, it is more efficient to do production domestically rather than outsourcing it abroad. The use of robots and the rising costs of labor in the principle outsourcing countries are both eliminating the advantages of outsourced labor. Labor laundering is meeting these rising labor costs from the other directions, reducing the costs of domestic labor. So although manufacturing is moving back to our shores, for labor and employment the picture is not as pretty as it might seems.

In my recent post on this topic I focused on robots taking over many labor-intensive tasks, some of which were considered beyond the reach of such automation. When there is labor involved, often the role of the robot is taken on by the consumer; we are outsourcing to ourselves. It is not very subtle stuff: self-checkout, self-ticketing, managing our own calendars, correspondence and travel arrangements. On net, even if the total time required for these tasks ends up being greater than in the days of cashiers, ticket agents, and secretaries, the cost to the producer is reduced because the labor is us. The same is true for a lot of our entertainment; Facebook and web surfing being good examples. The nature of this consumption leads us to do a lot of the work.

Workers of the World – Goodnight!
What do all of these unemployed and underemployed going to do?

I don't have a ready answer to this, but I have toyed with a thought experiment, one that – as most thought experiments do – takes things to the extreme: What if an alien race came to earth and said that if we allowed them to live in the desert sand of the Sahara and Gobi and left them alone, they would generally (if times were good) provide us with most of our consumption needs – food, housing, energy, transportation. What if they told us they would gave us all experience machines to keep us happy, (I wrote about this a while ago; it is aconcept most closely tied to the late 20th century philosopher Robert Nozick. Think of taking aspects of our virtual world a few iterations further, so that we can plug games, realty shows and other aspects of our non-work lives into our brains so that we are pretty much living a world of our own design), so that our demand for consumption was readily sated. What is the social contract that would be drawn up between us and the aliens? I might try to follow up on this question in a later post.  

August 26, 2012

Profit Incentives, Disruptive Technology, and Health Care

August 26, 2012

Medical care is famously immune to the usual market incentives; the patient has little reason to make a cost-benefit tradeoff. Doctors and hospitals hardly do either; indeed the opposite seems to be the case. Matters are made all the worse, ironically, by the continual improvements in medicine – improvements which often treat what was previously untreatable, and which improve on existing treatments but at a higher cost.

This is particularly true in the case of life threatening illnesses. The use of co-payments for self-rationing is considered unethical if it allows only those with adequate means to survive. Yet if we are to get control of medical costs, we need to find ways to deal with these, for they make up a significant portion of our medical costs. This is even more the case for terminal illnesses and end-of-life treatment, which are a significant component of the exploding health care costs and the related strain on medical entitlements. The cost of medical care in the last year of life due to terminal illness or decline makes up a third of medical costs. Given the increase in medical costs over time, expenditure for end-of-life care is poised to become as high on average as the total cost of medical care for the preceding portion of life.   

Cost Containment through Economic Incentives
In cases of life and death, only the patient can make the decision of when to terminate aggressive care. And right now those decisions are not made on the basis of economics. Here is a proposal to put economic incentives in place; to keep the decision for care firmly in the hands of those receiving it while adding an awareness of the economics of health care into their personal decision process:

  1. Lay out for the patient the possible modes of treatment along with the estimated cost until death if each of those courses of treatment is taken. The cost includes not only the specifics of the treatment, but the associated costs of care. Obviously a treatment that has the patient hanging on for a year in and out of intensive care will cost more in total than one where the patient has nothing more than palliative care and dies in a month or two.
  2. The patient receives a lump sum payment equal to some fraction of what is saved if he or she pursues a course of treatment with a cost lower than the highest cost allowable treatment. The payment can be assigned to their spouse, children or any other designee; this makes sense for the terminally ill, given that they are not going to have much opportunity to enjoy this windfall.
  3. The recipient pays taxes on the payment, so in an indirect way a portion of it is returned to the system. (In this proposal I am primarily thinking of Medicare).

The total savings will be based on the difference between the cost of the alternatives, the fraction of the difference the patient receives adjusted by the tax rate, and the decisions of the patients based on these incentives.

This incentive structure may be easier to understand in the context of terminal illness and end-of-life care because the costs are high, the quality of life is often low, the benefit of various courses of treatment can be more tightly defined than for curable illnesses. And it is here that outside interference in denying quality medical care is most charged. But the same approach conceptually can apply more broadly as well.

Cost Containment through Disruptive Technologies
There is a benefit to the health care system that comes from this sort of incentive structure that over time may be even more important for containing health care costs. As things stand right now, there is a limited prospect for a new, less expensive treatment to be developed if it provides a notably lower probability of success than the standard and more expensive treatment. That is, suppose researchers come up with a new treatment that has a 20% probability of adding six months to the patient's life and that costs 10% as much as the standard treatment, where that standard treatment has a 40% probability of adding six months to the patient's life. (All else equal in terms of side effects, etc.). The new technique may never see the light of day. With no price incentive on the part of the patient, who will pick a 20% success rate when another gives 40%?

But suppose that with this incentive in place the patient or his children might receive half a million dollars from choosing the cheaper approach. There will no doubt be some patients who are willing to take the tradeoff for the benefit of their spouse, children or other designee. Thus this new treatment will be put into the system – assuming the FDA goes along.

This is important because it is a way new, disruptive technology will enter into the medical system. The classic example of disruptive technology entering the system is in the steel industry. As Clayton Christensen has pointed out, mini-mills came to dominate the steel industry by starting in the lowest margin, lowest quality steel product, rebar, and then over time the mini-mill technology advanced, and the mini-mills rode up the quality curve until they absorbed the steel industry at overall savings to the consumers.

As it stands now, there is no equivalent for rebar in the medical field; there is no equivalent for the low quality steel where the disruptive technologies can cut their teeth. No substantially lower cost/lower quality treatment will be taken, or for that matter, permitted. In having the profit motive added to the process, these disruptive technologies can take root. The low quality process that starts off in rebar-land, with half the success rate but half the cost, might over time move up the quality chain to being of an equal success rate at a tenth the cost. Right now some of these technologies might stay funded in the lab until they get to that point, but many will not.

August 23, 2012

Will the Unemployed Really Find Jobs Making Robots?

August 23, 2012

There is a recent story in the New York Times on the growing use of labor-saving robots to increase production efficiency and, by replacing low-cost overseas labor, to return production to our shores. But the operative term here is “labor saving.” They return production to our shores, but given that they do so by replacing the low-cost foreign labor with machines, it opens up the question of the implications for employment once the production returns. If the robotic revolution is successful, will all the unskilled laborers that are being replaced move up the chain into more skilled and higher paying jobs? Or will they simply be replaced?

This is a critical question right now, because it is at the center of whether the high level of unemployment is structural rather than cyclical. By the time the dust settles on the cyclical component, we may discover we are looking into a growing chasm of labor-lite production.

In some cases, replacing human labor with robots may be a good thing all around. Take the development of robotic warehouses. Warehouse packing is the sweatshop job of our time. The article “I Was a Warehouse Slave” gives a day-in-the-life view of these workers, effectively paid for piece-work, without benefits, with one-day notice job security, in physically grueling conditions. (The warehouse workers are usually employed by temp agencies that act as what I would call “labor launderers”, a buffer between the sub-par conditions of the workers and the image of the company that uses them).

There are a number of companies now that provide robotic solutions for many of these jobs. One of them, recently acquired by Amazon, is Kiva Systems. I first saw what their robots can do at a Wired Conference a few years ago. Check out this video from that conference, or any number of other ones on their robots. It is amazing and entertaining. Another company in the same space is the start-up Symbotic, but they don't seem to have any cool videos out yet.

The problem, of course, is that a sweatshop job might be better than no job at all. So what do these workers do next. This is where the “Well, someone will have to make all those robots” sort of refrains begin. From the New York Times article: “Robotics executives argue that even though blue-collar jobs will be lost, more efficient manufacturing will create skilled jobs in designing, operating and servicing the assembly lines, as well as significant numbers of other kinds of jobs in the communities where factories are. And robot makers point out that their industry itself creates jobs. A report commissioned by the International Federation of Robotics last year found that 150,000 people are already employed by robotics manufacturers worldwide in engineering and assembly jobs.”

Well, common sense tells you that you don't replace five $30K-a-year workers with a $250K robot only to reemploy those five workers in other, higher-paying jobs to build and maintain the robots that just replaced them. There will be skilled jobs in designing, operating and servicing the assembly lines. But obviously not as many jobs as the robots replace, and, taking nothing away from the potential for retraining, most likely not to be filled by the unskilled workers who just lost their jobs.

We have a ingrained view that when one door for labor demand closes, another one opens, that the march of economic progress pushes the workers along with it. It has happened in the past, and in a spectacular way. For example, the industrial revolution came about by the efficiencies that reduced the need for labor in agriculture, freeing up labor for industry. The push of the unemployed and disenfranchised from the farms into the factories was critical for the industrial revolution because at the outset the industrial jobs were not attractive enough for those in agriculture to leave their land and move into the factory system voluntarily. The same has continued over the course of the industrial age. As industry after industry developed efficiencies of production that reduced the need for unskilled labor, new jobs opened up either because of new skills being required to deal with new manufacturing methods, because the raw demand for consumption expanded the labor demand, or because new products, even new industries arose.

But it doesn't always have to happen that way. Where do the displaced workers go this time around? To say that they will move up the chain and go into more skilled jobs building the robots is glib. The entire point is that the robots are labor saving. It certainly is not a good business proposition if they save on the cheap labor but pay out more for more skilled labor.

Whatever analogue there is to the Industrial Revolution, workers do not play much of a role in it. It is interesting that u to this point much of the displacement from computers has been in the mid-level jobs, like bookkeepers. These medium skill jobs that focus on rote but quantitive tasks are the easiest for a computer to do. Replacing workers doing relatively unskilled, manual tasks is actually more difficult. But the rubicon is being crossed. For example, Meyakawa Manufacturing is shipping robots that can debone chickens at the rate of 1,500 per hour, replacing ten human workers. As one commentator put it, “if you can do that, you can do most anything.”

August 12, 2012

Return Pankration (a.k.a. Mixed Martial Arts) to the Olympics

August 12, 2012

Of the sports in the ancient Olympics, there is one that remains absent from the modern Olympics: Pankration. Pankration, which means “all strength”, is a combat sport which is a combination of boxing and wrestling; indeed, it permits all fighting techniques. What is essentially pankration does exist as a sport today outside of the Olympics. It began in Brazil as vale tudo, Portuguese for “anything goes”, and now is called mixed martial arts (MMA). It dwarfs boxing in popularity. Its most active promoter, the UFC, has filled arenas throughout the US (except, surprisingly, New York), and has extended to events in Japan, Ireland, Canada, Australia, Brazil, Germany, Abu Dhabi, and Sweden.

MMA had a poor start in the U.S., decried by John McCain as “human cock fighting.” But whatever its past, it is now a carefully refereed sport with rules to protect the athletes, who wear gloves and are barred from dangerous techniques. Despite its reputation, MMA does not have the brutality of boxing. In boxing a fighter might sustain hundreds of blows to the head; even if he is knocked senseless, even if he sustains a concussion in the process, he will continue to absorb rounds of punishment after the respite of an eight-count. With MMA, if a blow stuns the opponent, rendering him even momentarily defenseless, the contest is over. And more often than not, if it fails to go the distance it ends not though strikes but through a submission, where an arm lock or a choke hold leads the opponent to “tap out” before damage is done.

I bring up the idea of returning Pankration to the Olympics for three reasons.

First, the roots of modern Pankration lead back to Brazil, as do the roots of one of the two key disciplines behind MMA, Brazilian jiu jitsu. (The other is Thai kick boxing). So the Brazil Olympics is a natural time to return the sport to the games.

Second, having an “anything goes” sport is a natural given that we have most of the raw ingredients peppered throughout the Olympics today. Among the combat sports in the Olympics is one where you can strike only with your hands, and another where you can strike only with your feet. With both, if you end up in a clinch you are separated. Then there are other combat sports where the contest begins once in a clinch, but where no strikes are permitted (Greco-Roman and freestyle wrestling, and Judo).

And, third, do I dare mention that the state of combat sports in the Olympics is pathetic? All of these sports are highly stylized, in some cases to the point where their combat origins are obscured. The scoring system for boxing and tae kwon do has turned them into little more than games of tag, with the athletes wrapped in padding, with the power of a strike almost incidental to the outcome. (Which gets to another question: how did tae kwon do end up elevated from being a demonstration sport? Or did it? If you compare what goes on in the competition versus in an academy, you would never guess there was a connection).

There are two problems with bringing MMA into the Olympics. The first is that having multiple matches in a few days is difficult in a sport that is so physically grueling. The rules should be modified to reduce the risk of injuries that might keep the victor from being able to continue with future matches by, for example, not allowing elbows to the head, and by having a small field admitted to the Olympics, so perhaps there would only be two or three preliminary matches. The second is that the very top fighters might not want to bypass a big payday in order to compete for an Olympic gold, any more than you would likely see Manny Pacquiao or Mayweather entering the Olympic ring if boxing eliminated its amateur-only restriction. (An amateur-only restriction would not fare well for MMA, because most all of the high level athletes have fought professionally).

May 7, 2012

Class Warfare

May 07, 2012

I spoke recently at a conference where I was followed to the podium by Fox's Tucker Carlson, who, among other things, railed against the instigation by the left of “class warfare”, pointing out that doing so is little more than singling out an unpopular minority group, (i.e., the rich), for higher taxation. (Though the minority group that happens to have the largest share of the item that is the war's objective). Tucker said we are seeing an ever shrinking number of people paying an ever greater portion of the taxes. (Though they also are the ever shrinking number of people acquiring an ever greater portion of the wealth).

There is little that matches the artfulness in waving off criticism of the widening income gap as “class warfare”. And there is little that matches the gullibility of those who follow along. There seems to be agreement all around that action to change the situation, for the poor to improve their lot at the expense of the rich, is an affront to civil society. I am not picking sides in this, but I believe such a "war" can be justified, and indeed ultimately is inevitable.

It is hard to discuss class warfare without referring back to the industrial revolution. Then class warfare centered on the length of the working day. A tightly defined working day only appeared with the advent of the industrial revolution. Before then laborers worked when they needed money, and then quit for a time once they fulfilled their needs. But regimentation and a dependable workforce became necessary once there was machinery to run and capital invested, and so with industrialization came an enforced workday. So it is not surprising that Marx stated the central battle of class warfare at the time in terms of the working day:

The capitalist maintains his rights as a purchaser when he tries to make the working-day as long as possible, and to make, whenever possible, two working-days out of one. On the other hand...the laborer maintains his right as seller when he wishes to reduce the working-day to one of definite normal duration. There is here, therefore, an antinomy, right against right, both equally bearing the seal of the law of exchanges. Between equal rights force decides. Hence is it that in the history of capitalist production, the determination of what is a working-day, presents itself as the result of a struggle, a struggle between collective capital, i.e., the class of capitalists, and collective labour, i.e., the working-class. – Marx, Das Kapital

Marx begins with an acknowledgement of the perception of rights on the part of both the capitalist and the laborer, but then argues that the question of the length of the working day cannot be solved by an appeal to rights, but only through class struggle, wherein “force”decides between “equal rights”. (Force can mean physical force, but can also mean the force of the political process).

The central point is that there is no way that this question of the working day or any number of other social questions, though posed as rights by the groups in conflict, can be resolved without being reformulated in terms of class struggle or class warfare. Unlike civil rights – the rights which our society regards as inalienable – it is difficult to do much more than simply take sides when it comes to economic rights, because what we call economic rights are really nothing more than the bargaining in an exchange between those providing labor and those providing capital, those creating jobs and those taking the jobs, or whatever. There is class warfare because the social and economic pie has to be split, and there is no objective way to do so. The war can be active or passive, the sides can have a truce, one side can temporarily be resigned to its lot or be held in check through force, but the conflict never ends. A change in generations or in social consciousness, and things will flare up again. There are some areas of fairness in the civil sphere – freedom from slavery, torture and piracy – but what are the rights inherent for a particular term of exchange between the parties in a trade?

Given this, we are left in a quandary because we don't know what to make of class warfare. And we don't know because we are not trained to make anything of it. It is not part of any self-respecting course of economic study. The introduction of class warfare marks a radical departure from the tenets of contemporary economics because as far as economics goes, the terms “class”, “warfare”, and “struggle” are, well, radicalized. Yet there has been an epic, historical struggle over the length of the working day writ large, extending to issues like retirement, the definition of the time worked, and the share of economic rents, and this is the struggle that is still with us. Clearly fundamental to our economic history and our capitalist system, this is ignored in our economic studies.

The time spent working and the share of that labor that accrued to the capitalists during the emergence of the industrial revolution is akin to the taxes and redistributions from the entitlement programs and government subsidies that are in the cross hairs today. Indeed, the timeline extends back even further. The benefits that we call entitlements are similar in our more advanced society to the rights of subsistence for the serfs during Feudal times – rights which were implicit in the social contract between lord and serf, and which were broken at the peril of revolt. The social contract between the lord and serf, as with any contract, had obligations on both sides. The serfs paid a portion of their production and provided service to the lords. The lords organized the serfs to defend against invasion, enforced a rule of law, and assured the serfs, as much as possible in that age, of subsistence. Is this so different from social contracts of today?

Even admitting to the term “class warfare” concedes a lot. To warn against class warfare only makes sense if there are classes, and more than that, if there might be a reason to be answered for one of the classes to do battle. (For otherwise there is the simpler course of pointing out that no differences exist). There is only so much to go around, and the efforts of one group or the other to assert a claim to a larger share can be called class warfare. It can be a war waged through changes in the taxes, in a restructuring of incentives and pay scales, an increase in the benefits given to the poor, or revolt. The first three are legitimate battlegrounds in a democratic society such as ours, and it is really taking a good joke to far to suggest it is damaging to the body politic for members of society to look at the differences in income and take action to redistribute in their direction.

February 24, 2012

Foxconn and China's Capitalist Revolution

February 24, 2012
The promises of reform at Foxconn are the latest of many as China painfully adjusts to the inevitable social realignment that comes with a capitalist economy. What is occurring in China now happened in Europe during the transition from feudal to industrial society. That transition is more germane than it might appear at first blush because over the past two generations China has been emerging not from a Marxist, but from a feudal state. Indeed, if one were to take Marx's view, China could only arrive at communism through capitalism, and only arrive at capitalism through feudalism. For in Marx's view, as Schumpeter writes, “it is essential for the logic of capitalism, and not only a matter of fact, that it grew out of a feudal state of society”. Marx's vision flows from feudalism through capitalism to a post-capitalist society that can only arise once capitalism has run its course, after it has not only provided the necessary social and economic foundation but also has become unsustainable.

European feudal society was governed by what is termed “extra-economic” means, namely by the power of culture to determine and maintain rank, by the social contract between the serfs and the lords – a contract that by its long custom became imbued with the power of law – and, of course, by military might. Economic production was dictated – though obviously in a much simpler economy than today – by the lords, who parceled land to tenants. The serfs put up with their lot because of a small carrot and large stick, a backstop for subsistence and the threat of force.

The uniformity of the feudal classes can be overstated, (though Chinese society can be overstated in a similar way). There was gradation in economic status among the serfs, and enough freedom for some to engage in commercial capitalism and become relatively well off in their station. And there were lords who, though landed and of superior rank, declined economically to the point of life as paupers. There were also times of labor shortages, such as shortly before the ravages of the Black Death in 1348, and of course far more thereafter, when the lords bid for the loyalties of the serfs. And in other times the serfs would threatened mass revolt or burn down structures and fields if the relationship between serf and lord was not respected. (Knights also could vacate oath of allegiance in the case of certain defaults in the social contract).

Early capitalist society spawned by the industrial revolution of the late 18th and early 19th century experienced many of the same social phenomenon as we are now seeing in China. (Note: Although we use the term “capitalist”,  “industrial” may be a better term because capitalism has been around in one form or another since the 12th century). In the early period of the industrial revolution as in China today,  overworked masses toiled mindlessly in hazardous conditions for close to subsistence wages while a politically connected bourgeois seized the reins of the capitalist plant. In England it was largely due to the conscience of those within the political system who recoiled at the human toll that pro-labor reforms and regulations were forced upon the new capitalist class. In the case of China, although there are protests and the simmering of revolt, the internal pressure is far less of a factor than the conscience and economic force of the international community.

If the momentum from Foxconn carries through, it will have effects beyond increases in prices and wages. If it progresses along the lines of the West's transformation, it will also have an effect on social and economic mobility. That change will alter Chinese society from what some have argued is currently a different sort of capitalism from that practiced in the West, but is really much like the loosening of the bounds of feudal society that appeared in pre-industrial Europe. (Which was not such a backwater; there was entrepreneurial commerce, power plants, specialization of labor, large-scale mining and of course a well developed financial sector supported by laws and accounting well before the industrial revolution took off).

Mobility through the ages

There are a lot of metaphors thrown around for economic and social mobility: Schumpeter compared the mobility of economic classes to people shuffling around different quality accommodations in "a hotel or an omnibus, always full, but always of different people". More common is moving up and down the economic ladder, more novelistic, the Horatio Alger stories. Here I will use a topographic metaphor.

Feudal Economy.
The feudal society was a subsistence one for most of the population. Even when the serfs were not at subsistence levels, they were always a poor harvest away. The serfs had little opportunity to improve their prospects. The contrast was great between the serfs and the feudal lords, who lived substantially above subsistence, who could extract extra-economic rents from the serfs, and who were protected by the legal rights and station of being landholders.

In terms of mobility, the serfs inhabited the land in the marshes of bare subsistence while in the distance, above impassible cliffs sat the lords' manors. The stability (or stagnation) of this feudal society was rooted in the fragility of life and fear of famine. In such an environment the strict oversight of the lord could be justified, though no such justification was necessary nor put forward. Still, serfdom was not slavery, and the lords control was limited. The potential for famine also formed the basis of restrictions on free trade and capitalist enterprise for the most basic of commodities. These restrictions were not only justifiable out of concern about the masses welfare, but also out of concern for the revolts that could be precipitated by scarcity, especially if perceived as coming from mismanagement or corruption. Because of this, the growing and marketing of grain was a sociopolitical rather than economic endeavor.

Sales were consummated based not on a notion of the best price, but rather the just price, which was often determined by the Church. As early as the 12th century English law dealt harshly with free market acts, especially for foodstuffs. Engrossing, (cornering the market by buying up large quantities of goods and holding them off the market); forestalling, (buying up goods before they reached the market, i.e. before they reached the market stall); and regrating, (buying up goods in a market only to then resell them in that market at a higher price), were all felonies. The farmer, whether serf or tenant or yeoman, did not have unfettered ownership of his crop. He could not store it, nor could he sell it to a distant market or to a middleman. He sold it to the local market for the just price. And further up the production chain the same held true. The miller and the baker were similarly constrained to sell their product at the just price, and could not enrage in any market activities that might distort that price. 

In terms of China, this should ring a bell for those with memories of the sixties. 

Industrial Economy.
The feudal relationships loosened to allow more economic and social mobility. A financial system developed to support the merchants and international trade, and land that had been locked up by primogeniture was freed to become the collateral for loans or to be sold to finance new enterprises. With the industrial revolution came a degree of production and efficiency in agriculture that lifted most people above subsistence. In fact, having a large population above subsistence was an essential condition for industrialization. No one could man the factories if they were just scraping by on their plot of land. And, conveniently for the labor needs of the factory system, the efficient methods of agriculture came with the policy of enclosures, which brought the land into fewer and fewer hands. It is ironic that one of the conditions for the oppression of labor at the start of the industrial revolution was for them first to be freed from the shackles of feudal subsistence.

But once early industrial society took root through the early part of the industrial revolution, the landscape for the serfs-turned-proletariat was not much different than it was for feudal society. The factory workers still occupied a plain below the cliff, but now above that cliff was the manor of the bourgeoisie rather than of the lords. Then, over time, the industrial revolution gave way to increased economic and social mobility, as well as more variation in income and ability to consume. The class distinctions of serf and lord, and then of worker and capitalist began to blur as the factory system gave rise to the company, and as the steam engine gave way to the less centralized electric motor, allowing smaller units of production. It also created more equality as uniform, mass produced goods were consumed across society. As Mumford has pointed out, there is no difference between the light bulb of the very rich and the very poor; more than any political system, it is the industrial process that is a communist.

The cliff began to erode into a hill which most of the population could ascend or descend. This is the world where there is an expectation of one's children doing better, not just because the economy grows, but because the slope is easily traversed. And it remains the world of today, though the topography is beginning to shift again.

Post-industrial Economy.
The time is coming when we will meet ourselves standing at the door, China's masses entering into the more socially conscious industrial society that we came to with the "second" industrial revolution in the late 19th century. And as that time comes we will then be heading out the back, into a virtual society.

We are seeing a world that is qualitatively different from the past. Many product that we consume in our everyday lives were not in the realm of imagination even a generation ago. We may not know what the virtual, post-industrial society will become anymore than someone living during the first glimmers of the industrial revolution could envision the world of today, it may be a world that is still relegated to science fiction. But thinking back to the difference between the feudal and the industrial, the long time of that transition and the dislocations that lay in store for society, what we have seen in the last twenty years has the same feel.

I have already discussed my view of the implications of this world for income distribution and for economic mobility.  In a nutshell, the more we move into caring about the virtual, the more the hill will turn into a plain, at least for the large subset of the population that is secure in the essential needs of life.  

February 15, 2012

Adam Smith and Joseph Schumpeter on the Issues of the Day

February 15, 2012
On the issue of the bifurcation of society and the widening income gap in the U.S., and the strains appearing from the factory system in China that have recently been highlighted, there is useful commentary that comes from a surprising quarter, or perhaps not surprising in itself, but in the view taken on the subject: Both Adam Smith and Joseph Schumpeter, defenders of capitalism as the source of “universal opulence”, see a road leading from capitalism to the disenfranchisement of the worker and the vaulting of the elite.
Adam Smith
Adam Smith is a social philosopher grounded in the search for what is moral and what provides man with the greatest good, with universal opulence. It is to this end that he promotes self-interest as the core of economic exchange, and division of labor as the core of efficient production. But he also admits to unintended consequences of human action and recognizes that government action is required to dampen these negative consequence.
Smith: Political influence
We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. – Adam Smith, The Wealth of Nations

Smith recognizes that workers and employers would jostle for an advantage by using political influence, and he also recognizes that this would be an unfair fight, with the employers having stronger influence and, because they were a far smaller group, being better able to do their lobbying behind closed doors. This was already evident; as he points out, the law prohibited workers from unionizing but allowed employers to organize to keep wages low:

Particular acts of parliament, however, still attempt sometimes to regulate wages in particular trades, and in particular places. Thus the 8th of George III. prohibits, under heavy penalties, all master tailors in London, and five miles round it, from giving, and their workmen from accepting, more than two shillings and sevenpence halfpenny a-day, except in the case of a general mourning. Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Competition was stifled through legal restrictions on the freedom to sell commodities and to supply labor. The government legalized monopolies that gave exclusive rights to sell products, and to limit the supply of labor for some occupations through guilds. Smith repeatedly observes that self-interests would be promoted legislatively at the expense of the public whenever and wherever possible, and this would be more successfully accomplished by the wealthy and well-connected “masters” who could peddle their influence largely unseen: Masters...enter into particular combinations to sink the wages of labour....These are always conducted with the utmost silence and secrecy till the moment of execution; and when the workmen yield, as they sometimes do without resistance, though severely felt by them, they are never heard of by other people.

Smith: Regulation
...the clamour and sophistry of merchants and manufacturers easily persuade them, that the private interests of a part, and a subordinate part, of the society, is the general interest of the whole...everywhere finally paid by the landlords, farmers, and labourers.– Adam Smith, The Wealth of Nations

Adam Smith recounts many failings of the market: price fixing (“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”); trade restrictions and duties extending from towns to international trade; and influence peddling to Parliament.
But it was not the gaming of the economic system, but rather the imposition of the factory system with the resulting long hours of monotonous labor that rose to the issue of greatest concern. Smith holds the view, later expounded by Marx, that men find their individuality and strongest link to society through their labor, and sees in the conditions of the worker a debilitating effect on intellectual and social vitality:
The man whose whole life is spent in performing a few simple operations . . . has no occasion to exert his understanding. . . . He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgement concerning many even of the ordinary duties of private life. . . . It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance, in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.

Here Smith points to the need for government intervention:  the alienation of the masses may be remedied if the “government takes some pains to prevent it”. In particular, Smith proposes universal public schooling, a proposal at variance with the view at the time that education would foment rebellion.

Joseph Schumpeter
Like Adam Smith, Schumpeter views capitalism in positive terms, as a force for improving society and making men better off. And like Smith he sees the emergence of a capitalist elite that will by their economic force ride over the mass of workers. (The growing pains of the Industrial Revolution with farmers and artisans displaced and then engulfed by the factory system was an object lesson that was still only a few generations old when Schumpeter began his academic career). Indeed, his view is that this ultimately will be the demise of capitalism and the rise of socialism. Thus he sees the same end for capitalism as does Marx, but through a path that is largely opposed to Marx's: Not the failure but the success of capitalism, success that is concentrated on the innovative elite, will lead to social revolt.

Schumpeter: The elite
That lambs dislike birds of prey does not seem strange: but that is no reason for blaming the birds of prey for taking the little lambs. And if the lambs say among themselves, "These birds of prey are evil, and whoever is the least like a bird of prey, indeed whoever is its opposite, whoever is like a lamb ―would he not be good?" then there is no reason to find fault with this as an ideal, though the birds of prey may view it with some irony and say to themselves, "We bear no grudge against these good little lambs, we even love them: nothing is more tasty than a tender lamb."  – Nietzsche, On the Genealogy of Morality

Schumpeter's view is rooted in the prevailing social philosophy of his day, a philosophy founded on that of Nietzsche, that supports the role of the elite: Society and capitalism depend on the elite, and the social and political environment should protect the status of the elite, nurture their activities, and even extend their influence in government policy. Schumpeter extolls the elite, the force for capitalist growth, while anticipating the effect of their success on the masses – the implications of the resentment of the many against the wealthy few.

Nietzsche's theme of the elite he thus naturally pairs with another, that of “Ressentiment”: the resentfulness of the inferior for the superior, and the tendency of the many to devalue and even revolt against the successful. (A revolt that in its least disruptive and passive form Nietzsche sees taking the route of Christian faith – Nietzsche argues that Christian meekness and humility is a means for the weak and inferior to feel comfortable in their lot, even to feel morally superior to the elite).  Schumpeter portrays Ressentiment as having an inescapable result; the success of the elite, especially levered by the capitalist system, leading to an increasing disparity with the masses still stuck in the status quo with their condition perhaps improving in absolute terms, but not, as is most important for the survivability of capitalism, in relative terms.

Thus, like Marx, Schumpeter argues that capitalism creates its own opposition. But according to Schumpeter, that opposition comes not from the existential impoverishment and alienation of the worker but from the resentment created by the successes of the very wealthy. It is in this way that Schumpeter, though through an argument in opposition to that made by Marx, comes to same conclusion, that capitalism sows the seeds of its own destruction:

Every social system is sensitive to revolt and in every social system stirring up revolt is a business that pays in case of success and hence always attracts both brain and brawn. It did in feudal times—very much so. But warrior nobles who revolted against their superiors attacked individual persons or positions. They did not attack the feudal system as such. And feudal society as a whole displayed no tendencies to encourage—intentionally or unintentionally—attacks upon its own social system as a whole.
Schumpeter: Education

Broadly speaking, conditions favorable to general hostility to a social system or specific attack upon it will in any case tend to call forth groups that will exploit them. But in the case of capitalist society there is a further fact to be noted: unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest.  – Schumpeter, Capitalism, Socialism and Democracy

In contrast to Adam Smith, who advocated for universal education at the expense of the state as a means of lifting up those alienated by the enclosures movement in agriculture and the factory system in industry, Schumpeter sees non-vocational education as a spur to resentment and a threat to capitalism.  “The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.” University education “may create unemployability of a particularly disconcerting type” with graduates that are not well trained for any vocation, and end up with jobs and at salaries that they find beneath them. They become discontented, and “discontent breeds resentment” that in turn can lead to revolt. Schumpeter's observations echo those of Voltaire and others in Adam Smith's time who were concerned that education would lay bear their lot and thus magnify the discontent of the lower classes.

Note: This post heavily draws from The Mind of the Market.