This Is the End


Markets, Risk and Human Interaction

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.