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The three ages of trade and the distorting retro-perspective of the modern

By Lorenzo

The history of long distance trade can be broadly divided into three periods: the globalisation or mass trade period (from the 1820s onwards), a transition period (in an integrating Atlantic economy, from the C16th onwards) and the pre-globalisation or network trade period (prior to the 1820s outside the Atlantic economy).

What drives the transition from one period to another is communication and transport costs. Prior to the development of steamships, railways and the telegraph, communication and transport costs were so high, one cannot talk with any seriousness of an economically globalised economy. There was simply no significant convergence of prices for commodities in different regions; so one cannot talk about global markets for, as economist Deirdre McCloskey points out:

The only relevant standard for “one market” is similarity of price.

Instead, there were series of trading networks linking local markets with divergent prices.

For example, as soon as significant trade connections were established between the Mediterranean world and China, the tendency was for silver to flow from the Mediterranean world to China, because there was no world price for silver; silver remained much more scarce compared to output in China than in the Mediterranean world, so silver flowed from where it was cheaper to where it was more expensive, and did that for roughly two millennia.

A PSFM world

Where specie (gold or silver) was the dominant medium of exchange, if you were buying more goods and services than you were selling (a negative trade balance), specie would flow out. If you were selling more goods and services than you were buying (positive trade balance), specie would flow in. In such a world, David Hume‘s price-specie flow mechanism (PSFM) makes sense: indeed, describes what happened.

So PSFM describes the pattern of Eurasian trade from at least Roman times onwards. The pattern was particularly intense under the late Roman Republic and Early Empire, when the Roman state had access to major silver mines. A key driver of the Crisis of the Third Century (235-284) was the exhaustion of said silver mines which massively undermined the trade flows that many states relied upon.

Said crisis was much wider than just Rome’s difficulties. In rapid succession the Han dynasty collapsed (220), the Parthian Empire was overthrown (224) by the House of Sasan, the Kushan empire declined (c.230),  and states around the Indian Ocean (the main conduit for trade between the edges of Eurasia) declined (such as the supplanting of the early Tamil dynasties by the Kalabhras dynasty c.250). Indeed, the remarkable thing was that the Roman Empire survived, albeit profoundly institutionally altered. (There was, however, some continuity between the Parthian and Sasanian empires.)

The silver-for-goods pattern became intense again when the development of better pumps and silver-lead-copper smelting led to large increase in the output of Central European silver mines (pdf) from the late C15th to the early C16th followed by–with the looting of the Aztec and Incan empires and the discovery of the Potosi silver mountain in the C16th–a flood of American silver into what was now the Atlantic economy. The silver-output ratio in the Atlantic economy made Atlantic goods even more silver-dear, and Asian goods comparatively silver-cheap (and silver goods-cheap in the Atlantic ecomony and goods-expensive in the Asian economy).

Silver was the main medium of exchange in the Eurasian trade networks and Atlantic economy, as it had been for centuries in the Eurasian trade networks, so goods flowed from Asia (particularly China) into the Atlantic economy and silver flowed from it to Asia (particularly China). That was the main driver of trade in (what were now) global trade networks up until the 1820s.

The one major exception was sub-Saharan Africa, which mainly used gold as a medium of exchange and mainly exported slaves–to Islam (as it had done for centuries) and across the Atlantic, to the Americas significantly emptied of local labour by the disease catastrophe of the Columbian exchange. (I.e. the importing of the entire Eurasian disease complex effectively all at once to populations with no immunity.) So, to the horrors of the trans-Saharan slave trade was added the horrors of the trans-Atlantic slave trade.

The Atlantic transition

There were only relatively minor improvement in transport and communication technology up until steamships, railways and the telegraph (i.e, the 1820s). But, as military folk say, quantity has a quality all of its own. The Atlantic economy saw a massive increase in the scale of water-borne transport, both via canal-building as well as coastal and oceanic sailing vessels.

Such a massive increase in the supply of transport services, even without major improvements in technology, allowed significant convergence of prices within the Atlantic economy. Thus, as economists McCloskey & Zecker point out (pdf), wheat prices expressed in silver within the Atlantic economy narrowed from a range of 6.66:1 around 1400 to a range of 1.88:1 around 1750.

The world economy was still not globalised, was not in an era of mass trade: but the Atlantic economy came to be somewhat so. In such a situation, the price-specie-flow mechanism increasingly became irrelevant within the Atlantic economy–specie prices adjusted within what was effectively a common specie market rather than quantities shifted between distinct specie markets. That is, there came to be something close to common gold and silver prices in the Atlantic economy. It is striking that, as economist David Glasner notes in this comment (links added):

... it seems that Adam Smith, David Hume’s very good friend, seems to have rejected PSFM even though in his Lectures delivered about a decade before the Wealth of Nations [1776] was published, he gave an accurate rendition of PSFM, but completely ignored PSFM in the Wealth of Nations. So even in Hume’s time, it may be questioned whether PSFM was the right theory.

I would say, PSFM was the right theory for the global trading networks (though that would stop being true from the 1820s onwards) but already the wrong theory for the Atlantic economy (or any mass trade system). This being a major indicator of why one can talk of a transition period before genuine economic globalisation because of the depth of trade interactions in the Atlantic economy.

Economic globalisation

Once steam technology starts driving down transport costs (on sea and and on land) and the telegraph drives down communication costs (ditto), then we are in the world of mass trade (i.e. globalisation). Including the politics of mass trade and so of globalisation.

Trade in goods becomes sufficiently large, and prices sufficiently converging, that trade began to seriously affect general factor of production (land, labour, capital) incomes. Creating the politics of globalisation: specifically, mass politics of mass trade (pdf). Not the patronage politics of network trade one had had earlier, with its licences and monopolies.

With the scale of trade that economic globalisation entailed, scarce factors of production attempted to restrict in the inflow of goods in order to protect their scarcity premium. Plentiful factors of production sought access to global markets to broaden their income sources (i.e. reduce their plenty-penalty).

How could one tell if a factor of production was scarce or not? If you imported it, it was scarce; if you exported it, it was plentiful. In the case of land the indicator was whether you exported (plentiful) or imported (scarce) its products. Thus, Britain exported labour and capital; hence labour and capital allied to force free trade on scarce land. Germany exported labour and imported capital; so scarce land and labour [capital] allied to force protection on plentiful labour. The settler societies (such as the US and the Antipodes) imported labour and capital; so labour and capital allied to force protection on plentiful land.

As modern economies became services-dominated economies, the above effects became increasingly muted, since participants in such (largely not internationally traded) industries benefited from access to cheaper goods from access to world markets without (usually) being threatened by imports from the same.

The period of globalisation had its own sub-periods in terms of the general barriers to trade (pre 1914, 1914-1945, post 1945) and wider patterns. The wider patterns being whether international trade was dominated by mass commodities following generalised comparative advantage, or by more narrow, specific goods and industries patterns due to economies of scale. To put that another way, shifts between production and trade reflecting generalised geography versus path-dependent, geographically much narrower, specialisation of production.

Such a shift splintered factor of production effects on income from expanded trade. That, along with the expansion of the importance of services in developed economies, encouraged the retreat of trade protection and expansion of free trade.

If you want to understand the patterns of trade in a globalised world, I recommend listening to Paul Krugman’s 2008 Nobel memorial prize speech. (In fact, if you are interested at all in how to do social science research in general, I recommend listening to the speech here.)

Network trade versus mass trade

It is a great mistake to look back on the history of trade without grasping how very different pre-globalised trade is from trade in a globalised economy; how different network trade is from mass trade. With the partial exception of the Atlantic economy noted above, pre-globalised long-distance trade was a matter of networks. These networks ran through and between localised farming economies whose activities were only minimally affected by said trade networks. (Pastoralist economies were more deeply penetrated by trade, but they were also much smaller in population, much more dispersed, with lower transport costs.)

Trade mattered, however, a great deal to states, because revenue from trade was relatively easy to access (involving, as it did, foreigners and specific nodes and routes) and had positive economies of scale (that is, tended to go up faster than the expansion in territory controlled). So the scale (both extensively in their territorial extent and intensively in penetration of territory controlled) of agrarian states was strongly affected by levels of trade. Hence the mass collapse and decline of states when the Roman Empire’s decline in silver production led to a major reduction in Eurasian trade networks in the early C3rd.

Trade mattered to states, state elites and (if the state forbore sufficiently from expropriation) non-state elites. It was not an engine of broad economic growth: as there essentially was no such thing before the Industrial Revolution (with the possible exceptions of early modern NW Europe, Yangtze River valley and Tokugawa Japan). Even in those cases, trade was not a driver of growth: it simply was not a big enough factor to be so. (Or, for that matter, the right sort of factor.)

Localised, not integrated

But that [importance for states and elites] is not to be confused with societies being deeply penetrated by long distance trade. Agrarian societies were overwhelmingly localised farming societies where most people never ventured beyond local areas. The larger the area considered, the more dubious is seeing the localised farming communities therein as constituting a single, coherent “society”. Precisely because production was overwhelmingly so local (in production and consumption) and movement by people so limited, religion and language were the main connecting forces, not commerce.

The cycles of agrarian life and production were common across localities in the sense of being repeated in many localities, but were not common in the sense of connecting across localities. Religion encouraged convergence by providing framings and identities not bound by localities: particularly if it had strong institutional structure (the Catholic or Orthodox Churches) or strong social role (Islamic scholars with Sharia, Brahmins with Manusmrti).

States themselves were, at best, limited integrating agents because it was entirely possible to have states whose rulers and agents did not come from where they ruled while said rulers and agents dominated (or entirely monopolised) political decision-making. Islamic and Hindu states were particularly weak integrating agents as provision of law was dominated by clerics, not rulers.  Trade was even less of an integrating agent because it relied not at all on converging of said localised economies in some larger coherent society and, even during periods of heightened trade, was a small part of total economic activity regardless of how important it was to states and elites.

Being a denizen of contemporary societies–highly urbanised societies with mass literacy, massive levels of international trade and pervasive communication with strongly integrating states–is to live in a very different social environment. The, largely unthinking, assumptions that come from living in such societies are a very poor guide to understanding the social realities of highly localised farming societies in the pre-globalised world of thin trade networks.

The Industrial Revolution, once it gets seriously underway from the 1820s onwards, is a transformative experience in so many ways. It takes considerable effort to not bring its profoundly different perspectives to the study of the past.


[Cross-posted from Thinking-Out-Aloud.]

Ethos and welfare

By Lorenzo

The OECD Secretariat released recently (November 2014) a revealing summary (pdf) of public social expenditure by OECD countries. The database the study is based on is available online. (Private social expenditure–i.e. private charity–is not covered by this post.) Social expenditure being defined as:

Social expenditure comprises cash benefits, direct in-kind provision of goods and services, and tax breaks with social purposes. … To be considered “social”, programmes have to involve either redistribution of resources across households or compulsory participation. Social benefits are classified as public when general government (that is central, state, and local governments, including social security funds) controls the relevant financial flows.

I was struck by the graph adjacent, covering specifically paid-in-cash benefits, which indicates that Anglo, Dutch and Scandinavian welfare states are strongly downwardly redistributive (i.e. the bottom income quintile receives a larger share of social expenditure than the top income quintile; and the former can be reasonably assumed to pay less tax than the latter) while the Mediterranean states are strongly upwardly distributive (i.e. the top income quintile receives a larger share of social expenditure than the bottom income quintile: one cannot say upwardly re-distributive, because that requires look at share of tax revenues). And, regarding present debates over fiscal austerity in the Eurozone: cutting public expenditure in states with downwardly redistributive social expenditure is likely to mean something rather different than doing so in states with upwardly distributive social expenditure.

There seemed to be some patterns in the data, so I downloaded said social expenditure data, added in data on economic freedom and (via Wikipedia’s useful lists) on religious adherence as % of population and was able to generate various, somewhat striking, correlations.

Using the bottom quintile’s share of social expenditure less the top quintile’s share of social expenditure (in % points of total such expenditure) as an indicator of how downwardly distributive social expenditure was, there was no significant correlation (0.18) between the total level of social expenditure (as a share of GDP) and how downwardly distributive total social expenditure was. So, the level of public social expenditure as a share of GDP tells us literally nothing about how focused on helping low income folk such expenditure is.

Regulation fairy stories

There was quite a strong positive correlation (0.59) between the level of economic freedom and how downwardly distributive social expenditure was. Now, if you believe in the state-as-regulation-good-fairy story (the state typically regulates to improve overall social and economic outcomes), this may be a surprise.

If, however, one accepts that a significant amount of regulation is to favour selected groups and that, generally speaking, the higher the level of regulation the more this can be expected to be so, then this result will be unsurprising. (Not least because, as mechanisms of transparency and accountability are not infinitely elastic, so the more they have to cover the weaker they can be expected to operate.) Especially as the better connected, resourced and organised an interest group is, the more it is likely to be able to bend regulatory policy in its favour.

So, taking economic freedom to be an indicator of “neoliberalism“, then the more neoliberal (other things being equal) your economic regime, the more downwardly distributive public social expenditure it tends to be. Shocking only if you accept the “bad fairies” theory of neoliberalism: which so many academics do; but, then, much of what academics write about neoliberalism is crap.

The deserving poor

There was quite a strong positive correlation (0.60) between the Protestant share of population and how downwardly distributive social expenditure was and a stronger positive correlation (0.64) with the no-religion share of population.  (It was clear from the sources that, depending on context, people would nominate both a religious identity and as being of no religion: I took that to mean they were culturally Protestant, Catholic, etc.) So actual and cultural Protestants, and folk with no religious belief, apparently tend to believe in the deserving poor: i.e. that welfare expenditure should be downwardly re-distributive.

This was capturing something specific, because the correlations between between the Protestant share of population and the level of economic freedom (0.47) and between the no-religion share of population and the level of economic freedom (0.36), though positive, were not as strong.

Protestantism I would characterise as “naked before God” religion, since one has direct access to the basic religious authority (Scripture) and is entitled to make one’s own judgement about it. Folk with no religion can be expected to generally also believe in a strong sense of individual moral sovereignty.

So, my tentative hypothesis would be that a confidence in one’s own moral judgements (and the sense of moral sovereignty that flows from that) apparently encourages social expenditure to be downwardly redistributive: what perhaps might be called a strong sense of the deserving poor. Perhaps because it encourages considering people by fairly direct, and directly identifiable, notions of worthiness (in this case, lack of income).

Preserving rank

A very different result was gained if the Catholic+Orthodox+Muslim share of population were added together, because then there was a strongly negative correlation (-0.70) between said share of population and how downwardly distributive social expenditure was.

Again, something specific is going on, as the correlation between the Catholic+Orthodox+Muslim share of population and economic freedom, though negative, was not as high (-0.48). In keeping with the level of social expenditure not being a key factor, there was no significant correlation (-0.08) between the Catholic+Orthodox+Muslim share of population and public social expenditure as a share of GDP.

Catholicism, Orthodoxy and Islam I would characterise as “priests and clerics give detailed instructions” forms of religion. They involve both hierarchical notions of moral authority and complex moral maps–since it is in the interest of gatekeepers of righteousness to promote moral complexity, as it inflates their role. You probably don’t need a priest or cleric to tell you that murder is bad; you probably do need them to tell you whether you need to wash your hair every time after you have sex or how to expiate specific sins.

The combination of moral complexity and moral hierarchy apparently leads to public social expenditure which reflects, even reinforces, existing social rankings. Thereby leading to much less policy weight being given to such a direct characteristic as (low) level of income. Remembering that complexity of any sort is a great way to obscure who is receiving what.

Ethos matters

So, ethos appears to matter, given that there is such a vast difference between the apparent connection between Protestantism (religious or cultural) (0.60) and no-religion (0.64) on one side, and Catholic+Orthodox+Muslim share of population on the other (-0.70), and how downwardly distributive public social expenditure tends to be.

One possible mechanism via which religious roots of cultural perspectives could matter is different perspectives on time. The work of psychologist Philip Zimbardo and others on time perspectives (pdf), suggests that higher self-trusting, future-oriented Protestants might be more likely to think that the state should concentrate on those who need help. Conversely, lower self-trusting Catholics, Orthodox and Muslims who are more past or present oriented may think the state should do more for everyone regardless of current situation.

The former will lead to more downwardly distributive social expenditure, the latter much less so. Especially as, once it is accepted everyone should receive, the better organised and connected are much better place to, well, so receive.

Whatever the actual mechanism by which the observed effects happen, the data does clearly suggest that policy, over time, reflects the choices of the voters. Choices that appear, in turn, to significantly reflect what moral ethos is dominant among voters.


[Cross-posted from Thinking-Out-Aloud.]

The Rotten Heart of Europe

By Lorenzo

Bernard Connolly‘s The Rotten Heart of Europe: Dirty War for Money is a jeremiad against European monetary union first published in 1995. Its publication led to the author’s sacking from the European Commission, where he had been senior monetary and foreign exchange economist. This is not, as Connolly a matter of saying the “Emperor has no clothes” but that, in his words, the Emperor is “ugly and sickeningly malodorous”.

It is entirely within keeping with the book’s analysis that the European Court of Justice referred to the book as:

aggressive, derogatory and insulting.

Apparently the Court took, in the words of the above news report:

particular umbrage at the author’s suggestion that Economic and Monetary Union was a threat to democracy, freedom and “ultimately peace”.

While the Court did not ultimately go there, the Court had been invited to consider the book analogous to blasphemy. (No, I’m not making this up.) Europe, with a capital EU, really is a substitute religion, a secular Faith.

A new of edition of The Rotten Heart of Europe was issued in 2011, with a new introduction. The ongoing Eurozone crisis puts Connolly in the position of Robert Conquest (at least as suggested by Conquest’s friend Kingsley Amis): I told you so, you fucking fools. The author notes in said introduction:

That no-one dared to attack the book’s economic analysis but that the book’s author was subjected to a concerted campaign of vilification says much about the nature and purpose of monetary union.

The book reads very much as an insider expose, because Connolly was very much an insider. It is fairly obvious he can describe various meetings and events so vividly because he was there (or worked with people who were: as a former policy bureaucrat, I can testify such folk are incurable gossips).

The book is an enlightening, if depressing, read. Depressing for an outsider living in an economy which has avoided so much of this nonsense; if you and yours actually had to live through the ill-effects, it might make you as angry as the author.

The book does lurch into hyperbole at points (particularly in the introduction written for the 2011 re-issue). But hyperbole is the vice of the impassioned, and the author has plenty to be angry about. Since it is about monetary policy and the effects thereof, the book could have done with an introductory primer–following the balance of payments, interest rates, etc interactions is a bit of an ask for a lay reader, even though Connolly is a clear writer and, if you persevere, explanations are generally forthcoming.

ERM as Euro precursor

The book covers the rise, operation and collapse of the European Exchange Rate Mechanism (ERM) and the use of the ERM as a springboard to Monetary Union–i.e. the Euro. It is a “how did we get here?” book, for the ERM, in its creation, reason for existence and operation was completely the precursor to the Euro: monetary union was always the aim. The ERM was the Euro, mark 1: the Euro is the ERM, mark 2. All the problems, failures and difficulties of the Euro were already on display with the ERM; but not as bad, because the Euro is far more constraining and the democratic deficit now bites even deeper.

The Euro is far more constraining because, while one could leave the ERM with a press release, leaving a common currency is much harder, as the Greeks are wrestling with. But that made the Euro more attractive to the Europeanising networks, not less, for it insulated their power-and-connection games against external disturbance.

A floating exchange rate is an economic shock absorber, a fixed exchange rate an economic shock transmitter. The stability of the Australian economy since the Reserve Bank of Australia (RBA) adopted a broad inflation target in 1992-93 has been based on the ability of (changes in) the exchange rate to absorb economic shocks, making it much easier for the RBA to keep total spending on goods and services in the economy on a fairly even path.

That is why Optimum Currency Area (OCA) theory considers what alternative shock absorbers economies have (specifically factor mobility and fiscal coverage) in examining how suitable territories are to share a common currency. That is why economist Paul Krugman entitled his paper on the Euro debacle Revenge of the Optimum Currency Area (and added financial integration to needed shock absorbers). As Connolly writes in his 2011 introduction:

The great … mistake … was that monetary union simply converted currency risk (the risk that a certain government’s bonds might be devalued, in terms of another currency) into credit risk (the risk that a government might simply be unable to pay its creditors).

Hence the Greek tragedy.

The European Faith

The “coordinated” exchange rates of the ERM again and again magnified economic shocks, to the detriment of participating economies. Rather than the failure of the ERM leading to a rethinking of the project, the European elite “doubled down”, going all the way to the Euro. Creating, if somewhat delayed, a much worse set of difficulties, problems and failures. Fairly clearly, they will not willingly abandon the Euro project, but want to “double down” again, using the ongoing crises to create an even higher level of policy, financial and political integration.

All of which is based on a deep interweaving of faith and interest. The faith is A Single Europe; the interest is the status, career paths, financial handouts and poorly (or simply un)accountable power the EU system provides. What Connolly refers to, in his 2011 Introduction, as:

a self-serving transnational nomenklatura made up of interlocking political, bureaucratic, business, financial, academic and media elites.

The book makes it clear, as it had long been to those with eyes to see, that the European Union’s democratic deficit is not a bug, but a feature.

Connection uber alles

One of the perennial questions amongst folk who prefer their economic policy to be of the liberalising kind is how does France manage it? It seems to continually “break the rules” yet create a successful society and economy (well, mostly successful; let’s ignore the suppurating social sores of the les banlieue). Reading The Rotten Heart provides useful basis for understanding how it is managed; through technical excellence, insider meritocracy, and corporate life operated as one vast insider trading exercise.

  • If the French builds something, it works.  This simple technical capacity provides a pervasive advantage and support for the broader system.
  • Their grande ecole system produces extremely well-trained, skilled and self-confident (indeed, somewhat ruthless) bureaucrats. Bureaucrats embued with a deep belief in, even reverence for, the State.  A reverence that easily translates into faith in Europe and the European superstate being built.
  • Networks and connections are keys to corporate life. The return to information (particularly regarding policy action) and certification comes from connection. As does ability to affect policy decisions in advance.

Which is why the masters of the system tend to loath the “Anglo Saxons”: not merely their success but their “casino markets” and excessive democracy.

The 2005 riots: many local unpleasantnesses.

It is not merely, as Connolly rather savagely puts it, that:

the French Establishment has never forgiven the Anglo-Saxon world for liberating the homeland from the Nazi occupation their incompetence and decadence had permitted (Ch.9).

(Just as, as their moral pretensions swell, the European elite cannot forgive Israel for the Holocaust.)

The combination of “Anglo-Saxon” economics (accepting the dynamism of open markets) and of “Anglo-Saxon” politics (governments as seriously responsible–British version–or accountable–Washington version–to their voters) is doubly subversive to the French elite’s entire modus operandi. The “Anglo-Saxons” provide an identity to define oneself against and, in the case of the US, a counterpoint to seek to surpass. (One cannot really say “rival” because the US fails to feel threatened by European unity–indeed, actively promotes it; which is, if anything, even more infuriating.)

Open markets tend to dissipate the advantages of connection. Closed or restricted markets can accentuate it. For example, the difficulty in dismissing employees under French law raises the risks of employing new people and thus increases the advantage of certification and being in the correct networks. As Connolly writes of the French technocratic elite:

For them, economics is not only a subject invented and developed by Anglo-Saxons, it is a subject fit only for Anglo-Saxons and their decadent liberal democratic societies. The servants of the enarque state have no need of economics: they possess power instead (Ch.12).

I wonder if an Anglo-Saxon economist of working class origins found dealing with the such folk a bit wearing. On the other hand, he is talking of folk he dealt with professionally, for years. His is an informed antipathy.

Admirers of the Bundesbank might also profit from reading his informed, but jaundiced, view of its operations and performance. Having read Richard Hetzel’s two (pdf) articles (pdf) on the history of German monetary policy in the C20th, I found Connolly’s critique plausible but not surprising, though his observations on how much the Bundesbank relied on essentially managing (and stunting) the Frankfurt financial market were striking. (Which would make it somewhat similar to–but not, on Connolly’s description, as bad as–the way the Japanese Finance Ministry does the same to the Tokyo financial market.)

Continental European corporations more generally have a level of state support and political cushioning that American corporations strive to achieve but ultimately fall short of. In Europe, particularly continental Europe, connection trumps, and generates, money. A game the French technocratic elite plays better than anyone else because they are so well trained to play it and believe in it so passionately.

EU as French state multiplier

The pattern of connection trumps, and generating money, is extended and reinforced by the EU; partly because said elite labours so mightily to make sure it does. As Connolly notes:

For France (as for Germany), a “level playing field” in the Single Market had always meant a slope steeply in their favour — the result of the ERM and the Social Charter impositions, both intended to keep the ‘peripheral’ countries of the Community in a state of economic weakness and political dependency (Ch.13).

Flexible exchange rates allowed countries to evade the anti-competitive effects of the Social Charter and other EU regulations by devaluation. The ERM, and even better Monetary Union, cut that option off. As Connolly writes:

For the French elite, money is not the lubricant of the economy but the most important level of power (Ch.1).

Moreover, the less say the general public has over important matters of policy, the higher the return to connection and insider status is. So, elections are managed so both sides of politics (with the occasional backsliding) play the key games the same way.

(One of Syriza‘s fundamental flaws is that they actually want to play the same game too–that even more be done via state networks is not subversive, it is the pretence of it–yet the massive Greek indebtedness which brought them to power also casts them as supplicants; they get the attention of the Top Table folk, but not in a good way. Margaret Thatcher was more threateningly subversive of the EU than Alexis Tsipras could ever hope to be.)

Hence we get ‘Corporatism in One Continent’ as Connolly nicely labels it (Ch.2). Something which favours the established but provides no avenues for the up and coming (Ch.3). Hence also the attraction of monetary union:

Fix the exchange rate, neuter monetary policy, and then use the fear of macroeconomic instability as an excuse to stifle the dynamism of the capitalist process (Ch.3).

Thus the effort invested in the ERM then and the Euro now. If reversion to independent floating currencies occurred:

… more than just ‘monetary Europe’ could be lost to France’s corporatist, fonctionnaire, industrialist and financier class: ‘Europe’ itself, with its promise of ‘Corporatism in One Continent’ in which bureaucrats, indigenous multinationals and trade unions could hold at bay the tide of the Anglo-Saxon market economy could be at risk (Ch.9)

The creation of a remarkably unaccountable central bank, as the European Central Bank (ECB) is, was very much not a defect of Monetary Union: despite differing conceptions of final outcomes between German and French EU-elites, they both found that highly desirable.

First the French manage the Germans (and vice versa) and then they manage everyone else, for:

The Franco-German axis is the Community, and the role of other members of the European Council is to give a ceremonial benediction to what the French and German leaders want to do (Ch1.).

One of the themes of the book is other countries trying to be “core” and not “periphery”. But that is a status decided by the Franco-German connection, according to the interests thereof.

Accountability (or, rather, the lack of it) is at the heart of the problem. Particularly when one gives such power to an unaccountable central bank:

… politicians have at some point to confront the consequences of their mistakes; their unaccountable central bankers do not (Ch.10).

While the ECB embraced inflation targeting originally pioneered by New Zealand, the full New Zealand model of an explicit (indeed, performance-based) contract between central bank and elected government horrified European central bankers. Connolly warned:

… the trend toward greater interference by central bankers in explicitly political affairs, set in train by Maastricht, will be hard to arrest as long as the fools’ paradise of EMU beckons (Ch.10, fn10).

The fools’ paradise has arrived, and so has the predicted pattern. A pattern that has not fully run its course, and which Connolly feared, for:

an ECB would be a totally anti-democratic institution that hastened the decaying of political life in ‘Europe’ and a probably precursor to an authoritarian reaction to mounting chaos (Ch.13).

We are not there yet, but nor has the working out of the implications ended. Connolly summarises the ERM thusly:

The rules of the system were, from the outset, more important than its results, for the framing and interpretation of the rules determined the distribution of power between and within — perhaps even over — the Community countries (Ch.11).

As with the ERM, so also with the Euro.

Another theme of the book is that Britain can never really be at “the heart of Europe”, in part because of a seriously divergent political culture:

For most people in Britain, politics is seen as providing a framework within which the constant balancing of the interests of different groups, or for that matter of different regions or countries, can proceed in legitimacy and reasonable harmony … That idea of politics is, literally, foreign to French technocrats. What they are interested in is power — first imposing their will on France and then imposing their conception of France’s will on everyone else (Ch. 14).

The Church of Europe

Reading this analysis of how the EU works, one is reminded of late medieval (“Renaissance”) Catholic Europe and its interplay of doctrine and interest. Now the doctrine Is Ever Greater Union, and heretics (such as Connolly) are to be hunted down, denounced, and thrown into the outer darkness. (Actually, in Connolly’s case, he seems to have had a nice post-Eurocrat career as a exchange rate analyst.) As Connolly puts it in his 2011 Introduction, the EU has no demos but

‘Europe’ has a right to arise because of its supposedly superior ethos and supposedly necessary telos.

Nor has his righteous anger abated:

the absence of a European demos implies, given the strains produced by the efforts to create and maintain a monetary union, a ruthless, deceitful, malignant anarchy-imperial ethos reflecting a telos devoted to destroying law, democracy, accountability, legitimacy and to emerging victorious in a ‘clash of civilisations’.

Go on, tell us what you really think.

Meanwhile, in counterpoint to the Church of EUrope, the Eurosceptics and enraged nationalists are the oikish Protestants, daring to want to decide things for themselves. Of course, those damned Protestants actually did rather well for themselves; as, in the long run, the combination of more open cognitive systems, nakedness before God and personal sovereignty created increasingly more dynamic societies.

It was a bit of a revelation to discover that “growth-positive fiscal austerity” was originally ERMonomics, just as it has now become Euronomics. As an aside, countries such as Australia, Norway, Denmark, the UK have unusually downwardly redistributive (pdf) welfare states: fiscal “austerity” implies something rather different in such societies than it does in the upwardly distributive Mediterranean states. (The share of GDP spent by government on welfare is actually a very poor measure of how redistributive a welfare system is.)

Though the blogosphere metaphor of Calvinism (i.e. rigid theologising) to describe those who insist that everyone is to blame, and everything is to be done, except examine the role of the ECB and the entire Euro project, comes across as even more appropriate. Connolly argues that an underlying notion of the ongoing General Will is used to trump mere elections. Hence the response to the (narrow) rejection of the Treaty of Maastricht by Danish voters in June 1992:

The Treaty of Rome be damned, they said in effect, a few thousand Danish votes one way or another could not be allowed to stop the March of History, to frustrate the General Will as decided by the political bosses in the countries that really mattered (Ch.6).

Framings for ignorance

Reading Connolly’s book, I am struck by the power of Scott Sumner’s point that so many people–including policy makers–simply do not understand monetary economics:

… monetary policy failures are not about special interest politics. There is an almost mindboggling lack of understanding of monetary theory at the top levels of government. The entire world economy is resting on the hope that a few sane people like Haruhiko Kuroda can keep their head and keep NGDP chugging along while the rest of the political establishment careens recklessly from one extreme to the other.

But policy makers do have framings through which they view the world, so they just apply the framing to matters of monetary policy that makes sense to them on other grounds.

So, in the absence of genuine understanding, those who worship at the altar of the state apply those framings to monetary policy. Those who get wrapped up in signalling Virtue apply that framing to monetary policy. Supporting the ERM and Monetary Union was the way, par excellence, to signal what a Good European you were.

Hence also conservatives tend to instinctively go for hard money policies, because it fits in with their social order concerns–they naturally think that devaluing money (so undermining proper order) is the worst thing you can do to it. (Not even close to true, but then you would have to understand monetary economics to realise that hard money and sound money are very much not the same.) There is quite a history of economically liberalising (or at least liberal) right-of-centre governments being brought down by hard money obsessions.

Which is part of the story Connolly has to tell–how Thatcher’s otherwise very able Chancellor of the Exchequer (1983-89) Nigel Lawson‘s obsession with having the Pound Sterling shadow the Deutschmark stoked the boom-and-bust that helped fatally weaken Thatcher’s Premiership. Connolly clearly admires Lawson, who comes across as the tragic hero of the story.

Margaret Thatcher, who proved to be entirely correct about the problems of the ERM and of the proposed Monetary Union, is the book’s fallen hero and martyr, since her fall made the path to disaster all but inevitable (and, Connolly argues, was at least partly engineered by Europeanising networks). Bundesbank President (1991-93) Helmut Schlesinger is admired for his commitment to German national interests, sense for German public opinion, and his strategic skill (particularly as he used it to effectively destroy the ERM).

The book has too many villains to count. Though Banque de France chief Jean-Claude Trichet is treated with thinly veiled contempt and Thatcher’s successor John Major with open contempt.

As an Australian reader, the constant political and policy dramas, the twists, distortions (and at times outright lies) engaged in to “defend” some particular exchange rate just seems mad. Which, if your goal is good economic policy for people in your society, it is. But the combination of portentous ignorance, faith and self-interest operating in a milieu of sabotaged accountability produced this madness, fed on it, and spiralled it up to even grander madness. Leading to the Eurozone having to beware of Greeks bearing debts and forcing deals which not only won’t work, but can’t, even in theory. But what is elementary economic and fiscal logic to Faith in Europe?

Though some mordant humour is to be had:

The Bonn summit was a classic example of international economic ‘coordination’: one country agrees to something that is bad for it on condition that another country does something equally bad for it (Ch.2).

Or, on the Major Government’s ultimately failed attempt to be in the ERM:

Instead, the government resorted to the tried, tested and failed methods of the 1960s and 1970s: bravado, declarations of undying and irrevocable commitment to the parity, insinuations that sterling would soon enter narrow bands, sneering denunciations of anyone who suggested a change in policy on the exchange rate (Ch.6).

Needless to say, the final outcome was–a change in policy on the exchange rate (ejection from the ERM and a floating exchange rate).

But, as Connolly notes of international coordination:

‘The masters of the world’ inevitably prefer ‘coordination’ to competition as a way of arriving at the desired result, simply because the processes of international ‘coordination’ increased their own influence, prestige and insulation from political accountability (Ch.7).

Not that Connolly was a perfect predictor. The ECB proved to be much tougher on inflation than he expected, and much more independent of the French politicians than he (or, for that matter, folk such as Mitterand) expected. But that was the outcome of French and German elites managing each other.

Cognitive closure

What comes across strongly in the book (and the history of the Euro since) is what a disastrous engine of cognitive closure signalling Virtue can be. Conservatism is prone to its own forms of cognitive closure: in recent decades, they have tended to matter much less since conservatives have so little role or influence over educational, academic, cultural, literary and intellectual life. In the case of the ERM and the Euro, many conservatives were very much wrapped up in signalling being Good Europeans, so ended up helping to build bricks in the wall of cognitive closure.

A wall of cognitive closure from which a constant public barrage was mounted, leading Connolly, in his introduction to the 1995 edition, to quote political scientist Leonard Schapiro’s famous analysis of propaganda:

the true object of propaganda is neither to convince nor even to persuade, but to produce a uniform pattern of public utterance in which the first trace of unorthodox thought reveals itself as a jarring dissonance.

And dissent against Virtue is wicked, so need not be engaged with, merely denounced as signs of a deformity of moral character. As Connolly writes in the final sentences of his book:

On this question, as on every other question about the ERM and monetary union, the propaganda steamroller attempts to flatten analysis. For analysis can only mean dissent. And dissent cannot be tolerated.

Cognitive closure indeed. And yet, all those Virtuous Europeans were so wrong, and Margaret Thatcher was so right.

But only if you care about economic consequences; particularly the way mass unemployment blights lives.* But the Good Europeans clearly don’t (or they care about others things a whole lot more). The have their Faith and their Connections and that is clearly more than enough for them.

If you want to see their ugly and shockingly malodorous world in operation, then The Rotten Heart of Europe is a guided tour therein.  The book is 20 years old, but still explains so much of what is happening in Europe now.


*A lot of which is caused by supply-side restrictions, but they are also part of the EU game, as played variously in different countries. And post-2008, by the policies of the ECB.

[Cross-posted from Thinking-Out-Aloud.]

When the three languages of US politics get in the way

By Lorenzo

Economist Arnold Kling, who blogs here, has provided a useful framing of American political debate as divided into three languages of politics. He discusses his framing with economist Russ Roberts here, and his analysis is usefully discussed here. The three languages are:

  • the conservative barbarism-civilisation axis,
  • the progressive oppressors-oppressed axis, and
  • the libertarian freedom-coercion axis.

None of them provide a useful way of thinking about the overall situation of African-Americans in the US. Certainly there are elements of the experiences and circumstances of African-Americans which the various languages can get some hold of; but that is actually a negative, because it invites conflation of that one element into becoming the entire perspective on the overall situation of African-Americans.

One-frame progressives

Starting with the typical progressive approach (since it tends to be the noisiest), the issue is racism–oppression of African-Americans, the oppressed–it is always racism and if you don’t see that it is always racism then you are probably a closet (or not so closet) racist yourself. For if you are disagreeing with the analysis that it is all about racism–which it so “clearly” is–then you are condoning racism.

Since racism explains remarkably little about the current overall patterns and dilemmas of African-Americans (however much to do with how we got here–not the same thing) yelling “racism!” constantly is mostly enormously unhelpful for any other purpose than signalling Virtue. But since it is very, very useful for that, there is no sign it is going to stop any time soon.

I have previously argued that slavery and its legacies explain much more about the present situation of African-Americans than racism–especially as American racism itself is very much part of the legacy of slavery. And slavery is, of course, a system of (profound) oppression. That there is a long history of oppression of, and racism against, African-Americans does provide a clear oppressor-oppression narrative about African-Americans. Alas, it really does not actually explain nearly as much as its propounders believe. The legacy of past oppression can be, and is, a lot broader than the current, remarkably pale, shadows of the same. Nor is oppression the only theme or factor in African-American history: still less in their current circumstances.

There is a sub-version of the progressive position which adds in “culture of poverty”–African-Americans are oppressed by a culture of poverty which is a legacy of racism and slavery. This approach goes back at least to the (later Senator) Daniel Patrick Moynihan‘s 1965 report The Negro Family: the Case for National Action (pdf): though his report is rather more specific and empirically grounded.

Now, as I have previously posted, I am not keen on the culture of poverty explanation either as it appears to answer the question before asking and because, like racism, it is analytical “silly putty”–it can be shoved into any shape to cover the required analytical hole. Besides, it is largely rejected as an explanation among progressives in place of, you guessed it, racism.

One-frame conservatives

Conservatism have their own answer to the situation of African-Americans–more civilisation, less barbarism. Now, there is variance between those who think essentially all African-Americans are barbarians who have to be kept in line (a widespread view once upon a time, rather less so now: it was strongly part of the rhetoric justifying Jim Crow and segregation) and those who think the African-Americans community suffers from too many barbarians, which more civilisation would keep in line.

A sophisticated version of this would be that African-Americans have not fully been through sociologist Norbert Elias‘s civilising process. Which may well have something to it, particularly regarding the high levels of violence (and that it is much the same among African-Americans and jurisdictions of majority African slave descent as the African west coast source population). Especially so, given that African-Americans have hardly experienced American history and the American state as have other Americans–a point conservatives (and quite a few libertarians) tend to be very poor at grasping. As the (later Justice) Clarence Thomas pointed out to the Cato Institute: that freedom had been eroding since the Revolution was not how history had been experienced by African-Americans.

If we consider African-Americans as a particular ethnicity, shaped by common experiences–which is analytically much more fruitful than thinking of them as a racial group (especially given the rising migration of people of African descent who do not share those experiences)–then applying Elias’s analysis is well worth considering. Especially as current African-American homicide rates are positively sedate by medieval European standards and unremarkable by C16th and C17th European or North American colonial standards.

Returning to current conservative views, a very clear manifestation of this civilisation-versus-barbarism outlook is this discussion (pdf) of what it is like to teach black kids. It is massively stereotypical in its language–full of whites do this and blacks do that–but it is pervaded by the language of civilisation (white) versus barbarism (blacks). (If one gets past it being far too black-and-white, it is also a rather depressing testimony.) Another former teacher reacts to the article by talking more neutrally of the difficulty in teaching black kids while a selection of comments to the original piece is here.

So, just as with the the problem is racism response, there are certainly things to point to give the civilisation versus barbarism response some legs. But not nearly as much as proponents think. Consider this example of successful reduction of gang violence in California. It is much more a process of broad civic engagement than imposing civilisation or “being tough” with the barbarians. (A version of which was previous LAPD policy, and a comprehensive failure it was too.)

The biggest single problem with this approach is the same as that with the oppression-oppressor axis; it excludes consideration of alternative factors. Such as, for example, that the African-American experience of American history and the American state has been very different from that of other Americans.

When there is yet another problematic incident with police in the US, the standard conservative response to the claims of racism! will be a “soft on crime” response: police have to impose order, you are getting in the way of that, you are being “soft on crime”, risking the lives, person and property of the wider society. Having decided that racism is not a factor, then any invoking of the same will be labelled “race-baiting”. The possibility that the US might have a broader problem with feral law enforcement gets excluded (as it also does, of course, with cries of “its racism!”). Which is surely the take-away point about those incidents which also involve black police officers or white civilians.

In both cases, the proponents cry their equivalent of “wolf!” way too often and way too loudly, which gets in the way of being more broadly persuasive when they do have a point: sometimes it really is racism, sometimes there really is a threat to civilised order.

The libertarian half-answer

One group who are more likely to approach the performance of law enforcement in the US with precisely such broad scepticism are libertarians. When they do pay attention to the situation of African-Americans (it is not exactly a hot topic among libertarians) their response is likely to be along the lines of too much state coercion: in particular, that the “war on drugs” is much of the problem.

Well, yes, the war on drugs has particularly adverse effects on the African-American community. But pointing to the war on drugs hardly explains why. Talking about African-Americans as living in more vulnerable communities just raises the question of why this is so: which the war on drugs point provides no basis for. Given that slavery was abolished by the Thirteenth Amendment (1865), and Jim Crow overturned by the Civil Rights Acts, talking about African-Americans as victims of past state coercion (while certainly true) is not much help in tackling present problems.

Indeed, as David Boaz points out, that history is often something of an embarrassment to US libertarians, who have their own heroic narrative of American history: though their’s is typically one of decline from a more gloriously free past which, for African-Americans (and lots of other folk) just ain’t so.

No way in

So, the preferred framings of progressives, conservatives and libertarians in the US are each quite poor at providing a full picture of the social patterns and dilemmas of African-Americans. Worse, they tend to be used to blot out what parts of other framings do have value and to wildly exaggerate the coverage of their own. No wonder public debate in the US is both so polarised and keeps “circling the drain” when it comes to the problems and prospects of African-Americans.

From here: uses median household income rather than average income. African-Americans tend to have smaller households than Hispanics.

From here: uses median household income rather than average income. African-Americans tend to have smaller households than Hispanics.

But it is worse than that, because African-Americans are not merely seriously badly served by public debate in the US, they are also seriously badly served by the political process in the US. Part of the problem is obvious: they essentially have a monopoly political provider–the Democratic Party. They overwhelmingly vote Democratic, and seem to be thoroughly “rusted on” Democrats: indeed, appear to be the most thoroughly “rusted on” group. (With Southern whites the next most “rusted on” group–but to the Republicans.) So Republicans have little or no incentive to seriously consider African-American issues.

But it is worse than that. Not only do African-Americans effectively have only one political provider, they tend to live in one-Party jurisdictions: that is, metropolitan areas where the Republicans are not competitive. Ironically, the decline in overall levels of crime have helped make the Republicans less competitive. So Democrats also do not have much incentive to seriously consider African-American issues–they get their votes anyway, with only concerns about turnout to provide some edge to that.

Republicans may be competitive (even dominant) at a State level, but have little incentive to apply themselves to urban issues of the large metropolises. Precisely the places where African-Americans tend to live. With teacher and other public service unions key providers of money and activists to the Democratic Party, there is even less incentive from the political class of large metropolises to look critically at the supply of public services to, and the effects of policy on, African-Americans. Especially as blaming racism at every opportunity provides splendid displacement and cover.

So, dominant frameworks of public debate which narrow what is considered and by whom; having an effective monopoly political provider across all levels of politics; and living in one-Party jurisdictions at a metropolitan level. There are not much grounds for optimism that public policy will start working better for African-Americans.

Wanted: a discovery process

Surely the most impressive political mobilisation in C20th US politics was the (overwhelmingly black-led and organised) civil rights movement. But it had a clear focus and plenty of entirely righteous passion to back it up.

What is needed now is not that single-minded focus, but a discovery process where different policies, efforts and means are experimented with, to see what works and what does not. There is always some of that going on–the US is a large and diverse country. But discovery cannot happen if choices are constrained by monopoly-interest politics and closed cognitive frameworks.


[Cross-posted from Thinking-Out-Aloud.]

The poisonous legacy of slavery and the US race tangle

By Lorenzo

In his book War, Peace, War: The Life Cycle of Imperial Nations, historical demographer Peter Turchin argues that the mass slavery of the Roman Empire–which was at is most intense in Sicily and Southern Italy–is still depressing the social capital of the area centuries later; that the socially disintegrative effects of mass slavery can persist long after the institution has been abolished. When I read it, I thought it was a big claim. In looking into American homicide and the history of American racism, I have come to have rather more sympathy for the claim.

It is not merely that the anti-black racism of the Americas and the Arab world originates in slavery and slavery across a colour line creates racism, and of a particularly invidious sort. (Racism does not cause slavery, as slavery long predates anything we might call racism.) It is that the legacy of slavery continues to poison societies and human interactions.

I have no patience for the claim that the US Civil War was not about slavery–a simple reading of the Confederate Constitution disabuses one of that canard. (Particularly a clause-by-clause comparison.) What is slightly more odd is conservative resistance to the notion that slavery might have enduring effects. Surely much of the central point of conservatism is that cultural effects can be resilient and unexpected, hence being cautious about major social changes.

About culture

While I have long been sceptical about cultural explanations (“the last refuge of the analytically bereft”), especially as they can be used as the analytical equivalent of “silly putty“–put in any shape wanted and shoved in to fit any required analytical use–I have become more sympathetic to use of cultural explanations, if done carefully. In particular, when one looks at cultural friction effects–difficulties in communications and lack of shared expectations and preferences (see my post on problems with South Asian call centres)–and if one takes a careful and precise approach–as was done by Kenneth Pollack and his Ph.D dissertation (The influence of Arab culture on Arab military effectiveness) turned book (Arabs at War: Military Effectiveness, 1948-1991) culture can be a useful explanatory tool. (Though see here for a more critical take on Pollack’s analysis.)

There also seems to be a difference between those aspects of culture which respond (often surprisingly quickly) to changes in incentives and those which are more resistant to change. A point emphasised by economist Deepak Lal. First, he tries to get some precision into the concept of culture (pdf):

… culture remains a murky concept. I have found particularly useful a definition adopted by ecologists (Colinvaux 1983). They emphasize that, unlike other animals, the human one is unique because its intelligence gives it the ability to change its environment by learning. It does not have to mutate into a new species to adapt to the changed environment. It learns new ways of surviving in the new environment and then fixes those ways by social customs. These form the culture of the relevant group and are transmitted to new members (mainly children) who then do not have to invent the “new” ways de novo for themselves.

Noting that:

This conception of culture fits in well with the economists’ notion of equilibrium. Frank Hahn (1973) describes an equilibrium state as one in which self-seeking agents learn nothing new, so that their behavior is routinized. It represents an adaptation by agents to the economic environment in which the economy “generates messages which do not cause agents to change the theories which they hold or the policies which they pursue”. Such routinized behavior closely resembles the ecologists’ notion of social custom, which creates a particular human niche.

Lal goes on to distinguish two levels of culture:

It is useful to distinguish two major sorts of beliefs about the environment: the material and the cosmological beliefs of a particular culture. The former relate to ways of making a living and encompass beliefs about the material world, particularly about the economy. The latter are related to understanding mankind’s place in the world; they determine how people view the purpose and meaning of their lives and their relationship to others. There is considerable cross-cultural evidence that material beliefs are more malleable than cosmological ones. Material beliefs can change rapidly with changes in the material environment. There is greater hysteresis of cosmological beliefs, that is, of ideas about how, in Plato’s words, “one should live.” Moreover, the cross-cultural evidence shows that these worldviews correlate more closely with language groups (and thus with cultural origins) than with environments (Hallpike 1986).

A striking manifestation of culture mattering is a study comparing (pdf) US children of African descent raised by white mothers with those raised by black mothers. There is no reason to assume that African-Americans have the same cultural and social capital as wider American society, and much reason to think not. Having a white mother is likely to change both the (cultural) presumptions brought to child-raising and the networks one has access to (a large part of social capital) compared to being raised by a black mother. The study finds that being raised by a white mother massively reduces black-white differences in education and employment. That the study only compares African-Americans raised by white mothers with those raised by black mothers limits what one can infer from it. But it is highly suggestive.

Also highly suggestive is the success of Afro-Caribbean migrants and recent African migrants, and their children, in the US and the UK, as noted in this piece. I find the evidence on that much more interesting than the argument over IQ tests and the hereditary influence on intelligence (also, the piece does not understand regression to the mean).

On the other hand, the focus on ethnic groups is much more sensible than tired and pointless general racial comparisons–and the long-established African-American population in the US is clearly a specific ethnic group with a specific history and selection processes, an example of ethnogenesis. (They have a much longer grounding as a specific ethnic group than do, for example, Palestinians as a nation; which Palestinians clearly are now but weren’t in, say, 1919.)

The success of Afro-Caribbean migrants and recent African migrants, and their children, in the US and the UK also gets in the way of racism as a blanket explanation for problematic social outcomes for the long-established African-American population: or even of reading too much into the observable phenomenon of unconscious discrimination and familiarity preference.

Note that racism is a classic analytical “silly putty”, as it can be shaped to fit just about any pattern of observed differences by race or ethnicity. Something that its cachet in signalling Virtue exacerbates, though its precisely its apparent analytical ubiquity which makes it so useful in doing so: a utility which may well extend into published academic studies.

West African coast versus New World post-slavery homicide rates

The paper comparing African-American children of black and white mothers suggests one mechanism for having a white mother making such a difference in speech patterns. Using distinctive African-American speech (aka “ghetto talk” or, more positively, ebonics) reduces employment opportunities because it signals difference from employers, their likely staff, clients and customers. It also invokes unhelpful associations. The most notorious of which is the much higher homicide rates for African-Americans–around 6 times higher than for other Americans: the differentiation between black and non-black teenagers being higher still (around 20 times higher).

Looking at comparative statistics on homicide rates, I had a strong suspicion that the legacy of slavery had a lot to do with the elevated African-American homicide rates. Looking more closely at the data, that does not seem to be the case.

If we look at homicide rates of the 11 countries from which over 80% of African slaves in the US came directly from (Angola 10.0 per 100,000, Cameroon 7.6, Congo 12.5, Gambia 10.2, Ghana 6.1, Ivory Coast 13.6, Liberia 3.2, Namibia 17.2, Nigeria 20.0, Democratic Republic of Congo 28.3), then African-Americans (15.2 per 100,000) have a higher homicide rate than all but three of those countries.

Yet the slavery-source countries have a population-weighted average homicide rate of 17.9, as the Democratic Republic of Congo (77.4m) and Nigeria (174.6m) are the demographic giants, accounting for two-thirds of the total population of the 11 countries and with the two highest homicide rates. So, on that basis, the African-American homicide rate looks rather more like that of their original source populations.

Even if we cast our comparison wider to the homicide rates of the 18 jurisdictions with a majority African slave origins, many of which have very small populations (Anguilla 7.5 per 100,000, Antigua & Barbuda 11.2, Bahamas 29.8, Barbados 7.4, British Virgin Islands 8.4, Bermuda 7.7, Dominica 21.1, Grenada 13.3, Guadeloupe 7.9, Haiti 10.2, Jamaica 39.3, Martinique 2.7, Montserrat 20.4, Saint Kitts & Nevis 33.6, Saint Lucia 21.6, Saint Vincent 25.6, Turks & Caicos 6.6, US Virgin Islands 52.6), 8 such jurisdictions have higher homicide rates than African-Americans.  Nevertheless, the weighted average homicide rate of said jurisdictions is 16.5 (driven by Haiti–66% of the population–and Jamaica–19%), much the same as the African-American homicide rate and also rather like that of the source populations.

So, if not evidence for a slavery effect and its persistence, it does appear to be evidence for the importance of the source population in homicide rates. I would be sceptical, however, of any strong claim of genetic effects, as slavery was a very specific selection process, so it is very unlikely–even presuming a strong hereditary element in intelligence and other traits–that we could just infer across from source to slave populations. Conversely, even with the socially pulverising effect of slavery, culture would be significantly transferred. Social capital much less so, and would have to be rebuilt from a very low base after the abolition of slavery (1804 in independent Haiti, 1833-8 in British colonies, 1848 in French colonies, 1863 in Dutch colonies, 1865 in the US, 1869 Portuguese colonies, 1873 in Spanish Puerto Rico, 1886 in Spanish Cuba).

What it is clear evidence for, however, is that the elevated African-American homicide rates have little or nothing do with racism. Not only are they in line with jurisdictions with majority African or African-descent populations, they are compatible with jurisdictions which have had full black participation in political life for well over a century. Even in the US, they also occur in cities which have high levels of African-American participation in politics and policing.

On the other hand, the wide variety of homicide rates between jurisdictions and shifts over time suggest that there is nothing inevitable about the homicide rates experienced (another mark against genetic explanations). Merely that factors specific to the social dynamics of African-American communities are going to have to be identified and tackled if their homicide rates are going to be reduced.

Residential segregation

The wildly variant homicide rates between African-Americans and other Americans are sufficient, on their own, to explain residential segregation by race–indeed, enough to do so even if racism, unconscious discrimination or familiarity preference played no roles at all. Consider: you are a family living in a previously non-black neighbourhood. Black families start moving in, with this much higher average level of violence. Do you and your children continue to live in the neighbourhood, or do you leave? The question answers itself.

In the US, preferences on house size and proximity can lead to significant residential segregation by political outlook (the urban liberal/rural conservative effect). How much more powerfully will highly differentiated homicide rates lead to residential segregation? Zoning laws in the US partly had their origins as mechanisms of racial separation (pdf): while racism had a considerable amount to do with that history, current patterns sadly look more like rational parental concern.

Which goes how complex and tangled these issues are in the US.

Entrenched patterns of disadvantage

This does not mean I am buying into some “culture of poverty” explanation. That is just another form of analytical “silly putty”. Not only do what characteristics one means have to be carefully delineated, the label provides a putative answer before asking the question. Especially as African-Americans are not predominantly poor even by US standards and are certainly not so by world standards.

African-Americans do have average incomes significantly lower than white Americans, yet higher than Hispanic Americans. According to US census data (pdf), African-Americans had a per capita income 68% of the overall US per capita income (for non-Hispanic whites 116%, Asian-Americans 112%, Hispanics 58%). Applying that percentage to World Bank data, that gives African-Americans about the same per capita income as Japan–or around 26th of the 185 jurisdictions covered by the World Bank data–and more than that of Italy, Spain, South Korea and Israel.

Nevertheless, there are clearly entrenched patterns of disadvantage: African-Americans are much more likely to live in communities with high levels of poverty and find it much harder than white Americans to escape from such communities. Much of African-American disadvantage is a African-American male disadvantage. The elevated homicide rates are overwhelmingly elevated male homicide rates. An unusual feature of African-American IQ results is that women do better than men. African-Americans males have a persistently low (if rising somewhat) college graduation rate of 35% in 2005: up from 28% in the early 1990s. African-American women have a college graduation rate of 46% in 2005: up from 34% in the early 1990s.

The African-American disadvantage in graduation rates continues. Which then feeds back into lower income opportunities and average incomes. Even though historically black colleges actually do a better job of getting students through than their intake demographics would suggest. Again, these issues are complex and tangled.

Particularly when one looks at school graduation rates, which are generally rising but with the gap between blacks and white males widening as that between white and Hispanics males is narrowing (remembering that Hispanics have significantly lower average incomes than African-Americans):

Since the last report in 2012, the gap between the four-year graduation rate for black males and white males widened from 19 points in the 2009-10 school year to 21 points in the 2012-13 year. For Latinos, the gap shrunk to 15 points from 20 during that same period, according to the report.

The national graduation rate for black males was 59 percent, 65 percent for Latinos, and 80 percent for white males for the 2012-13 school year, according to the report. Particularly striking was Detroit where only 20 percent of black males graduated on time in the 2011-12.

Detroit: the social disaster that just keeps rolling along. Given that the city is 83% African-American, it is again hard to blame racism for that disastrous school graduation rate.

Where to look

Cultural factors and low social capital are much more plausible contenders. Especially as the higher levels of violence, particularly amongst male teenagers, disrupts social capital formation and education participation (the much higher homicide rate among black teenagers can also be expected to translate into a tendency for more disruptive behaviour in class) while also being a product of the same: once again, complex and tangled issues. There is, to put it mildly, not the same culture of courtesy and educational attainment one sees among East Asians or South Asians, for example. The disruptive effects of entrenched violence is likely to matter quite directly, as cooperation and networking are crucial to social capital and its formation (pdf).

Lower levels of school graduation mean lower levels of college entry and job opportunities. Lower levels of college entry and lower levels of college graduation have compounding effects in reducing African-American entry into professional and other high income jobs. Which means fewer examples of same, and so it goes around.

It also means that persistent negative stereotypes of African-Americans, while suffering the generic problem of stereotypes (people are not categories), are not entirely without foundation–which, of course, makes them harder to shift.

Jonathan Chait and Ta-Nehisi Coates had a revealing exchange over African-American history and disadvantage. In his responses Coates made some telling and powerful points but, once again, without some fairly precise delineation, his pointing to white supremacy is every bit analytical “silly putty” as culture of poverty. His essay The Case for Reparations tells of the grim history of American racism. Yet it is, in the end, looking for external redemption.

Slavery’s poisonous legacy

The American South has lower levels (pdf) of social capital than the rest of the US. That is surely the legacy of slavery. Mass slavery is much longer ago in Italy, but social capital is also much lower in southern Italy. This is likely both an origins and a subsequent developments story, but part of that story is surely that previous structures affect future paths.

Then there is slavery and income inequality: the US has high income inequality by developed world standards, low inequality by the standards of former slave societies. There is evidence of persistent effects of slavery on unequal human capital formation. In a summary of another study:

In other words, the share of slaves in the population in 1860 is also correlated with current racial inequality in school attainment. Since the quantity of human capital is the main determinant of earnings, it follows that the schooling gap has immediate repercussions on income inequality across races.

Having a white mother means having a mother who is not part of that legacy.

Depending on where you are in the Americas, race or skin tone or some combination of both matters for income inequality (pdf). The authors note this shows the multidimensionality of race identities; but it also raises what is being signalled or is associated with what: remembering the effect of having a white mother.

Post-revolutionary Haitian society was promptly taken over by its mulatto and freedman elite, particularly after the massacre of the remaining white population (something which then fed into Southern fears in the lead up to the US Civil War). It is clear enough, however, that slavery has a persistent legacy and it is a socially divisive one.

The legacy of slavery also continues to retard (pdf) economic development decades later: and not just through initial unequal distributions of factors of production but through continuing effects–such as discouraging social capital formation and human capital acquisition.

For slavery’s poisonous legacy in the US is also a bad faith story. American patriotism is based on heroic narratives, and slavery gets in the way of those narratives. As does Jim Crow and the history of American racism generally.

Amerindians and African-Americans were, along with American Tories, the big losers from American independence.  The triumph of the North in the Civil War and the passing of the Thirteenth Amendment, the civil rights struggles, leading to the Acts of almost a century later, can somewhat repair the narrative, but they are easily countered, given that the Reconstruction Amendments did not deliver what they implied and African-Americans remain mired in patterns of disadvantage and outright repression.

American society does not bind across its history, it divides, and divides racially. That baggage still affects interactions between black and white Americans; an Australian going to the US can find that saying “g’day” a lot can elicit changes in responses from black Americans as they shed that legacy of expectations.

The combination of residential segregation, divided experiences, seriously different and differentiating expectations all combine to make social capital further racially differentiated. Another legacy of slavery and its effects down the decades.

It is easy to notice signs of a racially divided society and say “that’s racism!”. Yet it is hard to see what change in white behaviour will change a 20% black male school graduation rate in a city that is 83% black. It is hard to see what change in white behaviour will change African-Americans having a homicide rate 6 times that of other Americans, or the 20-fold difference in homicide rates between black teenager and white teenagers.

Even more so if having a white mother turns out to eliminate much of the education and employment disadvantage–people who deal with you don’t see your mother. Even more so if having two black parents but being a recent Caribbean or African immigrant does the same.

Yes, it is very easy to take any pattern of racial difference–particularly of racial disadvantage–and way “that’s racism!” Racism is analytical “silly putty”; you can shove it in to explain any such difference. Alas, it is not that simple, however comforting it might be to think it is. And perhaps a little condescending–because it also turns whites into the obligated redeemers of blacks. Informed understanding and equity in behaviour and policy–which definitely should be sought–not being quite the same thing.


[Cross-posted from Thinking-Out-Aloud.]

Thinking about states

By Lorenzo

While writing a paper on state dynamics in Latin Christendom, it was useful to try and think (think out aloud indeed) coherently about states as historical entities. State understood as an institutionalised structure of expropriation and coercion dominant in a particular territory.

The notion that a state has to have, or even aspire to, a monopoly of coercion does not make much sense in the context of medieval Europe. Indeed, for much of human history, the right to bear arms was a defining capacity of a free person. And even the notion of a state requiring to have a monopoly of organised coercion fails the medieval test. Though, as post-medieval states increasingly aspired to a monopoly of organised violence, there was a long-term decline in (pdf) private lethal violence.*

The OED definition of a state used by Wikipedia of:

an organized political community living under a single system of government

is both too abstract and assumes too much; a political community, according to Wikipedia is:

a geographic region accepted to be in the jurisdiction of a particular governmental entity

which constitutes a community, being

social unit of any size that shares common values.

This is way too touchy-feely. And inaccurate–how many empires were social units sharing common values? These definitions are too modern, too nation state, too Westphalian.

What do I mean by institutionalised? Wikipedia uses political scientist Samuel Huntingdon’s definition of an institution as:

stable, valued, recurring patterns of behaviour.

Which is a good short definition, though “valued” bothers me (valued by whom, how much?). Economist Douglass North defined institutions as:

the rules of the game in a society or, more formally, are the humanly devised constraints that shape human action (p.3).

Which, in the formal version, somewhat misses the stable, recurring element. Economist John Powellson defined institutions as:

an accepted mode of behaviour protected by the culture (p.9).

which also implies a bit too much social coherence. States only conform to ethnic or similar boundaries if the trade-offs of coercion, expropriation and dominance lead them to do so.

The key features institutionalised is trying to get at is persistent structure. That is, providing continuing and specific constraints on human behaviour. A street or criminal gang might be organised expropriation and coercion dominant in a particular territory, but it lacks the persistent structure of a state. Besides, such gangs are generally only dominant in a very narrow sense; much more narrowly than the persistent structure of a state provides.

Underlying these various definitions cited above tends to be some idea of states as epiphenomena of societies, as products of societies. That is fundamentally mistaken: societies with states are at least as much products of states as the other way around. Hence my first principle for thinking about states.

(1) State societies are significantly different from stateless societies.

State societies are larger in scale in almost every sense: including in population and production. They have less retail violence, but their organised violence is on a (typically much) larger scale. Their constructions are larger and more enduring. They are far more urbanised. They are more stably hierarchical. To have a state profoundly shapes and changes a society: in simplest terms, the state acts as a social multiplier compared to not having one.

(2) States depend crucially on the capacity to expropriate.

As this paper (pdf) by Mayshar et al points out, the notion that farming automatically produces a social surplus is fundamentally mistaken. All farming produces is more babies and somewhat more specialisation. The only way to produce a continuing social surplus is by expropriation. Which farming (specifically cereals farming, as cereals are less perishable) permits because then food is stored across seasons and so can be expropriated. But that creates a “chicken-and-egg” problem: the social surplus requires expropriation, the apparatus of expropriation requires a social surplus to support itself. This is a “chicken-and-egg” problem which the mere existence of cereals farming does not solve.

Which is why it took thousands of years for farming to produce states. Solving the “chicken-and-egg” problem requires a multi-generational authority with increasing coercive specialisation. The most likely way to produce that is by conflict, especially across an ecological frontier (pdf) (classically, river valley farmers versus oasis, savanna or steppe pastoralists). What historical demographer Peter Turchin calls (pdf) multilevel selection.

While priesthoods can provide multi-generational authority, coercive specialisation is also required to create and maintain a state. Hence hereditary autocracy is the simplest (and historically most common) form of the state–if a multi-generational authority has enough coercive dominance to establish and maintain state, then it will likely have enough coercive dominance to centralise power.


(3) The scale of state activity is primarily driven by its capacity to extract revenue.

The state is a structure of coercion, expropriation and dominance. The more revenue it can extract, the more it can do. It will tend to do so extract up to the level at which the trade-offs of capacity and consequence balance out for state agents. Remembering that all rulers confront principal-agent problems: indeed, these were plausibly central to dynastic cycles, particularly in China (pdf).

So, it matters how transparent production is to the state, because the more transparent, the easier it is to expropriate. Thus irrigation makes extraction easier because production is more transparent.

As the paper by Mayshar et al points out, Karl Wittfogel got it the wrong way around: irrigation favours state dominance not because the state provides irrigation (that is normally done locally and typically pre-dates the state, though the state may well expand its ambit) but because it makes production more transparent and so more able to be expropriated. Thus, given that production on the Nile was highly transparent (revenue could be predicted by how much the Nile flooded), Egypt was an early developer of a centralised autocratic state, despite being a relatively late adopter of farming.

Who said production was transparent to made a difference. In lower Mesopotamia, farming production was more transparent to local elites than any higher ruler. Moreover, unlike much of the Nile, everywhere in Mesopotamia was subject to pastoralist raids, requiring walled cities. The combination meant that the lower Mesopotamia was an early centre for urbanisation, yet its centralised (i.e. multi-city) states were more unstable than Egypt’s as production was less transparent to any regional ruler and resistance to such rule was easier.

Rainfall farmland is less transparent again, given that rainfall is more idiosyncratic than irrigation. So, in areas of rainfall farming, farmer-owners tend to be the pattern as the state does not know enough to reliably extract without providing the farmer with more incentive–such as owning their land. Egyptian and lower Mesopotamian farmers did not own the land they tilled: as the state in the first instance, and the local elites in the second, could reliably extract revenue without having to provide that much incentive. That Europe is overwhelmingly a place of rainfall agriculture was an important factor in its history.

In the modern world, the Industrial Revolution hugely increased the power of the state to tax. In the words of Mayshar et al:

We prefer to describe this increased efficiency of the tax technology as resulting from the increased transparency of production. The latter was due in part to the shift to mass production by hired labor in large corporations — a shift that was accompanied by a massive accounting paper trail (see Kleven, Kreinerand, Saez 2009). This paper trail exposed productive activity to the state and transformed the state’s ability to tax, among others by turning private companies into efficient tax collection agencies, and by facilitating the taxation of income (p.45).

(4) Level of social friction involved in the appropriation process is a major constraint.

A factor in the evolution of states evolve is responding to various forms of social friction the appropriation process has to deal with. Thus, Parliaments reduce social friction in revenue extraction: hence Parliamentary states tended to have higher tax rates than non-Parliamentary states. Which is a reason for rulers to have Parliaments. Indeed, that seems to be precisely why Alfonso IX (r.1188-1230) of Leon engaged in his experiment (1188) of asking merchants to send representatives to his court to discuss matters fiscal. It worked so well for him, he kept doing it. This was well before Simon de Montfort’s exercise of 1265, which had continuing historical significance because Edward I (r.1272-1307) repeated and institutionalised the arrangement.

While the notion of Parliaments being imposed on tyrannical monarchs makes for stirring historical narrative, monarchs were very actively involved in the development of Parliaments because it made the process of expropriation easier. It did so by:

(1) providing more information on the monarch’s own agents;

(2) alerting monarchs to potential problems; and

(3) allowing trade-off bargains which enabled more expropriation to occur.

Parliaments comprehensively reduced social frictions while making the political nation more transparent to the monarch. (Of course, whether the monarch made good use of that was another matter.)

Cultural homogeneity also reduces social friction in extraction (and state action generally) and it does so the more empowered folk are. Thus, the relatively culturally homogeneous Scandinavian states can manage a higher tax/spend equilibrium than more culturally diverse settler societies such as Australia or the US.

The Industrial Revolution’s explosion in technology (which only really took off in the 1820s with railways and steamships) increased the capacity of states, but also increased the capacity of organisations and individuals. Hence the Industrial Revolution resulted in much more pressure from upwards (nationalist agitation) and downwards (national identification and homogenisation) for states to conform to national boundaries. This was also an interactive process, as the power of states often determined the ethnic boundaries–if necessary, by massive processes of population shifts (some of which were population exchanges, some not: the Israel-Palestine conflict can be reasonably characterised as largely driven by an unresolved population exchange as the Jewish state integrated its refugees and the Arab states refuse to integrate theirs).

Strong kin networks increase social friction in extraction, as they provide ways for folk to organise to resist state power. Hence states in societies with strong kin networks (i.e. highly clannish societies) often make implicit or explicit trade-offs–they accept the clans’s internal authority in return for acceptance of the over-arching authority of state and ruler. Indeed, use of clan patronage networks can result in substitution of such patronage for the development of state institutions (as in Palestine under Arafat), as well as of more (pdf) general institutions of formal (non-kin) cooperation.

The anti-kin-network family rules of Christianity (monogamy, no divorce, no adoption, no concubines, no cousin marriage) tended to undermine clan networks, encouraging more formal arrangements for social cooperation.** In economist Avner Greif’s words (pdf):

The practices the church advocated, such as monogamy, are still the norm in Europe. Consanguineous marriages in contemporary Europe account for less than one percent of the total number of marriages. In contrast, the percentage of such marriages in Muslim, Middle Eastern countries, where we also have particularly good data, is much higher – between twenty to fifty percent. (Alan H. Bittles 1994.) Among the anthropologically defined 356 contemporary societies of Euro-Asia and Africa, there is a large and significant negative correlation between Christianization (for at least 500 years) and the absence of clans and lineages; the level of commercialization, class stratification, and state formation are insignificant. (Andrey V. Korotayev 2003.) (p.309).

The strong family networks of East Asia substituting for welfare provision likely has much to do with why East Asian states have a lower tax-spend equilibrium than other developed economies.

What might be called “the borough deal” was another way of increasing extractive capacity–in this case, over the longer term–by reducing social friction (specifically, fear of expropriation). A land-holding magnate wishes to encourage (taxable) commercial activity, so seeks to establish a local permanent market (fair or town). In the case of a town, it involves significant amounts of fixed capital, so increased risk of expropriation by said magnate. Thus the magnate grants a charter which allows the merchants of the town to make their own local laws, including regarding property rights, and build a wall around their town. That alleviates fears of expropriation and encourages local commercial activity, increasing the revenue of the magnate (including providing a local market for the products of his land).

(5) Social bargaining can increase or stabilise coercive capacity.

Mounted armoured warriors are expensive (the horse–i.e. war charger–alone could cost half the annual income of a large village), there are no significant economies of scale in their equipment or training (both of which are also very expensive), it is ideal for one generation to train the next and such a warrior can dominate local peasants. So, while having them extract their income directly from local peasants (by way of land-ownership or tax-collection grant) economises on extraction effort, it also leaves them significantly self-sufficient. So, some sort of implicit or explicit social bargain between ruler and warrior can usefully structure their relationship, providing the ruler more coercive capacity while economising on extraction cost. A franchising arrangement, if you like.

Suppose you have a large number of small city states in intense competition competition with each other. The geography is not very suitable for large-scale horse raising, so armies are dominated by (expensive to equip) heavy infantry which do have economies of scale in equipment and training. But the states are small and lack the coercive capacity to expropriate enough funds to equip large numbers of such folk. They are in a region of rainfall farming, and thus have lots of owner-farmers. So, how do you get said farmers and others to equip themselves and turn up for training? Give them a say in the running of the polity: or, more precisely, the polis. This allows you to have a larger and tougher army than your ordinary taxing capacity would provide: important in an intensely state-competitive environment. This would be the citizenship deal.

It does require a certain social stability to make work: hence the more socially unstable–yet highly commercial–cities of Sicily tended to end up with tyrants. But versions of the citizenship deal recur with the self-government cities of medieval Europe. Particularly (but not only) in Northern Italy and the Low Countries; both regions with lots of cities in intense competition, with each other and with landed magnates.

(6) Persistent constraints matter.

States may be central to the evolution of state societies, but that does not mean they do not face serious constraints. One is geography: until the technology of coercion and dominance developed sufficiently, it was difficult to stably project state power across ecological frontiers. As discussed above, whether the state operated in an area of rainfall farming or of mass irrigation also mattered.

As we saw in the matter of clans and Christianity, religion could also matter (both as constraint and as opportunity). That Islam, and India after the Brahmin resurgence, both operated on the basis of divine law (Sharia in the case of Islam, Manusmrti, the laws of Manu, in the case of Brahmin India) mattered because it foreclosed a great deal of social bargaining.

Parliaments, the borough deal, the citizenship deal, all required folk getting together and making laws, laws that entrenched various social bargains. If human law making (in practice, ruler decree issuing) was limited to the silences of divine law, then it simply was not enough to sustain that sort of social bargaining. Hence no more Kshatriya republics in India once Brahmin dominance of law provision was established.

An issue that very much still resonates in Islam (though not in India; given the demands of modern commercial society, bringing back Mansumrti is not even in the interests of Brahmins). Nowadays, opinion polls show Muslims as in favour of democracy; in some Muslim countries as much as Westerners (the logic of belief is not necessarily the logic of believers). But central to the Salafi movement is re-establishing the primacy of Sharia. The movement comes in quietist (withdraw from corrupt world), activist (seek to expand the social reach of correct action) and jihadi (kill folk until they accept our version of Sharia rule) variants. Muhammad Nasir-ud-Din al-Albani (1914-1999) was widely regarded as the most important Salafi scholar of the C20th. An advocate of quietist Salafism, he had this to say about democracy:

Elections according to democracy are unlawful, and parliaments that do not govern in accordance with the Qur’an and the Sunna [orally transmitted traditions of Muhammad], but rather on the basis of the majority’s arbitrariness, are tyrannical. Parliaments cannot be recognized and Muslims can neither seek nor cooperate to found them, for they contend (combat) God’s revelation. And they are a Western technique made by the Jews and the Christians, who cannot be legally emulated.

By unlawful and legally emulated, he means by the laws of Allah, the only true legislator. When the jihadis say they are fighting tyranny and injustice, tyranny includes any democracy (since it is illegitimate authority) and injustice means anywhere not under Sharia rule, because Sharia is the only justice. Remembering that, in mainstream Islam, ever since al Ghazali (1058-1111), revelation has been taken to be the limits of morality (a consequence of the defeat of Aristotelianism in the Islamic world). Moreover, since Allah is the sovereign of the universe, Allah’s law applies everywhere and to everyone.

Which is why Parliamentarianism and democracy struggle somewhat in the Islamic world. They are clearly outside imports (problematic in itself) and exist in a level of tension with religion that simply does not apply anywhere else. (Only the Islamic world, for example, felt a need to issue its own, adjusted, declaration of human rights.) There are functioning (even stable) Muslim democracies, but still the attraction of anti-democratic religious totalitarianism is enduring.

So, whether a civilisation accepted law as man made (as Christianity does) or not (as Islam and Brahmin India did not) was an enduring constraint that affected the evolution of states in the respective civilisations. Just as Christian doctrines undermining clan networks both encouraged and enabled the development of more formal institutions of social cooperation, affecting the evolution of states.

About the state

States–persistent structures of expropriation and coercion dominant in a particular territory–are not dependent products of their societies. The combination of coercive dominance and extractive-and-spending power makes them the most powerful element in their society–otherwise, you have a very weak state or no effective state at all.

States are not “instruments of the ruling class“: indeed, in historically typical autocracy, the “ruling class” (a deeply problematic term at the best of times) owed their social position to their position as superior agents of the state, they were not superior agents of the state because of their social position.

The central role of states in history is why the technology of coercion is such an important factor in history in its own right. Neither the hand mill nor the water wheel produces the knight; the technology of armoured horsed combat does. But how the knight’s–the armoured mounted warrior’s–social role was structured had a great deal to do with how widespread mills became.

States create societies (or at least social orders) at least as much as societies create states. This is blindingly obvious in the case of Leninist states, which literally created the social orders that (functionally) suited them. But even without that level of brutally socially pulverising social dominance, states are fundamental to the structuring and evolution of their societies. If we do not see that, we miss some fundamental historical dynamics. As well as much of the why of the passions politics can engender.


Economic theory does predict that monopolisation tends to lower output: though that is better described as its developing monopoly of violence increasing the capacity of the state to pursue its interest in not having its taxpayers kill each other.

** The persistence of clan in the Celtic fringe (Scotland–particularly highland Scotland– and Ireland) is likely a result of the Celtic requirement for kin loyalty–in contrast to the Germanic idea of freely chosen personal loyalty–somewhat exacerbated by the lack of urbanisation. One can see the tension between Celtic kin loyalty (the whole Mordred/Lot’s kin debacle) and Germanic freely chosen loyalty (embodied in the Round Table) in the Arthurian tales. 


[Cross-posted from Thinking-Out-Aloud.]

American homicide

By Lorenzo

Using US Census data and FBI homicide statistics to look at US homicide rates by race is problematic, because the race of offender (and of victim) statistics apparently do not cover non-negligent manslaughter. One is forced to multiply such statistics by the ratio of the total homicides counted on that basis to the total including non-negligent manslaughter to get figures that are internationally comparable.

Doing so, and if one excludes African-Americans, the US homicide rate is 2.6 per 100,000–in other words, about the rate of Turkey or the UAE or around 71st or 72nd of the 218 jurisdictions listed by Wikipedia: rather high by the standards of developed countries. (Claims that the non-African-American homicide rate is normal for high income countries appears to come from taking the FBI homicide-by-race statistics as covering all intentional homicides, which they do not: a mistake I made with the first version of this post. Which points to the need to be careful about statistical sources, especially administrative statistics.)

The homicide rate for African-Americans is 15.2 per 100,000. That is around 186th out of the 218 aforementioned jurisdictions and very high by developed country standards: it is about the rate of Myanmar and well above the global average of 6.2 per 100,000

(When looking at country statistics, the offenders and victims come from the same group so homicide and victimisation rates are the same; when looking at intra-country statistics, that does not follow. So the intra-US statistics I cite are based on race of offender, not victim.)

Region and homicide

The African-American homicide rate is high by Sub-Saharan African standards: only 9 out of 41 jurisdictions have higher rates. It is around the middle by Caribbean standards, with 11 jurisdictions out of 21 having lower homicide rates, and by Latin American standards, with 13 jurisdictions out of 23 jurisdictions having lower homicide rates: some of the Caribbean and Latin American homicide rates are astonishing.

The African-American homicide rate is high by Greater Middle East standards (North Africa-Middle East-Islamic Central Asia) by European standards and by Oceania standards, as no jurisdictions in those regions have higher homicide rates. In Asia (outside the Greater Middle East) only Myanmar 15.2 has an equal or  higher homicide rates.

Income and homicide

According to US census data (pdf), African-Americans had a per capita income 68% of the overall US per capita income (for non-Hispanic whites 116%, Asian-Americans 112%, Hispanics 58%). Applying that percentage to World Bank data, that gives African-Americans about the same per capita income as Japan–or around 26th of the 185 jurisdictions covered by the World Bank data–and more than that of Italy, Spain, South Korea and Israel. For that level of per capita income, the African-American homicide rate is strikingly high. All the jurisdictions with equal or higher per capita income have homicide rates in the range of 0.2 per 100,000 (Singapore) to 2.6 per 100,000 (UAE) with the exception of Bermuda (7.7 per 100,000). The excluding-African-Americans-US homicide rate of 2.6 per 100,000 is high for high income societies. Adding in African-Americans raises it to 4.7, which is even more so.

The FBI homicide figures for ethnicity (including Hispanic) are not anywhere near as complete (there are lots of “ethnicity unknown” in the FBI figures). If we apply an estimate of Hispanic American’s victimisation rate (pdf) (5.7 per 100,000, which will very likely be an overestimate for the Hispanic offender-homicide-rate), that is lower than the homicide rate for any Latin American country apart from Chile (3.1), Cuba (4.2) and Argentina (5.5).

Applying Hispanic Americans average income as a percentage of overall US per capita income (58%) as above, gives them a per capita income above Malta’s but below Israel’s, with Puerto Rico being the only Latin American country/dependency with a higher per capita income. So, for Latin Americans, the US is the land of opportunity: hence the continuing attempts to enter the US.

Given that the African-American homicide rate is above that of most sub-Saharan countries and countries with populations with majority sub-Saharan African descent, African-Americans are not getting the reduced-homicide benefit of their (much higher) average income.

This is so even if we look at jurisdictions were a majority of the population are of African slave descent. The other thing Bermuda has in common with African-Americans–other than strikingly high homicide rates for their level of income–is being descended from African slaves: a majority of Bermudans are of African descent.  Countries such as Jamaica (39.3) and various small island jurisdictions–Montserrat (20.4), Dominica (21.1)*, Saint Lucia (21.6), Saint Vincent & the Grenadines (25.6), Bahamas (29.8), Saint Kitts & Nevis (33.6), US Virgin Islands (52.6)–have rather higher homicide rates than African-Americans. Yet Martinique (2.7),  Turcos & Caicos (6.6), Barbados (7.4), Anguila (7.5), Bermuda (7.7), Guadaloupe (7.9), British Virgin Islands (8.4), Haiti (10.2 per 100,000), Antigua & Barbuda (11.2), Grenada (13.3) are all majority Afro-Caribbean jurisdiction with lower homicide rates. Many of these jurisdictions have small populations, so it does not take many murders to push up the homicide rate, but the pattern of African-Americans being roughly in the middle, despite their much higher average income, is sufficiently clear that the generally small populations of these jurisdictions do not invalidate the comparison.

Regarding guns

By the standards of developed countries, the US does have something of a general homicide problem.  Excluding African-Americans, the 2.6 per 100,000 homicide rate is elevated, especially compared to countries of similar population and institutional origins (Canada 1.6, Australia 1.1, New Zealand 0.9: weighted average of three 1.4). While the proportion of homicides caused by guns marches with the general trends, there is prima facie evidence that the level of gun possession elevates the overall homicide rate. Guns make homicide easier and, other things being equal, if it is easier to do, it will be done more often.

With gun deaths more broadly, the US also has something of a suicide and gun-accident problem. (To which the same point applies.) Nevertheless, the US non-African-American homicide rate is not nearly as high as the national figures suggest. Even with mass shootings, cases where armed civilians stopped or curtailed mass shootings tend not to get much media coverage.

There is, however, even more clearly an African-American homicide problem: given the level of economic development. Indeed, using the weighted average of the other Anglo-originated neo-European states as a guide, about 37% of the elevated homicide rate is likely about gun prevalence (the difference between 1.4 and 2.6) and about 63% is due to the highly elevated African-American homicide rate (the difference between 2.6 and 4.7).

Comparatively low social capital (including the legacy of slavery) and dysfunctional metropolitan governance (particularly due to the prevalence of one-Party government; somewhat exacerbated by a lack of urban voices in the overwhelmingly rural-and-suburban Republican Party) are likely factors in the latter. The extent of gun possession hardly explains the striking difference in homicide rates between African-Americans and other Americans.

Attitudes to gun control have a strong urban-rural divide, expressed thusly by Steve Sailer:

The endless gun-control brouhaha, which on the surface appears to be a bitter battle between liberal and conservative whites, also features a cryptic racial angle. What blue-region white liberals actually want is for the government to disarm the dangerous urban minorities that threaten their children’s safety. Red-region white conservatives, insulated by distance from the Crips and the Bloods, don’t care that white liberals’ kids are in peril. Besides, in sparsely populated Republican areas, where police response times are slow and the chances of drilling an innocent bystander are slim, guns make more sense for self-defense than in the cities and suburbs.

White liberals, angered by white conservatives’ lack of racial solidarity with them, yet bereft of any vocabulary for expressing such a verboten concept, pretend that they need gun control to protect them from gun-crazy rural rednecks, such as the ones Michael Moore demonized in “Bowling for Columbine,” thus further enraging red-region Republicans.

In the US, race (as so often) entangles the patterns: contra Sailer’s framing, plenty of African-Americans are keen on gun control–such as the middle class Americans Alan Wolfe starts off his One Nation, After All by quoting, voicing discontent about urban life and its dangers (before telling you they are all comments from African-Americans). Indeed, African-Americans tend to be keener on gun control than white Americans (pdf): unsurprising, since they are much more at risk from homicide and gun violence than white Americans.

Though Hispanics are even keener–66% of blacks give gun control priority according to the 2011 Pew poll but 75% of Hispanics do. Wanting the state to disarm those other folk may have something to do with the greater Hispanic enthusiasm for gun control, given that they are notably keener on gun control than African-Americans, yet are considerably less likely to be the victims of gun violence; the African-American homicide victimisation rate is 15.2 per 100,000 compared to 5.7 for Hispanic Americans.

Both groups are also much more concentrated in inner cities than white Americans: according to the 2011 Pew poll, 57% of urban dwellers give priority to gun control compared to 33% of rural dwellers. One sees the same urban-rural divide in Australia without a comparable racial element. Folk in cities, with quick police reaction times and lots of highly diverse anonymous strangers, tend to want all those unknowns to be disarmed. Folk in rural areas, with slow police reaction times, fare fewer unknowns yet dangerous (or just pesky) critters, tend to want access to guns. There is no great mystery to it, if you understand the different social perspectives.

But being against guns is easy. Improving social capital and city governance is hard: though the decline of gangs in Los Angeles points to what can be achieved if folk try. In the US, the easy can also be an evasion, which does not help people living in communities with low social capital, dysfunctional city government, inappropriate federal and state policies and homicide rates much higher than they should be, given their income levels.


*Dominica was the first British Caribbean colony to have a majority black legislature (1838). For countries with majority Afro-Caribbean population (and so electorates), racism is not likely to be a major factor in explaining their homicide rates. (Remembering that enslaving Africans generated racism, slavery was not caused by racism.)

[Cross-posted from Thinking-Out-Aloud.]

Cause and context

By Lorenzo

In the postwar period, the Democratic candidate for President has received a majority of votes cast in precisely four elections: Johnson 1964 (53.4%), Carter 1976 (50.1%), Obama 2008 (52.9%), Obama 2012 (51.1%). Which makes the first African-American President the only Democratic candidate to get a majority of the votes cast twice in the postwar period. (It is entirely possible to win US Presidential elections without getting a majority of votes cast, as was managed by Truman in 1948, Kennedy in 1960, Nixon in 1968, Clinton in 1992 and 1996, and Bush II in 2000–in the last case, the Electoral College winner infamously did not even get a plurality of votes cast.)

Obama’s election results were in line with economist Douglas Hibbs’s “peace and bread” (pdf) model of US elections: bang on in the case of 2008, a bit above in 2012. (Indeed, Obama’s 2012 performance in bettering the line of best fit is roughly equal to Nixon’s 1972 win and only clearly beaten by Clinton’s 1996 win.) An even simpler model based on growth in per capita national income also puts his 2008 vote as bang on what was predicted, a bit above in 2012.

So, the evidence suggests that Obama has been electorally a strong candidate for the Democratic Party. Yet, it has been argued, using regression analysis on survey evidence (pdf), that race denied Obama the landslide he would otherwise have had in 2008: reducing his vote by 5 % points. A study using Google searches as an indicator of racism (pdf), and comparing to 2004 results by county, suggested that race reduced Obama’s votes by a net 4% points in 2008 and 2012.

Now, in tight races, a 4 or 5% point disadvantage is a big deal. I am a little sceptical, simply because it would have moved Obama into being even more of a standout electoral success for the Democratic Party than he already was–given that he already achieved half the winning-a-majority Presidential elections that the Democrats have managed in the postwar era. Indeed, adding 5% points to Obama’s 2008 total would have made him the most successful non-incumbent Presidential candidate in the postwar period–beating ideologically moderate war hero Eisenhower’s 57.1% result in 1952 after 20 years of Democratic Presidents. It would even have beaten FDR’s 57.4% in 1932 at the height of the Great Depression. I am particularly sceptical of the Google-search paper, because it suggests that the experience of 4 years of Obama as President had no effect, when continuing knowledge of a particular person tends to increase their salience as an individual and reduce their salience as a member of a category.

The stunning retreat of US racism

But let us accept that 5% points (since the Google study found that Obama received a 1% point advantage from being African-American and a 5% point disadvantage, giving a net 4% point effect) was the “won’t vote for him because he is black” effect. That means 95% of the US electorate did not vote (negatively) on the basis of his race–at least in the sense that other considerations were more important to them. Even if we just assume that 5% were all whites, an overwhelming majority of white voters judged other considerations as more important. That is, in the context of the US’s long and vicious history of racism, remarkable. (Clearly, what was by far most important to US voters was which Party he belonged to, followed by the state of the economy.)

Obama’s electoral success is hardly the only indicator of massive change on this front. In 1958, 4% of Americans polled approved of interracial marriage. By 2013, 86% of Americans polled approved of interracial marriage. That includes 84% of white Americans (96% of black Americans).

It is notable that interracial marriage only achieved majority support in polling in the mid 1990s. So, about 20 years ago: around 30 years after the US Supreme Court ruled bans on interracial marriage unconstitutional in Loving v Virginia (1967). But polling support has continued to climb to the extent that approval of interracial marriage is way into the social consensus area. Support is lower among older Americans, but reaches 96% among 18-29 year olds, 93% among 30-49 year olds. Even in the South, overall support reaches 83% support, while in the West 93%. Inter-marriage rates are also rising.

None of this means that anti-black racism has vanished: it does mean that it is a pale shadow of its former self. One suspects largely confined to the malice of low status whites: for whom the effortless status of racism is a compensation for lack of social significance. Malice that is mostly petty but sometimes very much not. (The perpetrator of the Charleston massacre seems to fall into the category of being homicidally frustrated not to be a member of a master race.)

By contrast, antipathy to queer folk is still much more widespread (particularly among African-Americans): in significant part because there are mainstream institutions (in the form of many Churches, synagogues and mosques) still pushing denial of equal protection of the law: something that is absent in the case of racism. Indeed, one of the most respected institutions in US life, the US military, is particularly strongly committed to racial integration and has been for decades.

All of which means the long campaign against racism has been a stunning success: not an absolute success, but a stunning success nevertheless.

So, the question is, why?

Losing functionality

A major reason I would suggest is: racism lost a lot of its functionality–particularly its institutional functionality. Once the civil rights campaigns had led to the abolition of Jim Crow, anti-black racism lost a lot of its point. Moral exclusion such as racism is often about creating social cartels, denying out-groups access to social goods: and Jim Crow set up a series of massive social cartels that were very much about denying blacks access to social goods. Without legal enforcement, the racial social cartels broke down and so racism lost a lot of its point.

Moreover, the aura of social heroism was captured by the civil rights movement, not its opponents. Opposition to racism was heroic (people literally risked, and lost, their lives); support of racism brutal and reactionary. These factors are far from the full story (why did the civil rights movement win in the first place?), but I would suggest they are a lot of the story. The wider story being part of social psychologist Steven Pinker’s identification of shifting moral perspectives: the civilising process as moralising process.

Creating social cartels

A classic example of racism being driven by creation of social cartels were the Iberian “cleanliness of the blood” laws, where Jewish converts to Christianity were excluded from various offices across generations. As far as I am aware, they were the first European laws which blocked legal rights on the basis of descent. A massive step in the direction of being Jewish not being merely a religious category (which could be left by conversion) but becoming an inherent category, regardless of religion.

Slavery was a somewhat similar case. Racism did not cause slavery. Slavery way predates anything that might reasonably be called racism. Slavery was, however, massively involved in the development of racism. Specifically, the enslavement of sub-Saharan Africans. The earliest significant anti-black racism developed in Muslim North Africa, to justify not converting black Africans to Islam, so they could continue to be subject to mass enslaving. In ibn Khaldun‘s (1332-1406) words:

the Negro nations are, as a rule, submissive to slavery, because [Negroes] have little [that is essentially] human and have attributes that are quite similar to those of dumb animals, as we have stated.

Even now, many Arabic speakers use the word ‘abd, “slave”, to refer to people of sub-Saharan African descent. Anti-black racism lingers on in the Arab world.

With the development of the trans-Atlantic slave trade, the same logic applied in the Christian colonies of the Americas. Since all slaves in the Americas were black (something that had never been true in any other civilisation), why was it OK to have black slaves? Clearly, because they were “inferior” beings, suitable to being treated as mere property.

The Enlightenment made things worse for enslaved Africans in the Americas, particularly the new United States. If the Thirteen Colonies declared independence in the name of:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

Then how could they hold slaves? Well, clearly because they did not count because they were … black. Which the US Supreme Court decided was literally the case in Dredd Scott v Sandford (1857). Short of simple extermination, there is no more pervasive or vicious social cartel than owning other people as property. Doing so along a colour line naturally generates racism: indeed, a particularly virulent form of the same.

Along comes the US Civil War (which a reading of the Confederate Constitution demonstrates was most emphatically about slavery) and the Thirteenth Amendment. Slavery was abolished, but most Southern whites did not want political or economic competition from the freed former slaves (all blacks). So, using brutality and violence, Jim Crow was established. A new set of social cartels, both political and economic, enforced in part by simple mob homicide (i.e. lynchings).

Then, decades later, comes the aforementioned civil rights campaigns, and Jim Crow is abolished. The racial social cartels lose their state backing. Such social cartels do not immediately all disappear (and were not all in the South), but begin to be regularly overturned by civil rights suits and prosecutions. Racism loses much of its functionality, so begins to fade.

In large part by simple generational change. As people grew up in a world where the civil rights movements are seen as heroic, and the racial social cartels had lost their state backing and faded away, racism lost its social function and social power. There is still the residual appeal of effortless status–particularly among those otherwise lacking in social status–but that is simply nowhere near enough on its own for racism to be anything more than a pale shadow of its former self. (Though its consequences linger on.)

Complexities and cartels

Yet, American society has become, if anything, ever more hyper-concerned about racism. Partly, that is the fervour of the convert. Partly because, as racism fades, the role of low social capital in the problems of African-American communities becomes ever more salient, and that is a way more difficult and complex issue than being against racism. Thus diagnosing racism–when confronted with negative disproportions by race–is simple and therefore comforting: all the easier a path as the effects of low social capital and the effects of racism present in very similar ways (notably, various negative disproportions) and the former shades into the lingering shadows of racism.

Just to add to the complexity, there is unconscious discrimination: often a matter of familiarity preference (which is likely general among human populations), but it still leads to racial bias in decision-making and so social opportunities. (Though whether one can usefully call it racism is another issue.) That sort of unconscious discrimination is certainly worth identifying and drawing attention to.

But the hypersensitivity about race is also partly because anti-racism has become the basis of a new set of social cartels.

Anti-racism is reaching social consensus levels. In many social milieus, it is de rigueur. In social milieus were anti-racism is de rigueur, there is no moral heroism in being against racism: but anti-racism can wrap itself in a patina of moral heroism lingering on from the civil rights struggles. While a successful accusation of racism can destroy a career. Which makes anti-racism a potential enforcement mechanism.

Moreover, in social milieus were moralised discourse (and anti-racism in particular) is compulsory, there arises the problem of how to signal Virtue, and particularly anti-racist Virtue. The answer is–ever more hyper-sensitivity about racism. Such making a big moral deal about the difference between coloured people and people of colour, or identifying “micro-aggressions”. The University of California has provided a revealing set (pdf) of “micro aggressions”. The phrases may not be formally banned, but that is a distinction without much difference. Particularly in an age of adjuncts and casual academic employment. There is surely going to be a “chilling effect” on free speech on campus.

Especially given that even tenured professors can be targeted for dissenting. The use of civil rights legislation to prosecute a feminist professor, since disagreement is apparently “harassment”, is precisely the operation of a new belief-based social cartel, backed up by state power, with its very own Inquisition. (Presumably not if it gets to the US Supreme Court; though the US Department of Education apparently believes it is above such petty details as Supreme Court decisions.)

None of which should be read to say there is no racism in the US or it is not a worthy subject. The history of anti-black racism in the US is a vile one: embarrassing to those who take a positive or heroic view of American history. Denial of the extent and significance of racism can shade uneasily into racism itself or attitudes which are functionally not much different. The low social capital of African-American communities did not just happen. There is also a lot of hypocrisy in conservative complaints about political correctness, as many conservatives were just fine with a sexual-and-gender correctness which was much more vicious and pervasive: progressives did not invent Virtue signalling.

Nevertheless, the contemporary hyper-sensitivity Virtue-signalling is noxious at various levels. Starting with making that much more difficult to have a productive public discourse about the problems of low social capital in African-American communities. Or about police violence: the notion that too many US police are over-ready to use deadly violence because of poor training, discipline and inadequate legal constraints does not fit into either the “Racism! Racism!” progressive discourse or the “Soft on Crime!” conservative discourse; making it apparently impossible to have a productive public debate on the issue of feral law enforcement. Otherwise folk might notice more how police building social capital with local communities can greatly improve policing outcomes.

Progressivist Ascendancy

Then there is the term Social Justice Warrior: the term is clearly meant ironically, particularly on the (lack of) any moral heroism involved in what those labelled as SJW’s do. The term is also counter-productive, because it allows folk to completely evade the issue that has driven such things as the Sad Puppies campaign in the SF Hugo Awards. Use of the term provides cover for folk go off and talk about social justice concerns, using one of the basic techniques of Virtuous social cartelisation: “Folk like me are against X; you are disagreeing with folk like me: therefore you are against X”.  Which, of course, does not remotely follow.

But such systematic untruth is used again and again and does demonstrate anti-racism (and similar) as enforcement mechanisms. Which is precisely what sparked Sad Puppies in the first place–the notion that writers were not worthy of Hugo Awards because of their opinions or occupations (such as owning a gun shop). That only the Virtuous are entitled to literary awards, grants etc is an idea that has been around for decades now, but is a classic form of social cartel–denying social goods to outgroups. And part of what the term Social Justice Warrior is getting at is precisely the apparently endless ambition of such opinion enforcement–attempting to police people’s hobbies, fiction, etc. In other words, being Virtuous Wowsers. With all the you-are-not-listening-to-yourself puritanical earnestness Wowsers have: which includes proving the point when called on the same.

Hyper-sensitivity about racism leads to some remarkable convergences. Both racism and anti-racism can end up endorsing segregation and moral caste systems based on race (I am sorry, “privilege”). A convergence occurring not only because they both obsess with race, though from different moral directions, but because they both seek to set up social cartels–one based on race, the other on belief.

Blogger Scott Alexander also notes a Fearful Symmetry where both the social-justice folk and their critics end up making remarkably similar claims and arguments. Because both groups are worried about exclusions. Though the Virtuous or Progressivist Ascendancy currently seems to have more organs of the state on its side, extending as it does through education systems, the literary and artistic world, much of the mainstream media and into government bureaucracies.

But one of the Progressivist Ascendancy’s conceits is that it is “subversive” and not any sort of establishment: which, of course, also means they never having to take responsibility for anything awkward. The Protestant Ascendancy at least knew it was an establishment, though it was not without its own deep fears.

If, as is clear, racism in the US is in massive and continuing decline, but hyper-sensitivity about racism is used as a social-cartel enforcement device, then public debate about matters racial in the US will get more and more divergent from realities on the ground, encouraging policy to diverge from realities on the ground, making the Seeing Like A State problems even worse. Even wrestling with familiarity preference and unconscious discrimination becomes more difficult, since it conflates very different issues (overtly pushing the inferiority of group X versus having an unreflective preference for folk like oneself). Nor is making racial identity (and so racial difference) even more salient likely to be a helpful way to try and ameliorate such patterns.

The folk who will suffer most from this social cartelisation based on Virtue-markers are the most vulnerable: groups with low social capital. The anti-racism obsessors claim, of course, to be the friends of African-Americans: no, that is precisely what they are not. They are, instead, much more a manifestation of an classic analytical principle: in the race of life, back self-interest, it’s the only horse that’s trying. Which will, of course, infuriate Virtuous types: because one of their common games is to demand absolute respect for their own moral perspectives while on insisting on contempt for other people’s. It is not an unconscious familiarity preference but something much more overt and self-serving.


[Cross-posted from Thinking-Out-Aloud.]

Lies, damned lies and statistics on “racism”

By Lorenzo

African-Americans are about 13% of the US population. African-Americans commit roughly half the homicides in the US. That means African-Americans commit unlawful homicide at a much higher rate than other Americans (5.8 times higher than whites in 2013). Which means that we can expect African-Americans to be arrested and convicted for homicide at a much higher rate than other Americans. So, the mere fact that African-Americans are arrested and convicted for homicide at a much higher rate than other Americans is not an indicator of racism by police, prosecutors, judges or juries.

African-Americans are also far more likely to be victims of homicide (4.9 times higher than whites in 2013). In 2013, 3,005 white Americans were murdered, while 2,491 African-Americans were murdered. Of whom 2,245, or 90% of murdered African-Americans, were murdered by an African-American. If we are going to say blacklivesmatter, then by far the biggest violent death risk to African-Americans comes from other African-Americans.

Homicide is, statistically, a “good” crime because the definition is pretty clear and the reporting can be expected to be reliably high and consistent. Since it is also an extreme crime, one can expect that African-Americans will also disproportionately commit other crimes and disruptive behaviour. (Obviously, only a tiny proportion of African-Americans commit murder, it is just a significantly higher tiny proportion than for other Americans: and that can be expected to follow for other crimes and disruptive behaviour.)

Mere disproportion is not enough

So, any study which (pdf) merely points out that, for example, a police force arrests African-Americans for various crimes at a higher rate than white Americans is not proof of racism by said police force. Without some measure of the comparative rate of actually committing said crimes, it is not even, in any strong sense, evidence of racism. Especially not when what is done to arrested African-Americans matches what is done to white Americans arrested for the same crimes.

Nor are statistics which (pdf) show that African-American students are suspended at about 3 times the rate of white students and 10 times the rate of Asian students. Indeed, these statistics are completely compatible with teachers being biased in favour of black students and against Asian ones if, for example, African-American students are, say, 5 times more likely than white students to be seriously disruptive while Asian students are only half as disruptive as their suspension rate suggests.

In other words, without statistics on how often students in various categories are actually disruptive, or people in various racial categories commit specific crimes, we cannot tell whether there is any racial bias whatsoever in the decisions to suspend or arrest. Merely telling us the rates of suspension or proportion of arrests tells us nothing about whether there is any racial bias.

Not wanting to see

Anyone with any basic statistical knowledge should understand that. So, why bother publishing such statistics on their own? Because a lot of people do not have such basic statistical knowledge, or else refuse to apply it. The background assumption that rates of committing categories of crime, or being seriously disruptive in class, are evenly distributed among racial groups (which we have good reason to think is not the case) is allowed to frame the debate.

Which is a classic example of how signalling Virtue corrupts public debate. Supporting a study which purports to demonstrate racism–no matter how statistically inadequate–is Virtuous. Criticising a study which purports to demonstrate racism–no matter how statistically inadequate–is Not Virtuous: indeed it is condoning, expressing or whitewashing racism. Facts and statistical competence do not matter, only signalling Virtue matters.

What folk so obsessed with their own sense of Virtue demonstrably do not care about is the consequences of getting it wrong. If US public school teachers are systematically racist (a dramatically implausible claim, given the politics of teacher unions), then that is a very different problem than if African-American students are disproportionately disruptive. If the latter is true but the former is blamed, then that will make things systematically worse, since it will be that much harder to deal with disruptive student behaviour.

Similarly, if police in a particular jurisdiction are systematically racist, then that is a very different problem than African-Americans being much more likely to break the law. Once again, if the latter is true, but the former is blamed, then that will also make things systematically worse, since it will be much harder to arrest or cite African-Americans for breaking the law.

Police killings

The sharp end of this, and the focus of blacklivesmatter, is police killings of African-Americans. Though police kill more white Americans than African-Americans, African-Americans are killed by police at a much higher rate than their share of the population, as is pointed out here and here. But they are killed in proportion to the rate that African-Americans commit homicide. Which does not mean there is not a problem with the willingness of US police to use deadly force (fairly clearly there is), but it is not merely a problem of racism: likely not even mostly a problem of racism.

That US politics is so dominated by competing narratives–different languages of politics–does not help. Racism fits neatly into the oppressed/oppressor dichotomy of progressive discourse. Conversely, focusing on much higher crime rates among African-Americans fits neatly into the civilisation/barbarism dichotomy of conservative discourse. Each discourse-community thinks what is the “real” underlying problem is obvious and despises the other for not accepting the “obvious”. (A problem which extends to other political issues, but is particularly destructive on the matter of racism and race relations.)

Conversation across the politicised discourse communities is difficult and sadly rare. Constance Rice, an African-American civil rights lawyer engaged by a new LAPD police chief who talked to lots of LA police officers, reported a pervasive fear of black men among police. Given that African-Americans are apparently, according to Peter Moskos, a professor at New York’s John Jay College of Criminal Justice and former Baltimore cop, five times more likely to kill police than white Americans (a very plausible claim, given the differential homicide rates), police fear of black men has a statistical basis. Which makes the problem that much more tangled and difficult. A merely irrational fear would be easier to deal with.

Comparing Asian-Americans

If African-Americans acted more like Asian-Americans (or Jewish-Americans), the issue of racism and race relations in the US would become much less tangled. After all, it is not as if Asian-Americans were not historically subject to vicious racism in the US. Now, they are clearly treated as functionally indistinguishable from white folk. Indeed, a dark-skinned person of South Asian descent can apparently be a very politically successful good ole boy in deepest Louisiana. Merely being physically not-white is clearly not the problem [in these instances].

Which also points out how much racism is socially constructed. This gif set, from this BBC documentary, provides another excellent example of that. As well as a reminder of how vicious white American racism against African-Americans was in the 1940s: lynchings were the homicidal end of a pervasive racism. Racism which manifested–as this essay by writer Ta-Nehisi Coates spells out–in manifold different ways well into our time.

Though I am deeply sceptical that reparations are a useful answer, even without the very messy mechanics of who is supposed to owe whom and why would not the benchmark be a comparison between the current situations of African-Americans and West Africans? I am sceptical because the political structures of the US rather preclude the German Holocaust reparations example Ta-Nehisi Coates cites from being followed.  (It is much harder for the US political class to impose resisted outcomes on the US electorate than it is in Germany.) But, more to the point, a community that waits for someone else to redeem them will wait forever.

Why don’t African-Americans collectively behave more like Asian-Americans? Because they do not have the same internal trust networks, the same deeply ingrained reverence for education, the same deeply ingrained traditions of courtesy, the same strong families and kin networks. Nor, unlike Asian-Americans, did the way African-Americans came to the US select for initiative. (It is indicative that Colin Powell was the son of Jamaican immigrantsBarack Obama a university educated East African.) The levels of social capital are vastly different.

Weak social capital

It may be 150 years in the past, but the socially and culturally pulverising legacy of slavery clearly has much to do with that. As the same legacy has much to do with white racism: justifying treating African-Americans as property, and the poisonous human relations slavery creates, was the original poison-pill of anti-black racism. Which Jim Crow then reinvigorated.

There were heroic efforts to rebuild, with the black Churches being at the centre of that. But public policy kept being wielded in ways that undermined those attempts–(re)read Ta-Nehisi Coates’s essay with trying to build social capital within African-American communities from a weak base in mind. Add in the use of zoning and highway construction to disrupt African-American communities (particularly in the American South).

Then add in the War on Drugs and the War on Poverty [both of which suffer from Seeing Like A State problems]. Pervasive illegal markets offering potentially high returns for illegal behaviour and property rights defended by private violence are potentially immensely destructive in communities with low social capital. While welfare can also be deeply disruptive in communities with low social capital, as it offers income without effort or social connection. This without considering where public resources went within African-American communities (basically, to those with more social capital).

But folk focused on the conservative civilisation-versus-barbarism language of politics don’t want to be told that the war on drugs might have been incredibly, and unevenly, destructive. While folk focused on the progressive oppressors-versus-oppression language of politics don’t want to be told that redistribution policies might be seriously counter-productive.

Automatically diagnosing racism offers a corrupting combination of comforting simplicity and effortless virtue. As, of course, does racism itself. Which are just some of the reasons I deeply disliked race analysis–taking folk’s racial identity as some sort of ur-identity. It is so very revealing that both mentalities end up endorsing segregation and moral caste systems based on race (I am sorry, “privilege”). They both obsess with race, just from different moral directions.

And thereby avoid difficult questions and complexities. In African-American civil rights activist Robert L. Woodson Sr.’s words:

If race were the primary culprit in injustice and poverty, why are poor blacks no better off in institutions run by their own people, including city governments and public schools? If government safety net programs were the answer, why has $20 trillion spent on the programs over 50 years failed to improve the lot of the poor?

About correlation

On the matter of statistical literacy, I have noticed a tendency for folk, when someone cites correlations they do not like, to parrot off “correlation is not proof of causation” as if that means that correlations have no evidential value at all. Yes, it is true: lung cancer does not cause smoking. But, the correlation between smoking and lung cancer is evidence of a connection (in the sense of being statistically indicative). Not proof, but evidence; and the stronger the correlation, the stronger the evidence.

Correlations are, of course, only evidence, not proof. (And evidence can, indeed, be misleading.) Typically, folk have some model of what is going on and a correlation which points in the direction the model suggests provides evidence (not proof, but evidence) that the model is onto something.  The stronger the correlation, the more reason it provides to have confidence that the underlying model is onto something.

So, no correlations are not proof of causation. But that does not mean they have no evidentiary power at all. Otherwise, folk would never bother with the things in the first place.

It would be nice if people did not sacrifice statistical literacy to Signalling Virtue. But sanctimonious self-righteousness has a lot more emotional power, and cognitively corrupting simplicity, than open-minded concern for facts and evidence and the messy complexities such reveals.


[Cross-posted from Thinking Out Aloud.]

Fancy maths and data series are no reason to ignore supply and demand

By Lorenzo

Came across a 2014 NBER paper Betting The House (pdf) by Òscar Jordà, Moritz H.P. Schularick & Alan M. Taylor. I was wildly unimpressed. I am not quite sure whether I am willing to use the tag line of “numbers make smart people stupid”–as per this wonderful post on the adoption of farming, criticising an attempted cliometric study of said transition from foraging–but still, wildly unimpressed.

Judging monetary policy fail

First of all, the paper associates low interest rates with “loose monetary conditions”. For example:

The long-run historical evidence uncovered in this study clearly suggests that central banks have reasons to worry about the side-effects of loose monetary conditions. During the 20th century, real estate lending became the dominant business model of banks. As a result, the effects that low interest rates have on mortgage borrowing, house prices and ultimately financial instability risks have become considerably stronger… these historical insights suggest that the potentially destabilizing byproducts of easy money must be taken seriously (p.3).

Or, later:

Using short-term interest rates as a proxy for monetary conditions … (p.14).

The paper also refers to “easy low interest rates” (p.35).

The paper is centred around an equation based on the monetary policy trilemma (that monetary policy cannot have a stable exchange rate, free flow of capital and autonomous monetary policy all at the same time) where interest rates “measure” the stance of monetary policy (p.15), leading to the central conclusion (p.37) that (italics in original):

Loose monetary conditions are causal for mortgage and house price booms, and this effect has become much more dramatic since WW2. 

Judging the stance of monetary policy from interest rates is deeply problematic. In Milton Friedman’s words:

Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

This is hardly surprising, as nominal interest rates include inflationary expectations, so will be higher if inflationary expectations are higher. During the Great Moderation, inflation and interest rates were low: in what world is low inflation a sign of “loose monetary conditions”? To quote Milton Friedman again:

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Apparently, they don’t.

Money has two uses–the demand to hold money as an asset and the use of money in transactions. (Or, if you like, the demand to keep money for use in future transactions and its use in current transactions.)  If inflation is low, that means that the use of money in (current) transactions is roughly keeping pace with the growth of goods and services. So, not loose monetary conditions, with (nominal) interest rates to match. (Which, by the way, is the only way the quantity theory of money makes sense–i.e. if the demand to hold money is not included: money held has no effect on the price level because it is not being used to buy things.)

As long as one separates out the demand to hold money as an asset/for use in future transactions, then monetary conditions are a matter of supply and demand (of money in circulation and goods and services on offer). A simple way of thinking of the price of money is that it is what you can buy with it, so 1/NGDP (the inverse of total money spent on goods and services). Thinking of it that way, the price of money moves inversely to the price level (since NGDP = Py, where P is the price level and y is output of goods and services) holding y constant: as the price level goes up, the price of money in goods and services falls (and inflation is when that keeps happening); as the price level goes down, the price of money in goods and services rises (and deflation is when that keeps happening).

Conversely, if the demand to hold money shoots up, as happened in 2008, but the central bank does not adjust monetary policy accordingly (as also happened in 2008) then the effect is a serious (if passive) tightening of monetary policy. Which can lead to things such as the steepest fall in spending on goods and services in the postwar period. All that without any significant shift in interest rates.

Exchange rates are also prices of money. But they are the price of one money in terms of another money.

What is NOT the price of money are interest rates. (The price to borrow something is not the same as the price to buy it.) Interest rates are the price of credit (aka, the price of delayed obligation). Low interest rates (which normally implies low real interest rates) are a sign that credit is cheap, so we can expect, in such circumstances, more purchasing of goods and assets on credit. Such as, for example, housing.

To put it another way, easy credit is not the same as easy money. Though changes in a monetary regime can certainly shift risks. For example, when unification into a common monetary area lowers nominal interest rates in previously inflation-and-exchange-rate-depreciation prone economies that are no longer subject to differentiated money risk (since they are now using a single currency) nor to exchange rate risk (ditto). But that is not really “easy” money; it is a shift in expected risks favourable to more use of credit. One, indeed, based on the expectation that the common money will be “harder” (more resilient in value) than the local money that preceded it.

Time preference

Interest rates are typically divided into money risk, asset/agent risk and the “risk-free cost of capital” (plus other transaction costs, which we can ignore). The “risk-free cost of capital” is better conceived of as pure time preference; what people are concerned about in any delay in use of income, which can differ across time and space. If people’s concern about delay is dominated by fears that they won’t have income later, time preference may even be positive—i.e. people become willing to pay to have access to their capital in the future.

In other words, interest rates should be treated as entirely an across-time price: thus if there was no delay risk or fears about future income, people would be indifferent to which time period they had access to their income (capital which was genuinely “risk free”–so no agent risk–would have no cost across time, apart from money risk). Though risk of death does, of course, give us a reason to be concerned about delay.

A nice short discussion of shifts in general risk since the medieval period is at William J Bernstein, The Societal Risk Premium. For a discussion of situation where pure time preference is positive (i.e. there is willingness accept negative returns in order to have future access to capital) see John Hempton’s essay, The Chinese Kleptocracy Is Like Nothing In Human History.

As an aside, time preference should not be regarded as a single number, but as a continuum for agents across which the supply and demand for credit is matched–thus, if demand for credit sharply increases compared to supply, interest rates can be expected to rise, likely attracting new credit from people whose time preferences are now being covered and so are more willing to offer credit. (This can be understood as movement along a supply curve.) Conversely, if the demand for credit sharply decreases compared to supply, then interest rates can be expected to fall, reducing the number of people whose time preferences are covered and so are willing to offer credit. (This is also movement along a supply curve.)

If people increasingly judge that general delay risks are falling, their time preferences will shift, affecting their willingness to offer credit. (This can be understood as a shifting supply curve.) If such tendencies become entrenched, major effects can follow. Such as changing the arrangements of farming fields. Most peasant societies handle farming risk by dispersal across space (using scattered fields, thereby accepting reduced average production in order to reduce production variability from year to year). If interest rates fall, allowing much cheaper smoothing of income across time (either by increased use of less costly/risky storage or by use of–now significantly cheaper–credit), farmers tend to shift to concentrating fields, thereby increasing average production while accepting increased variability in production from year to year. That is, they move to managing variability across time rather than across space. Hence falling interest rates led to the enclosure movement (pdf).

So, the market for credit is not the market for money and interest rates are not a good basis for judging the stance of monetary policy.

Housing market fail

Then there is the Jordà, Schularick & Taylor paper’s treatment of housing markets as if they are generic. A particularly egregious example is given at p.14:

Viewed as a natural experiment, the question is whether these differences in monetary policy treatment led to different outcomes in Ireland and Spain using Germany as control.

Paul Krugman famously divided US housing markets into the Zoned Zone and Flatland. Germany is Flatland, so it cannot be used as a control for any housing markets where the supply of land-for-housing is rationed (such as Ireland: by rationed I mean restricted in a way which significantly reduces the responsiveness of supply to increased demand, typically by various regulations).

Just as with money, where we need to distinguish between demand for money-as-asset and use of money to purchase goods and services, so we have to distinguish between demand for house-as-asset and use of housing–i.e. the demand for shelter. (Actually, as Matt Yglesias has pointed out, houses are large decaying structures, it is the land the housing is on which is the enduring asset.) The demand for shelter can be satisfied by buying or renting, a choice which will depend on the circumstances of particular people and the structure of a given housing market. The demand for house(land)-as-asset can only be satisfied by purchase.

So, if people think that land is a particularly good asset–because, for example, land-approved-for-housing is rationed, so has an entrenched tendency to increase in value faster than inflation–then the demand for house(land)-as-asset will be greater. A choice that will be definitely affected by interest rates, as low interest rates imply lower borrowing costs, so encourage more people to take out mortgages to enter the market for house(land)-as-asset, driving the price of houses even higher; if regulation or other constraints continues to inhibit supply responsiveness. So, easy credit can certainly be expected to have an upward effect on house(land)-as-asset prices in land rationed housing markets (or other housing markets with strong feedback effects). But, as discussed above, the price of credit and the price of money is not the same thing. Hence monetary policy having very little correlation with house price rises, but capital inflows having quite a strong correlation, as then Fed Chair Ben Bernanke pointed out in a 2010 speech.

What do we know about markets for assets in restricted supply? They tend to be more unstable (pdf). Hardly surprising, since there tends to be a positive feedback effect, where rising prices expected to continue of themselves encourage more demand for the asset. Particularly as there is experimental and empirical evidence that lack of experience in investors increases feedback effects; with house-buyers largely being inexperienced (or, at least narrow-experienced) investors, in that they rarely have experience of investing with other major assets, or engage in many house purchases; factors especially important when various housing markets had prolonged price-build ups.

So, using Germany–where supply of land-for-housing is responsive to demand–as a control for Ireland, where it was not, is a basic failure of analysis: an apples-with-oranges comparison. (In the case of Ireland, access to some areas was highly rationed, driving up prices, and to other areas was much less so, encouraging misallocation.) Supply and demand, they matter, really they do. Thus, the structure of particular markets matter, really they do.

What we appear to have here is data disease–”we have assembled all this lovely data, and it is much more pliable for our analysis if we just abstract across housing markets”. But that is precisely what one cannot do–at least, not across housing markets with very different supply dynamics, for example.  The paper’s failure to consider the difference between demand for shelter and the demand for house(land)-as-asset is quite clear:

The house is a bundle of the structure and the land used in its construction. An ideal index would capture the appreciation of the price of a standard, unchanging house which is hard to identify (p.5).

Monetary policy general: assets specific
Then there is the general versus particular problem. Monetary policy is a general phenomenon while “bubbles” (i.e. asset price surges and collapses) occur in specific asset markets. It is always a pertinent question, why did a surge-and-collapse occur in this asset market and not another? The US, for example, does not have a single housing market, it has hundreds, with wide diversity in levels of boom or bust.

Monetary policy also has a poor record when applied to asset “bubbles”, including housing asset “bubbles”. (Which, btw, is not a helpful way to think about housing price dynamics.) Lars Svensson noted that such “leaning against” policy can actually make debt-to-gdp ratios worse (pdf), by depressing income needed to service past debt more than it discourages future debt. Folk such as Richard Koo in Japan and Steve Keen in Australia typically apply Irving Fisher’s Debt-Deflation Theory (pdf) of depressions in this unbalanced way–too focused on debt, not enough on income expectations (the deflation bit). There is no more effective way to produce disastrous debt dynamics than tight monetary policy driving down income expectations, thus spending, thus income, thus ability to service debt. Which is what happened in both the Great Depression and the Great Recession and continues to operate in much of the Eurozone.


The Jordà, Schularick & Taylor paper argues that the unified monetary policy of the Eurozone provides a situation for countries where the unified monetary policy was “too loose” to have credit booms through the “credit channel” of monetary policy (Pp11ff). First, as previously noted, it is surely more a matter of a unified monetary realm changing expected risks in various economies. Second, if it is a “monetary policy via credit channel” issue, one might expect that a similar process could operate in the US, since it is about as large as the Eurozone and also has a common monetary policy. Which then raises the issue of the paper’s different treatment of the US versus the Eurozone–either treat the various US housing markets separately or treat the Eurozone as one big housing market, as the paper treats the US. Treating the US as one housing market and the Eurozone as a collection of them is worshipping far too much at the altar of national statistics rather than market dynamics.

Extending the former point, what the creation of the Eurozone did do was to eliminate money risk differentiations between economies as well as exchange rate risk: the consequent drop in nominal interest rates would be expected to increase demand for credit and the elimination of exchange rate risk increase the supply thereof in countries where both factors acted most strongly (i.e. the Mediterranean economies). But, as the paper points out, the effects on housing markets were not consistent–which again points to need to examine the structure of specific housing markets. A paper such as this (pdf) which provides a simple model for explaining housing price bubbles also (very sensibly) confines itself to police recommendation which are specific to housing markets.

The Jordà, Schularick & Taylor paper holds that long-term interest rates are a good proxy for mortgage rates (p.21). Well yes, since mortgages are classic long-term financing and even more since mortgages have become such a large part of banking business (p.5). But, to invoke Milton Friedman once again, interest rates are set in a whole range of linked asset markets, so the question of why credit is drawn to a particular asset class still remains very relevant. Yes, monetary policy fundamentally affects general income expectations which will have a general tendency to push up (or down, depending on what income expectations it is generating) asset prices, but that is not even close to saying that monetary policy drives asset prices in anything close to a uniform way.

The failure to examine land use regulation in any systematic way also shows up in this paper bv Sebastian Dellepiane, Niamh Hardiman & Jon Las Heras on the housing boom-and-bust in Ireland and Spain. This paper notes that Portugal, Greece and Germany had very different experiences, but does not engage in any systematic examination of differences in land use regulation. (There is a passing reference to zoning in Ireland, and some hand-waving about de-regulation in Spain, but that is about it.)  The Dellepiane, Hardiman & Las Heras paper also engages in the unfortunate usage of “easy money” when they mean easy credit. On the other hand, the paper is clear that encouragement of “housing(land)-as-asset” was very much central to the difficulties in Spain and Ireland.

Either way, nice data and fancy maths do not warrant ignoring basic dynamics of supply and demand.

About history

If you are going to study the effect of monetary policy and monetary conditions on asset prices, then one really must familiarise oneself with C19th economic history. There you will find some truly spectacular asset booms and busts under a gold standard monetary regime: not generally regarded as conducive to “loose” monetary conditions. Yet one marked by generally low interest rates.

In particular, technological uncertainty (of which there was a great deal in the C19th) is more than enough on its own (pdf) to create asset booms and busts. But so will the supply of capital increasing in a way that it is “pushing on” investment opportunities; as per Andy Harless’s analysis here.

Speaking of whom, he made an apposite comment about low discount rates and asset price volatility:

Low discount rates (which may not be quite the same thing as low market interest rates) do make assets hard to value (which may not be quite the same thing as causing bubbles), because they make asset values more sensitive to flows in the more distant future, which are harder to estimate. For example, if you assume a constant growth rate, as asset value is V = d/(r-g), where d is the current flow (“dividend”), g is the growth rate, and r is the discount rate. If r is only slightly higher than g, then a slight change in g will have a dramatic effect on V. So suppose r is low, and people happen to get a little too optimistic about g. It’s debatable whether this fits the definition of a bubble, but in any case it’s going to cause the price of the asset to skyrocket, and when the overoptimism fades, the asset price will collapse. (Of course the situation is symmetric. Maybe people rightly became optimistic about g, the asset price rightly skyrocketed, and then people happened, wrongly, to get just a little bit less optimistic, and the asset price collapsed. In this case there wasn’t a bubble per se, but the same volatility problem exists.)

To which monetary economist Scott Sumner responded:

Yes, asset prices might be more volatile, but that would not be because of monetary policy in any case. At least not for any extended period of time. Suppose rates were low, but inflation was below target. The Fed could raise rates, but that would drive inflation even lower. In that case either rates would fall again, or we’d go into deflation, and rates would fall a bit later.

In any case, I see asset price volatility as being very different from asset price bubbles. Japanese stock prices have been very volatile over the past 20 years, but there has been no Japanese stock bubbles over the last 20 years. So it’s not clear that this sort of asset price volatility is a problem.

So, we are not talking about simple asset price volatility and housing prices were not notably affected by technological change (except, perhaps, changes in financing technology).

Comments I also made on the same post are apposite.  If there is a prolonged period of rising incomes are not asset prices going to rise? Not merely from expectations of future incomes but such further magnified by (rising) savings pushing on investment. And if expectations of increased income increased asset prices why would not also positive expectations about an asset as a store of value? Whether for gold or approved-for-housing land.

Moreover, in a market economy with multiple interest rates and multiple assets, with assets being various bundles of income-expectation, store-of-value-expectation, and expected risks, how can one measily central bank rate be more important than any of the aforementioned? And, in a market economy with multiple interest rates and multiple assets, with assets being various bundles of income-expectation, store-of-value-expectation, and expected risks, how can one interest rate be “the” rate that balances planned savings and planned investment?

To which the response is, it can’t. (A weakness of Austrian analysis is that, on one hand, it insists that the heterogeneity of capital is crucial, yet it also gives a single interest rate amazing pivotal power.) One has to look at the dynamics of different asset markets. (Another problem with Austrian business cycle analysis is that an implication is that downturns should hit industries in a sequence according to their different average investment cycles, rather than all at once, as actually happens.) And housing markets are not asset markets in an all-the-same-really sense, as specific housing markets are not equally driven by the demand for shelter; in large part because they are not subject to the same supply dynamics.

And no amount of data assembly and fancy mathematics gets around that. Just as it cannot get around interest rates not being good indicators of monetary policy: in particular, low interest rates are very much not a reliable indicator that monetary policy is “loose” or “easy”.

Scott Sumner famously keeps reminding folk to never reason from a price change. Another way to put that is: always attend to supply AND demand (even if no one understands that no one understands supply and demand). And so attend regardless of much data you have assembled and how much fancy maths you can apply to it.


[Cross-posted from Thinking Out Aloud.]