Pragmatic Utopia #37

White Collar Time

I’ve been enjoying the show Billions, which is about the U.S. Attorney for the Southern District of New York (Paul Giamatti) investigating a hedge fund titan (Damian Lewis) for insider trading. It’s loosely based on Preet Bharara’s efforts to nail Steven A. Cohen of SAC Capital on similar charges. Bharara was featured on the cover of Time magazine with the headline “This Man is Busting Wall St.” As it turned out, the government did manage to convict two lower-level employees on insider trading, but could only settle with Cohen on a minor charge of “failure to supervise” those employees. SAC Capital ended up paying $1.8 billion in fines and has renamed itself.

Jesse Eisinger’s new book about white collar prosecution argues that the SAC case is about as good as it gets for the government. The title is quite direct: The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives. Preet Bharara didn’t bust Wall Street after the financial crisis; no one did. Bharara did convict several hedge funds executives for insider trading, but Eisinger argues that these cases are easier and less important than cases for alleged securities fraud which were central to the financial crisis.

Here’s a good example of what he means by securities fraud. Perhaps the biggest winner in the financial crisis was John Paulson, whose hedge fund (Paulson & Co.) made over $4 billion betting against the housing market. A quarter of that profit came from a financial instrument called Abacus. Abacus was a collection of subprime home loans packaged into bonds. Paulson selected the bonds–the worst ones he could find–with an express interest in betting against them.

But how to get someone else to take the other side of the bet? So Paulson hires Goldman Sachs to pitch the deal to some other investor. Goldman finds a German bank, IKB, which is interested in buying the mortgages on the condition that some third party helps pick them out. Enter ACA, a bond insurer, to do just that. But ACA doesn’t know that Paulson has already picked out the mortgages, or that Paulson is going short on the deal. Goldman doesn’t tell them. So ACA happily outsources much of the work to Paulson, rubber-stamping its careful choices. The SEC would conclude that Goldman misled ACA about the nature of the deal and Paulson’s role. ACA and IKB  took major losses.

James Kidney, the lead lawyer working the case for the SEC, thought the government should charge Goldman and Paulson with “scheme liability:” essentially, conspiring to build a product they knew would fail and selling it to unwitting investors. Kidney was rebuffed by his supervisors. The reasons, in this particular case, are a pretty good microcosm for the broader forces hampering white-collar criminal prosecution throughout the book.There was institutional and personal timidity: Kidney’s bosses feared they might lose. There was a vicious cycle, where failure to prosecute top executives in previous cases had eroded the subtle investigative skill of flipping lower-level employees against their bosses (watch Paul Giamatti’s character to see how it’s done). The courts had impeded white-collar prosecutions after backlash from the defense bar; in this case, the Supreme Court had neutered scheme liability law with a 2008 ruling (Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.) that “private investors could not sue a secondary participant in a fraud scheme, unless that participant had made misleading statements directly to the plaintiff.”

But such rulings don’t happen in a vacuum; it didn’t help that the Bush-era Justice Department and SEC had written briefs in Stoneridge against allowing private investors to hold such fraud participants liable. The government was actively trashing the tools used to hold executives accountable.

At least in the case of scheme liability, the government itself was still allowed to bring charges. The same cannot be said for the “honest service” charge, another arrow removed from the prosecutorial quiver in the last few years. Until recently, the government could charge executives who secure personal benefits at their company’s expense with depriving their shareholders of “honest services.” Critics say this charge was used as an overly broad catch-all for any conflict of interest or self-dealing. It was one of the charges used against Enron executives Kenneth Lay and Jeffrey Skilling. In Skilling v. United States (2010)–which was decided 9-0, please note–the Supreme Court narrowed the reach of the charge only to “bribery and kickback schemes,” removing self-dealing from its ambit.

Within a week of the Skilling verdict, courts across the country dismissed charges and vacated convictions of businessmen and politicians accused of fraud. But the really striking thing about the honest services charge is the selective effort the government made to reinstate it. A few months after the ruling, Lanny Breuer, the chief of the criminal division for Obama’s Department of Justice, testified in Congress to advocate for a statutory fix to the honest services clause. But he only asked Congress to strengthen the law for public corruption cases, content to let the private sector equivalent wither and die.

Breuer is one of the main targets of Eisinger’s criticism. Some of the criticism is personal to Breuer: that he meddled in active cases (U.S. Attorneys usually have significant autonomy from Washington) and that he cared too much about how the Department’s cases made him look. E.g.: “Gary Grindler, Breuer’s first deputy, would emphasize to prosecutors that losing cases would reflect poorly on the front office. Grindler told Pelletier [a hard-charging prosecutor] one day, “You know, if you lose this case, Lanny will have egg on his face.” “I don’t give a shit about that!” Pelletier yelled. The sentiment jolted him. He was apoplectic. “Nobody had ever said anything like that to me in more than twenty-five years of prosecuting federal cases.””

But the more systemic charge is that Breuer, like many government lawyers, was a product of the revolving door culture between white-collar defense firms and the DOJ, and was thus unduly sympathetic to corporate executives and their lawyers. Eisinger depicts a bizarre scene where, as the government was deciding whether to indict HSBC for money laundering, Breuer pulled aside HSBC’s lawyer at a meeting and asked him when he thought it was appropriate for the government to indict a major bank. When people talk about “regulatory capture” they rarely have something so literal in mind.

Breuer has spent his whole career alternating between jobs in Democratic administrations and stints at Covington & Burling, as is the norm for elite lawyers with an interest in public service, increasing their cash-out value, or both. I’ve long been skeptical of this arrangement, and The Chickenshit Club is a helpful book for illustrating exactly how it breeds a culture of gentlemanly compromise between regulators and corporate America. The government seeks to settle most cases even before interviewing key witnesses or putting in the work necessary to charge individuals.

The book includes plenty of billion dollar fines, which the government sells to the public as mission accomplished. But, as far as Eisinger can tell, these fines serve neither justice nor deterrence. Big fines hit shareholders, not the culpable individuals. Companies see such fines as the cost of doing business. In the Goldman / Paulson case I described, the only individual found liable was Fabrice Tourre, a 20-something Goldman trader from the London office. He was the only person foolish enough to write about deceiving the German bank over email, but surely not the only person at Goldman to know about the scheme. Across the board, only one executive–Kareem Serageldin of Credit Suisse–went to jail in the wake of the crisis.

The counterargument from revolving door beneficiaries is that their experience on the defense side helps them understand the intricacies of corporate operations and thus become better public officials. It’s a rather one-sided definition of better. You don’t see these same people spending a stint as public defenders to learn the intricacies of criminal law. Or working in housing court, or in bankruptcy court, to better understand the consequences of financial fraud on the public. We’re all products of our experience, and it’s no surprise that people who spend half their careers defending the rich and powerful carry that mindset into public service.

In any case, the argument is shaky in its own right. Two of the heroes of Eisinger’s narrative, Stanley Sporkin at the SEC and Paul Pelletier at DOJ, spent most of their careers in unbroken government work, becoming more and more expert in the ways of corporate fraud and how to uncover it. Pelletier only moved to the private sector, reluctantly, when he lost an internal battle with Breuer over whether to prosecute executives at AIG Financial Products.

Eisinger’s reporting on financial crimes and prosecutorial inaction is top-notch–he won a Pulitzer for it in 2011–and The Chickenshit Club is great fun if you like picking apart securities fraud. It’s also the most useful thing I’ve read for understanding the culture and process of U.S. Attorney’s offices, especially the Southern District. In Eisinger’s depiction (and in every other one), Southern District prosecutors are extremely proud of themselves and the work they do. When it’s working–when they’re actually holding Wall Street accountable–I have trouble blaming them. It’s not that they’re so great (I really don’t know how great they are), it’s that we have almost no other mechanisms for doing what they do. Especially after the Stoneridge case which limited the private right to sue for securities fraud, we’re pretty much dependent on public prosecutors to do it.

Financial fraud is really complicated! Like, many times harder to prove than murder. And investigators will always have the deck stacked against them when the people perpetrating the fraud employ ten times as many lawyers making ten times the money each (these numbers seem in the ballpark, based on the book).It would be great to pay government investigators more, but it might be more realistic to pay corporate lawyers less. That could happen for two reasons, I think: decreased efficacy of white-collar legal assistance and lobbying, or lower corporate profits. I’m increasingly of the opinion that the courtroom and the statehouse are the key terrain where corporate America makes its money, so these avenues are mutually reinforcing. An alternative strategy would be to change the culture within the legal profession to make it shameful to build a career defending securities fraud. I’m looking forward to making friends in law school.

1. Cool paper by Nathan Wilmers finds industries that rely heavily on high-income consumers have greater wage inequality due to vertical differentiation. “Our intuitions about the effect of wage inequality on consumer welfare rely on an increasingly outdated picture of a mass consumption economy.”
Here’s a good figure: 
2. In discussions of globalization and neoliberalism, people like me often frame the problem as a loss of democratic control over the economy. So I was intrigued and challenged by this essay from Jacob Levy arguing that there never was such control. In challenging the notion of economic sovereignty, Levy’s main point is that
“The modern state is a creation of the bond market, and so is the modern democratic state. Medieval mercantile cities had long been able to borrow money at better interest rates than other political units. In early modernity, states that were relatively representative and relatively commercial learned that they could do the same. First Holland, then England, gained crucial advantages in international competition from their ability to borrow cheaply.” 

It’s a good point whose historical dimensions I’d like to study further. If you can suggest any reading on the relationship between international banking and state capacity in the age between Medici and Rothschild, I’m all ears. For now I’ll just observe that even when a state has debt, there are degrees of freedom within the tax and public finance systems as to how that debt will be paid, and ultimately by whom.

3. If you haven’t seen anything about the controversy over Democracy in Chains, a new book on the intellectual history of public choice economics, the Koch brothers, and conservative ideology, you should probably skip this and go on living your life. If you have been following, I recommend this essay as the closest approximation to where I’ve landed. And once you’ve lost (Nixon scholar) Rick Perlstein, you’ve lost me.

Pragmatic Utopia #36: What Happened After the War?

Bomb damage in West Berlin

I recently read most of Tony Judt’s epic history of postwar Europe, Postwar. I’m up to 1989, and will read and discuss the rest in a different post about the post-Soviet transition. In general, we spend so much more time learning about wars than about how life changes in the aftermath. Wars are discontinuities, opportunities for breaks with the past (good and bad) that would have been inconceivable otherwise. This is a major theme of Piketty’s analysis: the World Wars as the rare points in modern history when the capital stock (and thus, wealth inequality) were reset.

Without much of a common thread, here is a hodgepodge of interesting facts, themes, and perspectives I encountered in Postwar:

  • I wasn’t aware of the vast resettlement of ethnic populations back to their “home” countries after World War II, e.g. millions of Germans sent back to Germany from Poland, Hungary, and Czechoslovakia. Countries like Bulgaria, Turkey, and Czechoslovakia exchanged hundreds of thousands of their co-ethnics with one another. Judt comments that in this way Hitler’s project of ethnic cleansing was fulfilled by everyone else; there was too much resentment and distrust not to do so.
  • Hard to keep straight the factions in wartime Yugoslavia. The Ustase regime in Croatia was a Nazi puppet state given free reign to murder Serbs and Muslims. The Chetniks were a monarchist Serb resistance movement that engaged in extensive collaboration with the Ustase, and also killed Muslims. Bosnian Muslims thus sometimes sided with the Nazis in their own defense. The Communist Yugoslav Partisans, led by Tito, were considered Europe’s most successful anti-Axis resistance movement. They had to convince the Allies to support them instead of the Chetniks. My sense is that there were no saints in wartime Yugoslavia. Are there great novels or films about this time? There should be.
  • In eastern Europe, wartime property seizure by the Nazis and then the subsequent free-for-all after their defeat created one of the most dramatic redistributions in modern history. In this way property passed from dispossessed minorities, especially Jews, into the hands of hundreds of thousands of peasants. In some countries a quarter of national wealth changed hands.
  • A consensus emerged after the war to treat Austria as “Germany’s first victim” rather than a guilty party. Among other things, this appealed to Churchill’s insistence that Nazism had uniquely Prussian origins. So the Austrian leading class of academics, civil servants, and military officers got off relatively light despite pervasive Nazi representation. In another book I’m reading, Christopher Hitchens comments, “As is said, the two great achievements of Austria were to convince the world that Hitler was German, and that Beethoven was Viennese.”
  • Judt argues that denazification was more thorough in East Germany than in the West, but that this was based on the convenient misrepresentation of Nazism as out-of-control capitalism while downplaying the racial ideology. I had not realized that until the 1960s, a significant share of West Germans remained sympathetic to the Nazi Party and war effort, casting blame only on Hitler personally.
  • The first significant plan for postwar reconstruction (pre-Marshall Plan) was France’s Monnet Plan. Jean Monnet (“the Father of Europe”) spent the war in the United States helping convince FDR to serve as “the arsenal of democracy.” It would be interesting to read about the influence of the New Deal, via both the Monnet Plan and the Marshall Plan, on European reconstruction planning.
  • Did you ever wonder where all those Christian Democratic parties came from? These parties emerged after the war in most western European countries as a way to wrangle the socially conservative Catholic vote, which would never go socialist, into supporting reformist, left-leaning policies. It was possible because the traditional right-leaning parties were all discredited. In their early years, these parties were marked by disproportionate female support and by very old leaders born in the 1870s (e.g. Konrad Adenauer), the past two generations decimated or compromised.
  • While the British foresaw the divided Germany settlement as early as 1943, French leaders insisted that Germany should be dismantled and its coal regions put under French control. “A European solution to France’s Germany problem could only be adopted once a properly French solution had been abandoned, and it took French leaders three years to accept this.”
  • Judt emphasizes how tenuous things felt in 1947: no recovery in sight, widespread fears of descent into communism or anarchy. Even optimists thought France and Germany would emerge from poverty in no fewer than twenty years. This is the context in which the Marshall Plan was so important–moreso politically than economically.
  • Marshall aid was offered to all countries. Poland and Hungary, occupied by the Red Army, had no choice but to decline. But Czechoslovakia also bowed to Soviet pressure to decline the funds, which would have been immensely popular. Judt thinks had the Czechs accepted the money, the Communist coup of 1947-8 would not have been possible. In Czechoslovakia, unlike the other Eastern Bloc countries, the Communist party was very popular on its own terms and had won a parliamentary plurality fairly. Nonetheless, Stalin felt the need to consolidate Communist control by force. This move turned many other socialists in western Europe against Stalin, and probably saved Finland, which would have been the next country targeted.
  • Some of the first insights into possible European economic cooperation came from the administrators of Vichy France, tasked as they were with integrating German coal mining with French steel production. This first step of cooperation had unexpected fans; here’s George Kennan: “It often seemed to me, during the war living over there, that what was wrong with Hitler’s new order was that it was Hitler’s.”
  • When the European Coal and Steel Community was formed in 1951, all six foreign ministers involved represented Christian Democratic parties. And the three main prime ministers all hailed from the borderlands of their own countries: Robert Schuman from Luxembourg (his father a German citizen!), Konrad Adenauer from the Rhineland, and Alcide De Gasperi from South Tyrol, at that point part of Austro-Hungary.
  • A major theme of the book is how “Western Europe” and “Eastern Europe” were split apart in the modern imagination and in reality. Pre-war Czechoslovakia was comparable to Belgium in industrial skill, productivity, standard of living, and exports. Its prescribed role in the Soviet manufacturing universe represented enforced backwardness.
  • Judt’s best topic (the subject of his earlier scholarship) is the story of European intellectuals’ infatuation with and, in some cases, ultimate rejection of communism. In general, the most enthusiastic intellectuals were French ones who had no firsthand experience of communism. Judt admires Raymond Aron and Albert Camus for balancing their leftist commitments with a principled, consistent condemnation of Stalinism. Jean-Paul Sartre, perennial apologist for Stalin, gets heaps of withering scorn. Judt cites the translation of The Gulag Archipelago as a key moment for mass disillusionment of Western intellectuals–but not Sartre, who called Solzhenitsyn “a dangerous element.”
  • The first decade of the Cold War gave German politicians on both sides major leverage over their respective Great Power patrons. The United States and USSR were both afraid of losing credibility with “their” Germans, so Adenauer and Ulbricht were able to extort them. This is one way of understanding why Germany was allowed to re-arm and join NATO as early as 1955. The Berlin Wall helped settle things and assuage everyone’s concerns in this regard; I was not aware the extent to which West German leaders were secretly quite pleased about the Wall as a guarantee of stability.
  • The French were deeply opposed to German NATO membership at that point but were won over in part by American financing for their war in Vietnam.
  • The way we learn Cold War history in the U.S., we forget how colonial independence movements were the dominant story of the 1950s for Europeans. The Dutch are an interesting case here: grudgingly pivoting from Indonesia to Europe, recasting their lot the European integration project.
  • I had forgotten how much of the French commitment to Algeria was driven by right-wing settlers, not all of whom were even French (Algeria’s “European” population drew a mix of settlers from Spain, Italy, etc.). The settlers voted overwhelmingly for de Gaulle’s return to power and thus felt betrayed when he moved to let Algeria walk. The rest is in The Day of the Jackal.
  • Divergent lessons of the Suez crisis: British and Israelis realize they can’t afford to cross the Americans; French conclude they can’t rely on them.
  • Also, important to remember how the timing of Suez distracted from the Soviet occupation of Hungary. Emboldened in party by Radio Free Europe, Hungarians thought America would step in to protect their uprising. Not only was it the last week of Eisenhower’s reelection campaign, the basic fact is that the U.S. was never going to go to war for Hungary. Which makes you wonder how secure the Baltics should really feel about NATO.
  • Keynes on the malaise of the postwar British economy: “If by some sad geographical slip the American Air Force (it is too late now to hope for much from the enemy) were to destroy every factory on the northeast coast, we should have nothing to fear. How else are we to regain the exuberant inexperience which is necessary, it seems, for success, I cannot surmise.”
  • An essential fact about the wildly successful Swedish Social Democratic Party is that it pragmatically dropped the anti-rural strain that characterized most European socialist parties. Judt says nowhere else was such a worker-farmer alliance conceivable.
  • The German version of the 1960s student movement consisted of people too young to remember the Nazis. Their main enemies were Americanization, consumerism, and the Western-facing government in Bonn. A popular slogan: “Vietnam is the Auschwitz of America.”
  • There was a bizarre Western affinity for Romania during the Khrushchev years because it split somewhat from the USSR and pursued a more nationalistic, Stalinist path under Ceausescu. Nixon became the first president to visit a communist state in Romania, 1969. Romania was the first Warsaw Pact state to enter the IMF, World Bank, and gain U.S. most-favored-nation trading status.
  • Of Poland’s thirty-thousand remaining Jews, twenty-thousand left the country in 1968-9, scapegoated for their association with a critical student movement (an impeccably Marxist one, at that!) led by Adam Michnik and others. I think I would like to read some of Michnik’s work.
  • In the U.S., we hear nothing about the wave of European terrorism in the 1970s: Basques, the IRA, the Baader-Meinhof group in Germany, and the Italian Red Brigade. The latter two were vaguely leftist groups with no clear agenda beyond destabilizing the state.
  • Portugal, in fighting to keep territories in Angola, Mozambique, and Cape Verde, lost a greater share of its population than the U.S. in Vietnam. The badly underpaid officer corps was resentful and conspired to oust the old regime in 1974.
  • The share of of Britain’s GDP going to public expenditure was virtually same in 1988 as ten years before, despite Thatcher’s massive privatization campaign. How? Unprecedented unemployment benefits came due. Judt observes acerbically that if privatized companies became profitable, it was because the state had socialized the expense of superfluous workers.
  • Khrushchev once said that if he were British he would vote Tory, while Gorbachev said his favorite foreign leader was the socialist Felipe Gonzalez of Spain. Is there a more telling anecdote for understanding the USSR?

1. Founders and cynics
You may have noticed that on the intellectual left, it is considered a sign of naivete to be too enthusiastic about American history or American ideals. This rule is particularly visible around the 4th of July, when we are reminded that celebrating the founders is childish hero worship as they were aristocratic slave-owners. Jeff Stein at Vox summarizes the historiography of the Revolution and argues that despite the founders’ personal flaws, the Revolution was a truly populist movement and a major force for both racial and economic equality at the time. “Slavery was legal in every colony, and the Revolution led directly to the abolition of slavery in the northern United States,” says one historian.

Stein points out that nearly every movement for equality in American history has cloaked itself in the language of the Revolution. I was reminded of this when re-reading Frederick Douglass’s “The Meaning of July Fourth for the Negro,” which I try to read most years. As you know, this speech is the big gun that smart leftists trot out when we want to chastise you for being too smug about the 4th of July. And indeed it’s a blistering speech. Douglass says “O! had I the ability, and could reach the nation’s ear, I would, to-day, pour out a fiery stream of biting ridicule, blasting reproach, withering sarcasm, and stern rebuke.” And he does. But if Americans are guilty of hypocrisy, American ideals point the way out. He argues at length that the Constitution does not sanction slavery, but rather is hostile to it. And he “draw[s] encouragement from the Declaration of Independence, the great principles it contains, and the genius of American Institutions.”

This may have all been a rhetorical ploy for Douglass, playing to his audience’s fantasies. But this is the kind of fantasy that, if we all believe in it long enough, becomes a reality. The Declaration and the Constitution come to mean what we want them to mean. Those who would discard them and ground egalitarian politics on other terms should ask if we have anything better.

2. Rebuilding the network
Last week I wrote about the concept of network power, the winner-take-all dynamic that coerces people into adopting the most popular protocol or network. I mentioned that tools for translating between protocols can help keep any given network from becoming too entrenched. An op-ed from Luigi Zingales and Guy Rolnik makes exactly that point in the context of avoiding lock-in on Facebook or other social networks. For the problem of network monopoly, they propose reassigning key property rights over the network connections to you, the user: “It is sufficient to reassign to each customer the ownership of all the digital connections that she creates — what is known as a “social graph.” If we owned our own social graph, we could sign into a Facebook competitor — call it MyBook — and, through that network, instantly reroute all our Facebook friends’ messages to MyBook, as we reroute a phone call.” Joshua Gans discusses the proposal here. “The larger issue is how these links work is constantly evolving yet having a consumer controlled social graph may make it difficult to be responsive.” It’s true that Facebook adds new features all the time. But it seems to me that the core underlying feature that make it attractive–the links to one’s friends–is very simple and easily ported.

3. MBAs will love this book 
A while ago I wrote about Edmund Phelps’s book Mass Flourishing, which, while I disagreed with much of it, contained a thought-provoking attempt to put “dynamism” at the center of economic history and even a philosophy of economic life. Phelps touted the work of his collaborator Amar Bhidé, which I finally got around to. The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World turned out to be a narrower book than the title indicated. I thought it would be a meditation on the value of “venturesomeness.” It turned out to be a takedown of the idea that we should worry about other countries getting ahead of the United States in advanced scientific research. Not exactly what I was looking for, but plenty interesting on its own terms.

The main idea is that if we’re being nationalistic, we should care more about our country’s capacity for mid-level innovation than advanced research. “Because high-level ideas cross borders easily, a nation’s venturesome consumption–the willingness and ability of intermediate producers and individual consumers to take a chance on and effectively use new know-how and products–is at least as important as, if not more important than, its capacity to undertake high-level research.” For this reason he is skeptical of the effort to channel top students into STEM; he thinks managers and marketers are just as important for the nitty-gritty work that brings innovation to life. And since organizational and consumer-facing innovations tend to be more context-specific than pure science, they are less likely to benefit other countries.

The other big idea is that “Continued prosperity in advanced economies crucially depends on innovations that increase the productivity of the services sector.” Bhidé is extremely skeptical of the conventional wisdom that information technology has not increased overall productivity, but alas this book is not the place to find that question neatly wrapped up.

Pragmatic Utopia #35: The Cost of Joining the Club

Protest of the World Trade Organization in Seattle, 1999

There’s a relatively familiar criticism of globalization that goes: unrestrained globalization is bad because it undermines national sovereignty and forces poorer countries to do things that aren’t in the best interests of (most of) their people. In its most sophisticated form, this criticism is associated with people like Joseph Stiglitz (Globalization and its Discontents) and Dani Rodrik (The Globalization Paradox). Recently, in assessing the effects of trade with China on post-industrial parts of the United States, many commentators (and both political parties, to varying degrees) have generalized the criticism, dropping the word “poorer.” Globalization can be bad for any country.

If you think about it, though, this critique shouldn’t be unique to globalization. It sounds like a specific case of the broader charge that market outcomes are often undesirable and should be regulated. In domestic politics, this obvious fact has been acknowledged (in general, if not in many particular cases) since the British Factory Acts of the early 19th century. Collective oversight of our international relationships is comparatively underdeveloped. As David Grewal puts it: “The central tension in contemporary globalization is that everything is being globalized except politics.” In this light, he observes, debates about globalization are really just extensions of the old debate about whether it is better for people to engage with one another as private individuals or, by contrast, as citizens with equal shares in a collective decision-making process.

Grewal’s book Network Power is an effort to give us a better framework for talking about globalization and connecting it to other forms of coordination (like markets and democracies). He defines globalization as “the rise to dominance of shared forms of social coordination or international standards that enable us to coordinate our actions on a global scale.” Prominent examples of such standards include: the English language, the gold standard, the World Trade Organization’s membership rules, and multilateral treaties like the failed Multilateral Agreement on Investment of the 1990s. The rise of such standards is often “double-edged,” Grewal observes, in that it allows diverse participants to cooperate through one channel while threatening the elimination of all others. Coordination standards become more valuable as more people use them, so it’s common to see a sudden exodus from a losing standard (e.g. a dying language) as everyone clusters to the presumptive winner. You’re just describing network effects, you might interject, and indeed that was one of my early reactions to the book. But I think what Grewal is really doing is turning network effects political.

A few chapters in, Grewal reveals his true ambition: to intervene in the oldest debate in social theory (itself the child of the oldest debate in philosophy), the one between structure-focused and agency-focused accounts of social life. The old way of thinking about power was straightforwardly agentic: I exercise power over you by making you do what I want. This is sometimes called the power of sovereignty, including by Foucault, who famously sought to replace it. Foucault argued that the more important form of power in modern life isdisciplinary power, which is diffuse, invisible, and all-pervasive, enacted not by the sovereign but by our collective circumstances, norms, and even our consciences. Grewal insists that we must make more room for individual action than this.

The problem is not with agency, he argues, but with assuming that relationships of power must always resemble political sovereignty. In the case of globalization, they distinctly do not. The concept of network power can “help us see how individual actions can create structures [e.g. networks] that in turn limit individual agency in a way that resembles the more familiar exercise of power by one person over another.” This type of power relationship he termssociability. Sociability is voluntaristic; it’s raw human interaction (fighting, cooperating, trading) prior to the construction of a political sphere. With this concept in hand, Grewal can give his best definition of globalization: that which “extends and deepens relations of sociability at a global level without the concomitant construction of a global sovereignty.”

The problem with network effects, in Grewal’s view, is that they give adopters little choice but to participate. He cites the philosopher Serena Olsaretti, who wrote: “A choice is voluntary if and only if it is not made because there is no acceptable alternative to it.” And once a standard is selected, there is no going back. The linguist Ferdinand de Saussure may have been the first to recognize this: “Once the language has selected a signal, it cannot be fully replaced by any other…The community, as much as the individual, is bound to its language.”

Grewal says there are two types of consequences of being forced into a popular network: interest concerns and identity concerns. These roughly map onto Charles Taylor’s phrase, “Freedom to get what you need / freedom to become who you are.” Interest concerns arise when less powerful actors are forced to accept a bad deal because it’s the only one on the table. This is one way to characterize the widespread criticism of investor-state dispute settlement (ISDS) provisions in trade agreements (like TPP), which give multinational companies the opportunity to sue countries for harming their investments (e.g. by enacting environmental protections). As much as lefty Americans complained about the ISDS clause in TPP, I bet the American trade representatives were the ones insisting on the clause. Lots of multinational companies are owned by American investors. I suspect the government of Peru, for example, would much rather have signed a version of TPP without any ISDS.

Identity concerns seem even more fundamental to the working of network power. Because networks are often winner-take-all, every alternative option will lose out. Few of us mourn Friendster and MySpace, but we do lament the decline of local and regional languages. In general, Grewal observes that globalization tends to enhance some forms of universalistic recognition (notably, the idea of human rights) while diminishing more local, solidaristic “communities of value.”

How to remedy the consequences of network power? One common approach you see is the effort to withdraw from networks. Grewal argues that this is unrealistic and even counter-productive: people (and countries) only enter these networks in the first place because they need each other. Instead, he concludes that the best bet is to provide multiple alternative channels of access. One way to build alternative channels is to make networks non-exclusive. Another way is to make networks compatible with one another, like how any two languages can be mediated by translation. In a world with ubiquitous, low-cost translation services, no one would need to give up the language of their grandparents.

Network Power includes commentary on topics you would expect like international trade agreements, investment standards, and technological standardization. On globalization, Grewal praises Dani Rodrik as one of the best critics of hardcore free trade ideology, which treats trade as an end in itself rather than a means to development. This reminded me to pre-order Rodrik’s upcoming book, Straight Talk on Trade. But in general, I found the theoretical framework I’ve been discussing to be the most interesting, original contribution. I’ve been exposed to social network analysis in a few classes, and one debate that always arises is whether there is any theory of networks or just a method of characterizing networks, nodes, and their position therein. Grewal doesn’t speak much to the literature on networks from sociology, probably because that literature is very concerned with an agent’s exact position within a network while Grewal is mostly concerned with whether you’re in or out. And while it may seem simplistic, I think treating network membership as dichotomous helps unlock much of Grewal’s insight. If the costs of staying out are high, people will sacrifice a lot to get in.

Grewal’s theory of networks is clearly applicable to antitrust policy in the context of platform monopolies: Google, Facebook, Amazon, and perhaps Uber. Each giant has achieved critical mass in its domain, initially for intrinsic reasons (quality) but now increasingly for extrinsic ones (it’s where all your friends/customers/drivers are). In the past I’ve discussed the idea of regulating these platforms as public utilities, e.g. by requiring nondiscrimination between their own products and others or by imposing common carrier obligations. Using Grewal’s framework, this approach would address interest concerns–everyone would get equal access to the dominant networks–but not identity ones. It is tempting to conclude that diversity is not a realistic value when it comes to platforms; that they work best when everyone gets together on a single protocol.

The parallel to languages and translation suggests one way out. Imagine a world with ten ride-hailing services, all linked on some underlying level thanks to data sharing and an API (indeed, providing the underlying infrastructure is the key to all of Amazon’s businesses). You might prefer to use a particular service–the one that pays it drivers best, the fancy one, the one that specializes in pooling–but if there were no cars available you could seamlessly expand your search to all ten, or some subset. Like with language translation, we might prefer to use our idiosyncratic protocol, but we also want access to everyone within arm’s reach. My ten-Uber hypothetical is probably flawed on many levels, but I share it as an example of how this concept of accessibility helps us think beyond the seemingly inevitable winner-take-all dynamics of networks.

1. Prime time for centralization
Speaking of monopolies, here is Stratechery on the Amazon / Whole Foods acquisition.  It is the only thing you need to read to understand the logic of the deal. Amazon is not so much buying a retailer as buying an anchor customer for its impending Food Supply Chain Logistics business. Once it builds out the back end of a food supply chain well enough to service Whole Foods, it will start selling to other grocers, direct to consumers, to restaurants, to caterers, etc. This is how Amazon functions in every market: build out a service (Prime, AWS) and then open it up to third parties. So from an antitrust perspective, the FTC should ignore the red herring of centralization in the grocery industry (the much-repeated stat is that Whole Foods only sells 2% of groceries) and think about centralization in the food supply chain.  

2. Dream of Cali jurisdiction
I follow a bunch of people on Twitter who share my concerns about monopoly power. Many of them were disappointed by this Supreme Court decision limiting the ability of plaintiffs to sue a company in a given state’s court even if most of them were allegedly injured in a different state. A bunch of people–most of whom are not California residents–sued Bristol-Myers Squibb in California court after being injured by a blood thinner. The Supreme Court held 8-1 that “what is needed is a connection between the forum and the specific claims at issue,” and that there is no such connection between these people and California.

Justice Sotomayor, along with my Twitter friends, bemoaned the likelihood that this decision will make it impossible for far-flung defendants to hold corporations accountable for their nationwide activities. I am inclined to agree, and so this case seems one of those frustrating examples where the desirable outcome can’t be justified by the law and precedent. Sotomayor acknowledges this in taking a realist tack: “What interests are served by preventing the consolidation of claims and limiting the forums in which they can be consolidated?” The majority reassures us that plaintiffs can still bring a mass action against a corporation in its “home” state–in this case New York or Delaware. In response, Sotomayor raises several troubling questions: Where can plaintiffs sue multiple defendants who are headquartered in different states? What about a nationwide mass action against a defendant not incorporated in the U.S. at all?

3. Racism for realists
Scott Alexander defines liberalism as “a technology for preventing civil war.” “Popular historical strategies for dealing with differences have included: brutally enforced conformity, brutally efficient genocide, and making sure to keep the alien machine [liberalism] tuned really really carefully.” This comes in the context of a controversial essayabout racism. I’m tempted not to share the post because I think it minimizes racism, but it’s important to talk about this stuff. On a charitable reading, I think there’s a valuable idea at the conclusion of the essay.  Basically: we should avoid defining racism as pure evil, unintelligible, and unresponsive to reason. Because once you define it that way, violence is the only appropriate response. It’s more useful to treat racism as something very human, present in all of us to varying degrees, that can be changed and mollified over time. We might call this the “realist” approach to racism. I’ve seen it articulated by a number of anti-racist writers; one example is Beverly Tatum, famous for the “smog” and “moving walkway” metaphors. Thanks also to Kate Selker for helpful comments on this view of racism after a long-ago newsletter. I’d be interested to hear your views.

4. Pedagogy and pasttimes
Wonderful old essay from Alan Kay on science education and the way our pedagogy does a better job inculcating an appreciation for stories than an appreciation for logic. On being told that it’s too hard to get children thinking scientifically, he says it’s harder to learn to hit a baseball. “In fact, what really seems to be the case is that children are willing to go to any lengths to learn very difficult things and endure almost an endless succession of “failures” in the process if they have a sense that the activity is an integral part of their culture.”

5. Capital allocation is a myth, volume 481
John Kay: “The paradox of modern capital markets is that although there is less and less need for market activity from the point of view of either the end users of finance, or the investors who are the ultimate beneficiaries of finance, the volume of market activity has increased exponentially.” In this context, it was funny listening to Will Thorndike talking about the most effective CEOs of all time (from a financial perspective) on the investing podcast. In his book, Thorndike profiles eight CEOs who excelled at capital allocation, meaning they were very good at timing dividends and buybacks. There was almost no talk of CEOs making smart capital investments–i.e. the stuff that financial markets are supposed to be facilitating. And to the extent that Thorndike praised acquisitions, it was exclusively for finding opportunities to “reduce headcount.” None of this is how a society advances in the long run.

Pragmatic Utopia #34: Market Domination and Republican Liberty

This week, I have an essay discussing three books that analyze economic affairs from the perspective of neo-republican political philosophy, which is concerned above all with independence from arbitrary power. The books are: a provocative argument that workplaces are dictatorships, a history of 19th century labor reformers who came to roughly the same conclusion, and a reinterpretation of Marx’s Capital that emphasizes its republican features. All three writers–Elizabeth Anderson, Alexander Gourevitch, and William Clare Roberts–cite each other approvingly and seem to be part of a nascent academic movement to build a case for socialism on neo-republican terms. I should apologize to anyone who knows this material for failing to include Philip Pettit much in my discussion; he has been a key (and I think one of the first?) proponent of this republican socialist view, and all three authors build on his arguments. I should have read one of his books, but as is often the case I seem to have stumbled on this topic out of order and will have to absorb the classics by osmosis.

If you know any fathers, paternal figures, or indeed paternalistic figures who would enjoy these topics, please consider forwarding the newsletter to them or signing them up at the link in the top right corner.

The Map of Hell by Botticelli, depicting the rings of Hell in Dante’s (and perhaps also Marx’s) Inferno

A lot of academic types I know were very eager for the recent release of Elizabeth Anderson’s new book: Private Government: How Employers Rule Our Lives (and Why We Don’t Talk about It). The premise seemed to offer what many of the best non-fiction books do–a new way of looking at an old topic, so obvious in retrospect that you can’t imagine how we ever saw it differently. In this case, the idea is to think about employers in the same terms we think about governments. That is, as paternalistic authorities that can do much good for us but who run the risk of infringing on our liberties.

Anderson charges the modern workplace with being a “communist dictatorship”: “The economic system of the modern workplace is communist, because the government—that is, the establishment—owns all the assets,and the top of the establishment hierarchy designs the production plan, which subordinates execute. ­There are no internal markets in the modern workplace. Indeed, the boundary of the firm is defined as the point at which markets end and authoritarian centralized planning and direction begin.” For many readers, it may seem inappropriate to apply terms like “communist” and “dictatorship” or even “government” to the private realm. These are terms we use exclusively for states, right?

Anderson recognizes this, and so she builds her argument on top of an effort to undermine the historical and philosophical distinctions between public and private, state and economy. She concludes that a government is “private” with respect to a subject if it can order the subject around while ignoring the subject’s preferences in how it (the government) should operate. What makes something public, conversely, has nothing to do with “the state” but rather with the presence of deliberative, inclusive decision-making. The historical support for this argument involves looking back to the British Levellers (17th century egalitarian movement during the English Civil War), Adam Smith, and Thomas Paine, all of whom conceived of liberty in terms of dismantling social hierarchy. These early modern thinkers were excited about market exchange not as an alternative to government regulation (as modern libertarians might tell you) but rather as an alternative to non-market forms of private privilege: hereditary land ownership, the House of Lords, the state-backed Church, and state-sponsored monopolies. This conception of liberty–as freedom from social hierarchy and the domination it enables–is known as republican liberty. Part of what brought me to Anderson’s book was my growing interest in republican liberty as a potentially useful basis for critiquing economic inequality and the concentration of economic power in our contemporary situation.

Around the time I found Anderson’s book, I came across two other recent books on the history of republican critiques of market society. Anderson’s groundbreaking argument, it turns out, is 150 years old. The original source may well be–what else–Marx’s Capital. This is the argument of William Clare Roberts’s fascinating reinterpretation of CapitalMarx’s Inferno: The Political Theory of Capital. But around the same time, in the United States, workingmen’s groups were arguing that the legacy of chattel slavery remained present in “wage slavery,” and that the private employment contract was not truly free. These 19th century “labor republicans” are the subject of Alexander Gourevitch’s book, From Slavery to the Cooperative Commonwealth: Labor and Republican Liberty in the Nineteenth Century. I must admit that this post would have a better symmetry if I had read one more book, something about Pierre-Joseph Proudhon and his coterie of republican socialists. This is because the labor republicans’ ideas resemble Proudhon’s more than they do Marx’s. In ascending order of radical republicanism, then, I’ll briefly discuss the labor republicans before working up to Marx.

Gourevitch’s project began as an effort to critique the history of republican thought from a Marxist standpoint. Republicanism, after all, emerged from aristocratic origins in Greek and Roman political philosophy. Gourevitch surveys the literature on slaveholding ideology in Athens and Rome and concludes that republican-style independence for some always depended on slavery for others. Landed independence for peasant-citizens was only tolerable if wealthy citizens had access to slave labor (see Finley, Ancient Slavery and Modern Ideology for more on Greece and Rome as slave societies, and on longstanding historiographic neglect of this fact). The same relationship between independence and slavery crops up again in the American South, see for example George Fitzhugh (pro-slavery advocate and, sadly, America’s first sociologist) writing, “To become independent is to be able to make other people support you, without being obliged to labor for them. Now, what man in society is not seeking to attain that situation? He who attains it is a slaveowner.”

Proponents of an egalitarian republicanism can’t be satisfied with these origins! Now, contemporary republicans like Quentin Skinner and Philip Pettit claim that republicanism overcame its aristocratic, propertied origins. But when? Gourevitch set out to poke a hole in their history, but ended up filling it in himself. He suggests that a coalition of American workingmen’s associations, most prominently the Knights of Labor, undertook a radicalization of the republican tradition by extending the accusation of “domination” to the workplace.

The labor republicans’ signature phrase was “wage slavery,” and it was carefully chosen. They understood slavery as a situation of being so economically vulnerable as to be coerced into work, and to have the proceeds of that labor taken away. Before the Civil War, they continually pestered William Lloyd Garrison to add materials on wage slavery to his abolitionist agenda in The Liberator. Even though they were committed abolitionists, this feels a bit like the 19th century version of “All Lives Matter,” and it’s easy to understand why Garrison ignored their requests. After abolition, it was easier for the crusade against wage slavery to take center stage on the “Radical Republican” (i.e. the political party, not the political philosophy) agenda.

Labor republicans argued that workers were coerced or dominated at three stages. First, they were coerced into seeking work, because they lacked the independence of personal land or property. As one prominent labor republican wrote, “If laborers were sufficiently free to make contracts…they would be too free to need contracts.” The second stage, then, was labor contracts written on the employer’s terms. The third stage, most important to the republican critique, was domination inside the workplace within the contract’s inevitably ambiguous terms. The point here is that labor (or more precisely labor power, in Marx’s terms) is a unique commodity. The basic logic of most contracts involves the seller giving over complete ownership and control of the commodity to the buyer. But in a labor contract, the commodity is pure human capacity. So, the labor republicans concluded, the labor contract was necessarily an agreement to give up control over one’s will for the duration of the working day.

Elizabeth Anderson builds much of her argument on this same observation about the broad scope of employer prerogative within contracts, and provides many examples of things modern workers are forced to do because of the power imbalance: have their possessions searched, refrain from using the bathroom during the workday, endure sexual harassment, and so on. Unfortunately, she commingles these aforementioned examples (which I believe to be both serious and widespread) with examples of abuses that seem more anecdotal and peripheral: workers fired for their comments on Facebook or for espousing political positions contrary to the employer’s. It would have been helpful to give some sense of the relative prevalence of these abuses. Private Government includes a series of responses by prominent academics (the book and the responses were originally delivered as a Tanner Lecture series), and it is only in response to Tyler Cowen’s skepticism that Anderson really sharpens her focus on the most serious examples of workplace domination. Cowen suggests that when firms fire people for insensitive Facebook comments, they are usually trying to protect other workers, and more broadly suggests that there is less conflict between firms and workers than Anderson thinks, and more conflict among workers themselves. In general, he thinks workplaces compete on hospitality to attract employees and doubts that work is nearly as tyrannical as Anderson says. Anderson gets the last word, accusing Cowen of being out of touch with the world of low-wage work (e.g. slaughterhouses, home health aides) and generalizing from his highly-educated social circles.

Ultimately I don’t think either Anderson or Cowen presents the most useful evidence on what work is really like these day. I’d suggest an ethnography like Vanesa Ribas’ On the Line: Slaughterhouse Lives and the Making of the New South (slaughterhouse workers) or Seth Holmes’s Fresh Fruit, Broken Bodies: Migrant Farmworkers in the United States (farmworkers) or the old classic, Barbara Ehrenreich’s Nickle and Dimed: On (Not) Getting By in America (clerks, maids, waitresses, health aides) for the reality of low-wage work, low-control work.

Cowen’s other main critique is that Anderson should have given more space to evaluating alternatives to “private government.” Anderson names worker-owned cooperatives (which are public, in her terms) as a preferable alternative to employer-controlled private government, but her book is not the place for a full exploration of the pro’s and con’s of the cooperative form. The labor republicans were also deeply committed to the idea of cooperatives. For them, the cooperative ideal was not just an institutional solution but a manifestation of their highest ideal, solidarity, which they defined as a synthesis of self-interest and virtue, or, alternatively, as the habits required to act collectively for common good. Classical republicanism had generally held that property owners were the most likely people to act virtuously; they had the luxury to do so. The labor republicans flipped this thinking on its head, inventing a “political theory of the dependent classes” that held up propertyless workers as the vanguard of solidaristic virtue. The dependent classes, after all, would have to work together even in pursuit of self-interest.

The idea of worker-owned cooperatives has a long history on the political left. It was the signature recommendation of Proudhon, of the labor republicans, and now of critics like Anderson. The challenge since Marx, however, has been to explain why a cooperative facing the same market pressures and production technologies as a capitalist firm wouldn’t exploit its workers just the same. As William Clare Roberts summarizes Marx’s view, “The [cooperative] separatists replicate the founding gesture of capital, the fantasy that there is some part of the world that can be appropriated a novo without expropriating another.” The labor republicans were aware that a few islands of cooperation in a sea of capitalism would not long endure. The Knights of Labor advocated for a suite of society-wide institutions necessary to support a cooperative system: the nationalization of public utilities, a public bank making cheap credit available to cooperatives, and a nationwide system of labor legislation (e.g. minimum wage, maximum hours). This is all well and good, but it makes you wonder whether we’re still talking about cooperatives and voluntaristic reform or about a socialist political revolution.

So as I’ve indicated at multiple points, Marx had a critique of the employer-employee relationship that is complementary to yet deeper than the one found in other republicans concerned with domination at work. Ordinarily I would leave discussion of Capital for another day–it’s a big enough subject in its own right–but Marx’s Inferno fits too nicely into today’s labor republicanism theme. I found this to be an extraordinary book, the most difficult but most rewarding of the ones I’ve mentioned today. Capital is one of those works that has spawned literally tens of thousands of responses, analyses, and exegeses, and while I haven’t read the vast majority of those, I get the sense (in part from David Harvey, who has) that Roberts is really saying something new.

More than one thing, actually. Roberts makes two main claims in situating Capital. First, the structure of Capital is closely modeled on Dante’s Inferno. There are the same number of chapters, grouped into Parts which correspond to progressively deeper rings of Dante’s Hell. The metaphor of capitalism as a “social Hell” was actually quite common in socialist writings of Marx’s time; his choice of the Dantean structure was not just a clever Easter egg (although it is that too) but also a move to appropriate common socialist imagery for his own purposes. And indeed those purposes differed from his socialist interlocutors. Whereas usually capitalism itself was held to be the social Hell, for Marx it is bourgeois political economy; i.e., Hell is other people’s analysis of capitalism. It’s a pretty devastating metaphor when you think about it. It’s why the subtitle of Capital is “Critique of Political Economy.”

And this brings us to Roberts’s second main intervention. Capital is often read as a rebuttal to “classical” British political economy, or the work of Smith, Malthus, and Ricardo. But Roberts argues that it is really a conversation with Marx’s rival socialists: Saint-Simon, Fourier, and especially Proudhon. With the social Hell metaphor and again throughout the book, Marx takes up the socialists’ key terms to use against them. I found this context very helpful for making better sense of Capital than I had before. Marx spends long sections reconstructing arguments that he ultimately disagrees with, so it can be pretty confusing if you don’t have some familiarity with the version of contemporary socialism he’s trying to improve upon.

For Marx, the prevailing socialist analysis of what it meant for workers to be exploited was far too narrow. Socialists identified most of the exploitation occurring prior to any labor contract; poor workers lacking property were forced to seek work. Recall: “If laborers were sufficiently free to make contracts…they would be too free to need contracts.” The ultimate origin of this unfairness was whatever process of “primitive accumulation” led some people to have property and others not. If property ownership were equalized, the wrong of primitive accumulation would be righted, free exchange between equal parties could commence, workers would be paid a fair wage (e.g. determined by the labor theory of value), and all would be well. Not so fast, thought Marx.

To show the true problems with markets–and why the socialist approach wouldn’t solve them–Marx leads us into the first level of his social Hell, the sphere of exchange. This level corresponds to the region of Dante’s Hell associated with sins of incontinence, or lack of self-control: the circles of Lust, Gluttony, Greed, and Wrath. The question this level raises is: why do markets seem to make people behave badly? Roberts observes that early socialism inherited a Christianized version of classical moralism about the sinfulness of market exchange, but also a tradition of republican thought where lack of self-control is a consequence of domination rather than its cause and justification. What Marx wants to do in this section is strip away all moralizing and show why participating in markets robs people of self-control.

The basic argument is that for producers, being sensitive to prices (or to what the market wants) undermines the possibility of deliberate action. Here Roberts reinterprets the famous concept of ‘commodity fetishism,’ which is usually seen as a problem of mis-perception, mistaking social relationships between people as economic relationships between money and things. Roberts thinks commodity fetishism should be understood mostly as a problem of domination rather than false consciousness. In other words, people’s behavior is coordinated and imposed by the market–which is really just an aggregation of everyone else’s voices, weighted by their market power–rather than by a deliberative process where everyone’s voice is equal. Of course, this collective process of coercion is further obscured by the commodity relationship, but in Roberts’s emphasis, the power dynamic is the more important part than the means of its deception.

This argument so far is meant to explain why markets sap the agency of producers. But you’re probably wondering: isn’t Marx supposed to be showing why capitalism is bad for workers? In the next Part of Capital, Marx leads the reader deeper into social Hell–into the sphere of production, which mirrors Dante’s descent into lower Hell, and specifically the circle of violence. Recall that other socialists had located the violence of capitalism occurringbefore exchange, in whatever primitive accumulation put the landless at a permanent bargaining disadvantage. Marx sets up the more challenging goal of criticizing “cleanly generated capitalism,” or the employment of a consenting worker for a fair wage. This is where he defines the exploitation of labor power, by which he means the exploitation of human potentiality. When a worker is hired for a fixed period, Marx says, the capitalist will naturally want to use as much of the worker’s energy, skill, and capacity as possible. Roberts notes that modern concepts like emotional labor or affective labor build off this same insight that the capitalist will eventually use every piece of the worker, physical and psychological. But ultimately, manipulating human nature by force is not the end of the story for Marx. Rather, he concludes that exploitation of labor power is wrong because it sins against the proper nature of labor, which is to produce something of some use or enjoyment rather than surplus value (or honestly, just call it profit) for the employer.

The next section of Capital corresponds to Dante’s sphere of fraud. Here Marx accuses the defenders of capitalism of offering a bait-and-switch on their promise that technology and productivity growth will improve people’s standard of living over time. I suspect much of this section is misguided, but the interesting part where Roberts focuses is Marx’s accusation that Proudhon’s promised cooperation is fraudulent. Proudhon was enchanted by an idea of “collective force,” a sort of increasing returns to scale for which individual wages did not adequately compensate the collective body of workers. As I mentioned earlier, Proudhon’s ideal society would be one of many worker-owned cooperatives, each governed by his principle of mutuality, a sort of social contract for groups larger than a family and smaller than a state. Marx argued in response that workers cannot cooperate without being employed by the same capital. Workers are employed not just by bosses but by the conditions of labor itself, especially machines which demand a certain pace of work, and moreover by the market for which they produce commodities. This is where Marx’s prior analysis of market exchange comes in handy; it suggests that workers can no sooner cooperate than become enslaved to the market, and consequently to enslave one another.

The final section of Capital, which discusses primitive accumulation, corresponds to Dante’s sphere of treachery. In brief summary, Marx minimizes the traditional socialist story that capitalism arose when the first capitalists usurped monopoly ownership of land from their feudal predecessors. In Marx’s cursory historical account, capitalists did not replace landlords so much as crop up between them and landless workers, making both parties dependent on the middleman (the one for cultivation of the soil, the other for a paycheck).

The upshot of this account is that you can’t explain away capitalism as mere violence, as the traditional primitive accumulation story tends to do. It was the landlords who amassed the modern proletariat through plundering land; all the capitalists did was invite both parties to engage in peaceful exchange. This argument was tailor-made to frustrate Marx’s socialist contemporaries, who tended to frame capitalists as malicious actors. Marx wants none of that moralizing. As I understand it, the crux of Marx’s critique of capitalism is found in the early chapters on exchange, commodity fetishism, and the ways in which people lose their agency to the collective domination of the market. The rest is critique of political economy.

I hope that my discussion of Marx’s Inferno, coupled with my earlier discussion of republicanism, makes clear why this book is framed as a political interpretation of Marx. Roberts sees Marx radicalizing the republican tradition by pointing out a new form of domination: domination by other people, mediated by the market. This critique of domination lines up nicely with Elizabeth Anderson’s definition of private situations. Both might be remedied by restructuring relationships of power as relationships of association. Roberts argues that Marx was more appreciate of deliberative, democratic methods of association than he is usually given credit for. Now, what a deliberative economy might look like is a challenging question; Roberts says Marx would not have approved of central planning, nor market socialism either. The only option that seems plausible (according to Marx’s preferences, not necessarily in any other terms…) would be democratic deliberation over all production decisions. One place you can explore a vision roughly consistent with this is a working paper by Henry Farrell and Cosma Shalizi, “An Outline of Cognitive Democracy.” In the age of Democracy for Realists, this may seem a more than optimistic pursuit.

1. Minnesota magpie
I enjoyed Bob Dylan’s Nobel Prize acceptance speech immensely. He walks you through four of his literary influences–the blues music tradition, Moby Dick, All Quiet on the Western Front, and the Odyssey–sharing the words, phrases, and sounds that stuck in his mind and filtered into his lyrics. It felt like an English class lecture that could get anyone inspired to start reading those books. Then I learned that he appears to have cribbed many of the passages he quoted from Sparknotes, many of which weren’t even in the actual books in the first place. But then also Dylan has been copying and repurposing material without attribution for decades? It’s kind of his process? So I’m not sure exactly how to feel.  

2. The China trap
Withering, scathing takedown of a prominent book arguing that the U.S. and China are doomed to fall into the ‘Thucydides trap’ where a rising power strikes fear into an established power and the two cannot escape going to war. The author shows how there was no such trap in the original Thucydides and why it’s dangerous to adopt this fear with respect to China. Appeasing China in lots of minor confrontations out of such fear is likely to lead to greater trouble down the road. I don’t know enough to weigh in on his China conclusion, but this is worth it for the schooling in ancient Greek history alone.

3. Automation and global labor supply
Excellent Lant Pritchett essay on automation in the context of developing countries already struggling with massive youth unemployment (h/t Alexander Berger). I do not expect to be surprised by people’s takes on this subject, but by taking the international perspective Pritchett made me see it in new light. Much follows from the massive wage multiples between U.S. and, say, Ugandan or Indian workers.  “None of the usual economist platitudes or models about technology and job creation and destruction that use local prices apply in the face of massive distortions to global markets. It is an economically inefficient—not to mention inequitable—use of resources to use the world’s scarce technological and entrepreneurial talent to displace workers who are globally abundant.”

4. Still don’t think BuzzFeed is serious?
This BuzzFeed News investigation on the widespread practice of Russian-backed assassinations in the U.K. is mind-blowing. Assassins connected to Russian intelligence and mafia are routinely killing expats and their British associates who have become enemies of Putin…and the British police are ignoring the obvious evidence and ruling them all suicides. According to anonymous American and British intelligence officials, the British are afraid of starting a fight with Russia and eager to keep the spree of Russian investment in London real estate flowing. Based on my memory of how normal countries function, people should resign over this story. It is a pathetic abdication of the most basic function of sovereignty.

Pragmatic Utopia #33: “Regulating Society by the Market”

A few weeks ago I shared a helpful definition of neoliberalism, from Greta Krippner. Now I’ve finally gotten around to reading the the current authority on the topic: Undoing the Demos: Neoliberalism’s Stealth Revolution, by the Berkeley political theorist Wendy Brown. While reading this book, I couldn’t help noticing that the word remains a vague catch-all in public discourse (and, to be fair, in much academic discourse too). In Noah Smith’s recent essay in praise of neoliberalism, for example, the term stands for some combination of centrism, technocratic expertise, “pro-growth” policy, and a friendliness to markets. Brown would surely agree that these ideas are related to neoliberalism. But she’d rather give a more precise definition: not because the dictionary says so, but because it helps clarify what neoliberalism is different from, and therefore the stakes in supporting or opposing it.

Brown builds her conception of neoliberalism on top of the picture Foucault sketched in his ‘biopolitics’ lectures. If I can leave you with one idea from Brown and Foucault, it would be that neoliberalism is not the same thing as “free market economics” (contrary to much usage). The principle of laissez faire–that the state should leave the economy alone–was the prime tenet of liberalism. Neoliberalism is almost the reverse. It is a strategy of governing via the market, or “regulating society by the market.” For a concrete example, take this essay by my Berkeley colleague Robbie Nelson about how the Obama administration outsourced its mortgage forgiveness program to private companies, letting the market decide which underwater homeowners (all eligible under the program) should actually be granted relief. A second way to state this definition is that neoliberalism substitutes markets for laws as principles for determining what is right, or what actions must be upheld.

A third way to define neoliberalism is in terms of what kind of subject or citizen it assumes. Foucault argues that whereas once sovereigns conceived of their citizens as homo juridicus–a subject with certain rights which must be respected–neoliberal governments conceive of their citizens as homo economicus, a subject who pursues his self-interest. Here Brown makes her most important update to Foucault. She wryly observes that it is as if Foucault considered all of Western political history and somehow forgot to chop off the king’s head. There was an important stage after homo juridicus: homo politicus, the citizen who wrote constitutions and learned to conduct self-government with his neighbors. For Brown, this is the whole problem with neoliberalism: that in abandoning homo politicus, it abandons the hope of individual or collective mastery of existence. The logic here is that political debate is a better (or at least more transparent) mechanism than markets for expressing normative values and especially for raising and responding to disagreements.

Brown uses much of the book to highlight some of the concepts she considers most emblematic of neoliberalism. First, there’s governance: a form of governing that is networked, integrated, cooperative. You’ve probably taught yourself to stop reading whenever you see these buzzwords, but Brown dwells on them and notices a mode of governing where process rules and agents are absent. The upshot, she thinks, is to decenter state sovereignty and make corporations co-responsible for managing public affairs (see the ubiquitous “public-private partnership”). The problem with cooperation is that robs political life of normative debate. So does her next target: “best practices.” The problem with best practices or “benchmarking” is that they replace properly political debates about what is right for a particular community with one-size-fits-all technical engineering.

It’s worth considering how much “evidence” is necessary in a book like Brown’s. There are two main ways to do theory, both on display here. The first way is to offer a close reading of other theorists, reconstructing and then improving upon their arguments. That’s what Brown does vis-a-vis Foucault. The second way is to generalize about the real world, inductively generating a theory based on one’s analysis of events, headlines, and case studies. This kind of empirical inspiration seems especially important for Brown’s argument, given that her topic, neoliberalism, is a recent, bounded phenomenon. Brown’s deepest engagement with contemporary texts comes in a chapter on the neoliberal takeover of law, which she finds in Justice Kennedy’s opinion in Citizens United.  This analysis was a great start and I’d love to read more like it. I suspect we will one day get a full book parsing the rise of neoliberal reasoning in jurisprudence. In her discussion of governance/benchmarking/etc, Brown offered less evidence that these concepts really operate the way she says.

I appreciate Brown’s definition of neoliberalism because it helps us think more clearly about when markets are the right mechanism for addressing public problems. The mistake of neoliberal thinking, in Brown’s view and mine, is that it assumes markets are desirable ends in themselves. You can see this reasoning at work in the HAMP loan modification program, in the Obamacare exchanges, in funneling retirement savings into private 401(k) plans, and in the most utopian rhetoric about charter schools. With Brown’s definition, you can reject this thinking without abandoning the usefulness of markets entirely. The key question remains: can people govern markets democratically? Is there political–that is to say, deliberative–recourse when markets continually fail to produce satisfying outcomes? Brown’s deepest worry is that in a society populated only by homo economicus, there would not even be a language in which to ask these questions.

1. Piketty, critics, and friends
After the Piketty, there’s the After Piketty. Subtitled The Agenda for Economics and Inequality, this is an edited volume with contributions from over twenty social scientists evaluating the lessons and implications of Piketty’s Capital in the 21st Century. The first thing to say is there should be more books like this! After a piece of work as obviously important as Capital, researchers should take time to digest and reflect on it before moving on to the next thing. I can’t summarize all of the contributions, so I’ll focus on one thread.

Recall that Piketty argues that capital’s share of income is rising and will continue to rise. When I last wrote about Piketty, I mentioned Matt Rognlie’s influential critique. His critique was an updated version of the theory John Maynard Keynes described as the “euthanasia of the rentier:” namely, that as wealth grows more concentrated, the relative rate of profit should decline even faster (and thus capital’s share of income should sink back toward labor’s). You can think of it as diminishing returns to investment, or see Brad DeLong for abetter discussion. But Piketty argues that we should move past Keynes’ and Rognlie’s neoclassical, supply-and-demand framework and instead look at the historical data, where he observes that the rate of profit has been more or less constant at 4-5% for centuries, even across varied levels of capital concentration.

How can this be? Piketty doesn’t really say. In his formal model, the operative assumption that leads to this conclusion is an elasticity of substitution between labor and capital greater than one. But in a useful contribution to After Piketty, Devesh Raval shows (as did Rognlie) that the elasticity is almost certainly much lower than one. So perhaps the answer lies outside a neoclassical model. This is where Suresh Naidu takes us in “A Political Economy Take on W/Y,” which I thought was the best essay in the volume. Naidu senses a “wild Piketty” struggling to break free from the chains of neoclassical economics. This is his attempt to liberate him. In Naidu’s view, capital “is a set of property rights entitling bearers to politically protected rights of control, exclusion, transfer, and derived cash flow.”  To understand the wealth/income ratio, you need to examine the details of labor bargaining power, corporate concentration, and the rate at which financial markets capitalize expected future income as present wealth. By manipulating these parameters, capitalists might be able to maintain a fixed rate of profit even as capital grows more concentrated.

Naidu’s view of capital is also very helpful for making sense of the distinction between capitalists and “supermanagers,” the high-paid executives who are responsible for the rise in income inequality (rather than wealth inequality) in Piketty’s data. Some of the contributors to After Piketty say: if inequality is driven by supermanagers, the story is reallyabout differences in human capital, and the solution is just (what else!) a better education system. To the contrary, Naidu points out that executive bonuses aren’t really labor income. They vary with corporate profits, and are thus an indirect product of the firm’s noncompetitive position. He suggests we should think of a continuum of capital-like contracts, from fixed wages up to full ownership, with executive pay somewhere in the middle.  

I was pleased to see, in the book’s concluding essay, Piketty himself agreeing with my perception of the best chapters. He enthusiastically claimed the “wild Piketty” title Naidu had suggested. He also praised David Grewal’s contribution, on the historical legal foundations of capital’s consistent rate of profit. Grewal describes capital as a social relation: “What [Piketty] has estimated is not a physical stock of stuff so much as the market valuation of the extent of capitalist privilege,” instantiated in a range of assets from houses to machines to software. Piketty agreed with Naidu and Grewal’s effort to reframe the elasticity debate to a debate over the institutional (that is, political) climate for capital. I am eager to see what kind of research this framing can accommodate.

2. Why should we care about education?
Freddie deBoer has mostly stopped blogging about politics and started (resumed?) blogging about education, and it is excellent. I could link to several very good posts in the last month, but this one is probably the most important, as it states his general worldview on public education, to which I am very sympathetic. It starts with an anecdote that concludes: “I laughed and told her that if teachers only did things that we knew had a meaningful impact on grades and test scores, they wouldn’t have anything to do.” This sometimes gets Freddie accused of being an edu-nihilist:

“It’s true: I believe that the degree of assumed plasticity of outcomes for both individual students and groups of students at particular performance bands has been broadly exaggerated in our educational debates. That is, I think what’s plausible in terms of improving quantitative outcomes through education-specific policy interventions is far more limited than the “no excuses” rhetoric lets on.”

But we also need to remember that “schools perform a set of vastly important social functions that have nothing to do with standardized tests or even with learning as traditionally defined – including housing, and often feeding, children in a safe environment for half their waking day, providing them with socialization and the ability to form meaningful peer-group relationships, and providing the only support for those with developmental and cognitive disabilities that many families will ever be able to take advantage of. ”

In this view, education is good because it’s one of the most direct redistributive programs we have and because it plays a crucial function in socializing citizens. How would we spend our time and money if most education reformers believed this??

3. This week in John Dewey
Over the next few months I’m taking something of a deep dive into pragmatist philosophy and social theory. One starting point was a biography of America’s most important pragmatist philosopher: John Dewey and American Democracy by Robert Westbrook. Suffice it to say I’m a big fan of Dewey. Because I found so many aspects of his thought deep and relevant, I’m going to share snippets in each of the next few weeks. Some extremely basic background: John Dewey was a philosophy professor and social reformer active from the 1880s to 1950s. He grew up in a progressive Christian family but ultimately replaced his religiosity with a devotion to democracy as a kind of civic religion. Other major interests were education, the relationship between psychology and philosophy, dismantling dualist metaphysics, art, and socialism.

Dewey is often introduced as a theorist of democracy. This is of course true, but somewhat misleading. Dewey’s strength was not in the analysis of political institutions. During his career, he sparred continually with “democratic realists,” including Walter Lippmann, who doubted that the people could govern effectively or even deliberately, and tended to favor expert management. Such realism is very much alive today: see Democracy for Realists, one of the hottest political science books in recent years. Dewey did not have a persuasive rebuttal on the realists’ terms.

Instead, he urged us to think about democracy not as a system of government but as “a form of moral and spiritual association.”  He was primarily interested in what kind of person you become by participating (or not) in self-determination. “Democracy means that personality is the first and final reality. It admits that the full significance of personality can be learned [only] by the individual…personality cannot be procured for anyone, however degraded and feeble, by anyone else, however wise and strong.” This seems to me a useful foundation for Wendy Brown’s attention to homo politicus. And while this focus on personality may suggest an individualistic purpose of democracy, Dewey’s definition of individuality was deeply social. Everyone has a function–a relationship of mutual adjustment between our own capacities and the environment, which includes other people. Both must adapt to accommodate each other (this synthesis of an apparent dichotomy is a hallmark of Dewey’s philosophy). Thus “It is through association that man has acquired his individuality, and it is through association that he exercises it.”

4. Permanent transformation
Jeremy Adelman has a good, critical reflection on Karl Polanyi and his book The Great Transformation, which I’ve written about before.  The Great Transformation is a favorite text for sociologists who want to be critical about markets, but it’s sort of unsatisfying to that end. First, there are theoretical ambiguities: “On the one hand, Polanyi argues that the liberal age had disembedded the economy from wider social systems. On the other, Polanyi implies that the market always rests on legal, intellectual, and political conditions—that supply and demand never operate freely. Polanyi wants it both ways. Close readers will find themselves chasing the tail of his argument.”

Second, as Michaeljit Sandhu has pointed out to me, Polanyi’s historical account of the causes of the World Wars yields confusing lessons about why, exactly, market societies are bad. Polanyi seems to blame the “double movement” of state protectionism (e.g. going off the gold standard) in response to market societies rather than the consequences of markets themselves. In contrast, he attributes the relatively peaceful “long 19th century ” to rising middle class consumerism. And this is everyone’s favorite anti-market book? Moreover, as Adelman points out, it’s quite strange that Polanyi, a once-Jewish emigré from Vienna, had no sharp words for reactionary nationalism in the run-up to either war.

Polanyi, writing shortly after WWII, thought that the experiment in market fundamentalism was over. He was clearly wrong.
In this essay, Michael Burawoy argues that Polanyi’s blindness to the future should make us question his account of the past, and concludes that mistakes on both ends stem from his failing to take capitalism seriously.Rather than one “great transformation,” Burawoy says there have been three successive waves of marketization. Burawoy thinks that each wave has called for a successively updated version of Marxism, but that is a discussion for another day.



5. Social entrepreneurship for libertarians
I’m not a libertarian, but I can respect this essay from Jason Kuznicki arguing that libertarians should spend less time on theoretical suasion and more time building the kind of voluntary institutions a society would need to be less dependent on government. The main example he talks about is Dominant Assurance Contracts, an idea where a wealthy philanthropist provides the seed money for a Kickstarter-style project. The difference between this and Kickstarter is that if the funding goal is not met, the subsequent contributors would still get to take home a share of the philanthropist’s money, so it’s a win-win for them. It seems like this would create perverse incentives for people to contribute to projects they thought would fail to reach the target and thereby grab the philanthropist’s money for free. Whatever, I don’t really want a world where schools are funded by Kickstarter anyway. But I appreciate people who are trying to build good institutions, libertarians included. 

Pragmatic Utopia #32: Socialized Capital in American History

The last few weeks were the end of my semester, and in the frenzy I didn’t share summaries of everything I read. But today I thought I’d share the result of much of that reading: a little paper written for one of the best classes I’ve taken at Berkeley, on Political Economy in the United States. An important disclaimer: this is a paper about U.S. history, but I am not a historian! Apologies to all historians.

Not being a historian, I felt permitted to commit a minor sin of that profession, which is to choose a topic motivated predominantly by contemporary concerns. As you know from a recent post, I’m interested in “market socialism,” an umbrella term for economic systems that reconcile private enterprise with collective ownership. Thinking about market socialism got me thinking more generally about what happens when “regular people” or “workers” take on a new identity as capitalists. In this paper, I review what historians have uncovered about this phenomenon in the context of American history. The phenomenon (which I think includes everything from cooperatives to pension funds to labor banks) doesn’t have a single name, so I gave it a clumsy one: “socialized capital.” You can look at the (draft!) paper here, and I’ll summarize below (when I quote without attribution, it’s from the paper).

Amalgamated Bank is the nation’s oldest union-run bank and one of the major success stories in the history of socialized capital
The motivation for writing about socialized capital is maybe best depicted by this 2×2, which represents my impression of how we usually talk about achieving the American Dream.

The dominant tradition in the study of American social mobility and individual prosperity is labor history. “Whether Americans have succeeded or failed to achieve economic security, they have often done so as workers.” Within labor history, the most interesting questions often deal with the presence or absence of collective action, i.e. comparing the two left-most quadrants. A second tradition looks at Americans as property owners. Historically this usually meant ownership of land and housing, but a newer trend (“the new history of finance”) explores the importance of household financial assets in supporting consumption and providing security. But one quadrant remains empty: what about collective capital ownership?

You might respond: but public corporations are the very definition of collective capital ownership! Maybe. My suspicion is that shareholders cannot (or do not) exercise enough control to do justice to the word ‘collective.’ But I’m getting ahead of myself; I need to define what I think counts as socialized capital.

“Socialized capital, in my usage, refers to a community’s effort to advance its collective interest by pooling money and allocating it like an investor or a bank. In its ideal form, socialized capital has three necessary characteristics that distinguish it from other forms of capital.

  • First, socialized capital is democratic. The extent of participation may vary, but participants in a collective fund have some input on how the money is to be used.
  • Second, socialized capital seeks holistic returns. Socialized capital funds have investment objectives that are specific to the interests of their members. This feature distinguishes socialized capital from capital that seeks only a financial return without regard for the consequences of its investment on its members in their capacities as workers, consumers, or citizens.
  • Third, as a consequence of the above, socialized capital exercises governance over the non-financial economy. Whether directly as private equity investors or indirectly as shareholders, social capitalists seek to discipline companies to behave in the interests of the fund’s members.”
Few experiments in collective capital ownership have met these criteria. Two challenges deserve particular attention

“First, ownership does not guarantee control...Not only have small-time investors struggled to exert any control over the corporations in which they hold stakes, they have even struggled to control the professional investors who manage their assets.”

Second, capital can yield both financial returns and collateral benefits—but it is difficult to do both at the same time. Some citizen-capitalists have hoped to profit from the financial markets while also lending to favored businesses, inducing demand for their own labor, and enacting pro-worker policies. But difficult tradeoffs arise. Moreover, the very dynamics that make it possible to earn a market return—such as a large pool of contributors with diverse interests, or professional investment management—tend to impede these other benefits. As some citizen capitalists (notably, pension funds) have discovered, the more capital you accumulate, the less there is to distinguish you from the rest of Wall Street. In this way, socialized capital is often privatized right back again.”

In the body of the paper, I show how these two challenges recur throughout seven major episodes of attempted and actual collective capital ownership. I’ll mention each episode briefly.

  • Fraternal societies. In the three decades following the Civil War–“the Golden Age of Fraternity”–36% of adult men were members of a non-profit fraternal society, entitling them to cash benefits in the event of sickness, disability, or death. The most interesting aspect of the fraternals’ story is how they differentiated themselves from corporate insurance companies and why the insurance companies ultimately won out. The irony of the fraternals is that “in order to achieve freedom to use capital in their preferred ways, outside the reach of financial markets and their temptations, the fraternals had to hold no capital.” They simply charged a $1 assessment of all members whenever someone got sick. Insurance companies, meanwhile, convinced their customers that it was desirable to collect a large reserve fund, invest it, and then pay out a reward to lucky policyholders. Insurance transmuted into gambling. I was amused to see in this week’s NYT that Chinese insurance companies are now doing the same thing. Jonathan Levy’s Freaks of Fortune includes a very good introduction to the fraternal movement and its relation to the insurance industry.
  • Populist agricultural collectivism. While the fraternal movement was an urban phenomenon, the Populist movement was the 19th century’s key episode of rural collectivism. Historians love to argue about Populism: whether it was progressive or reactionary, a project of the petit bourgeois or the proletariat, etc.  I was persuaded by two books that emphasize the Texas branch of Populism known as the Farmers Alliance, which sought to free farmers from reliance on Eastern credit by replacing the for-profit financial system with local, state-run development banks that would lend to farmers on friendly terms. In The Populist Vision, Charles Postel shows that the Texas Populists’ ideology, confusing to modern eyes, was both pro-monopoly and anti-bank. They thought small farmers should band together in cooperative cartels (as the California fruit growers did most successfully) and that credit allocation should be a political process subject to democratic oversight. Their financial vision went nowhere, but it bears greater resemblance to 21st century calls for breaking up the banks than anything else I’ve seen in American history.
  • Interwar labor capitalism. The historian Dana Frank (in Purchasing Power) argues that the post-World War I period was the first time in American history when (white) workers were both prosperous enough and well-organized enough to think about “politicizing” their savings. As Frank and others show, workers in the interwar years pooled their money to start cooperatively-owned businesses, buy out the businesses that employed them, and even start union-run banks. The Amalgamated Bank, created by Amalgamated Clothing Workers president Sidney Hillman, was the most successful such project and still exists today (see picture above). This quote from Hillman cut directly to the point: “To enter the banking business seemed the highroad to social control, a peaceful way of penetrating the holy of holies of the capitalist system.”
  • Social Security trust fund. The history of Social Security is a massive topic; here, I focused specifically on issues surrounding the Social Security trust fund, the largest investment fund held by the federal government. During the 1930s as Social Security was being hammered out, the insurance industry and its Republican allies in Congress were horrified by the idea that the federal government might manage a large fund. Most troubling to Senator Arthur Vandenberg was the possibility that it might invest in private securities: “That would be socialism.” As far as I can tell, historians do not think the prospect of such publicly-directed investment (essentially using Social Security like a sovereign wealth fund) was ever taken seriously. I do note that when he first started writing about Social Security in the 1970s, Harvard economist Martin Feldstein (a major proponent of privatization) did talk about investing the trust fund in corporate bonds. It seems to me that the history of Social Security privatization efforts should consider why this possibility–of the government managing the investment choices, rather than spinning off private individual accounts–has been so peripheral.
  • Alaska Permanent Fund. The notion of government as investment manager might be more farfetched if not for the prominent example of the Alaska Permanent Fund, which the state of Alaska has managed and paid dividends out of since 1982. “In one of the most conservative states, the Permanent Fund fuses two left-wing policy fantasies: collective capital ownership and a universal basic income. And while public investment funds have thus far been confined to seven Western states with resource extraction profits, no law of nature prevents such funds from forming on the basis of other tax proceeds.” One interesting theme of the Permanent Fund is that voters have repeatedly rejected efforts to use it for local, Alaska-themed investment projects like taking an ownership stake in pipelines. “The voters’ preferences suggest that across such a large, diverse community, the shared interest in collective capital ownership is limited to the least common denominator. When smaller, more homogeneous groups control an investment fund, more idiosyncratic choices become possible. This has been part of the promise, and occasional reality, of employee-owned pension funds.”
  • Pensions. Pension funds were probably the most important test case for socialized capital in the 20th century. “At the end of 2015, U.S. pension funds held $21.7 trillion in assets and owned over 20% of domestic public company stock.” In 1976, the management scholar Peter Drucker noticed this trend and “set off a debate by claiming that “pension fund socialism” had come to America. If workers owned their stakes in pension funds, and pension funds owned so much of the stock market, therefore workers owned the means of production.” Subsequent analysts of the pension system have sharply disagreed with Drucker’s premise (even perhaps while wishing it were true) because Drucker failed to distinguish ownership and control. Jennifer Klein’s book For All These Rights shows how unions were defeated in their original vision for controlling their healthcare and pension funds. In Labor’s Capital (the best book I’ve found on the pension economy), Teresa Ghilarducci shows how “unions relinquished their demands for joint control of pension assets in favor of bargaining solely over benefits.” Pension funds are invested by professional managers who have little connection or responsibility to the rank-and-file contributors. This is both a legal consequence of the conservative, anti-union bent of the relevant legislation (Taft-Hartley and ERISA), but it is also the “least common denominator” phenomenon: one of the few things all plan members can agree on is a high return. One might think that public employee pension funds might have a more distinctive, leftist investment philosophy, but analyses of CalPERS, the most activist public fund, suggest an approach only slightly less conservative than the mainstream.
  • Union building funds. Even in light of the least common denominator principle, there are rational, self-interested reasons for fund contributors to oppose certain investments. Private equity, which often turns companies profitable by closing plants and firing workers, might be an unwise asset class for unions. On the flipside, unions might wish to invest in industries that tend to employ their own workers. This has been the approach for several buildings trades unions like the national Sheet Metal Workers, who invest in union-built construction projects, and the Union Labor and Life Insurance Company, which operated the only private equity fund (Separate Account P) dedicated to preserving union jobs. These alternative, union-run investment funds are a clear exception to the norm, and the little information I could find on them made it unclear whether they have been able to sustain themselves.
In the conclusion of the paper, I make a few observations about what it means to study socialized capital as a coherent theme across these different moments and episodes. This research necessarily begins in the tradition of labor history. “In their effort to become labor capitalists, workers have naturally discovered tensions between this and other priorities—from collective bargaining, to political action premised on a critique of capitalism itself. An ambitious project might revisit the full history of the American labor movement in the context of unions’ secondary identities as capitalists.”

But to make sense of socialized capital’s limits, one also needs to account for the financial services industry. Insurance companies and asset managers lobby the state to protect their exclusive right to invest certain pools of capital, often under the pretext of responsible, professional management. A closer look at the relationship between professional asset managers and the gleaming pot of retirement savings is probably necessary to understand why “pension fund socialism” never came to pass.

Finally, I would love to see more research on the “motivations and influences under which workers, savers, and retirees have considered (or rejected) becoming citizen-capitalists.” “What do pension holders think about the investment decisions of their fund? What do depositors in the Amalgamated Bank hope their money will accomplish? What do union members expect from union-owned businesses? In both historical and contemporary settings, these questions may shed light on why socializing capital has been only a minor strategy in working class politics, and whether it could be a major one in the future.”

Pragmatic Utopia #31

Casino construction in Singapore. Tyler Cowen argues that the East Asian economic “miracle” was the most moral episode in human history.

This week Tyler Cowen released the link to a free ebook he’d been working on for 15 years. Titled Stubborn Attachments, it presents the philosophical foundations for all the rest of Tyler’s thinking. This is rare access to the earnest version of Tyler who says what he means. FT’s Cardiff Garcia did a podcast interview with Tyler, which I recommend as the most efficient way to cover the main arguments in the book. In one sentence, the book argues that the main conclusion of moral philosophy should be: “We should push for sustainable economic growth, but not at the expense of inviolable human rights.” At first this might seem like a pretty standard thing for an economist or policymaker to say. And perhaps it is,  but it’s more novel as a point of philosophy.

Tyler observes that much of moral philosophy since Rawls is about trying to determine fair rules for redistribution of resources. But in his view, there should be less focus on redistribution and more on production. This is because, in the long run, our well-being will vary enormously depending on what level of growth has been compounding for centuries or millennia. The long-run view is essential to this argument: Tyler builds on Derek Parfit (and on his own collaboration with Parfit) to argue that we should value the lives of future people just as much current people. The only appropriate discounting rate is for the risk that there won’t be any people left, not diminished moral importance of those who are.

If you’re tempted to dismiss the focus on economic growth as materialistic philistinism, I’d urge a closer look. Following Amartya Sen and others, Tyler is working with a conception of value he calls “Wealth Plus,” which entails normal GDP but also leisure time, household production (stuff you do at home for free), and environmental amenities. And a concern for the far future implies some traditionally “left-wing” priorities. In particular, Tyler’s view of the moral good suggests three questions should be raised in importance: (1) What can we do to boost the rate of economic growth? (2) What can we do to make our civilization more stable? (3) How should we best deal with environmental problems?

One common objection to all this comes from the literature on the relationship between income and happiness, where you’ve probably heard that happiness stalls out after $70K/year, or something. Tyler has pretty withering criticism for this view. It seems obvious that people recalibrate their use of language based on baseline expectations, so “even a constant level of reported happiness implies growing real happiness over time, because the “happy” word is taking on more ambitious meanings.” I was also pleased to see Tyler dismiss the importance of “satisfying preferences,” which he thinks is a bad way to conceptualize well-being  because it’s not sufficiently pluralistic and it doesn’t value long-term interests (especially not those of future generations). Economics would be a very different discipline if it demoted “satisfying preferences” from its role as a decisionmaking heuristic.

Another objection might be that Tyler’s moral philosophy isn’t sensitive to disagreements between people who have different interests or priorities. He basically acknowledges this and argues that long-term economic growth is so good for everyone that it eventually swamps any short-term disagreements. In this way he (amusingly) throws out Arrow’s impossibility theorem, which he finds relevant only to static situations. But precisely because of this power for long-term considerations to swamp short-term ones, Tyler insists that we draw some lines in the sand and refuse to make certain sacrifices for growth. This is where “inviolable human rights” must become part of the theory. What exactly the rights should be is up for discussion; conceptually they are akin to Robert Nozick’s notion of “rights as restrictions on the choice set of an individual or an institution,” (i.e things we just can’t do) though they need not line up with Nozick’s specific libertarian rights. Note that this is a purely negative vision of liberty; positive liberties are already included in the appeal of sustainable economic growth.

So if you feel like you should disagree with Tyler, what are your options?

  • Deny some of his starting premises, like that “right and wrong” are real concepts, or that consequences matter.
  • Hold out that there is no meaningful relationship between growth and wellbeing. Argue that whatever the apex of human flourishing is, it was perfectly attainable in pre-modern societies. Tyler seems to agree with this objection in a static context but not over time: “Poorer societies from the past have collapsed repeatedly through military weakness, eco-catastrophe, famine, tyranny, and natural disasters, among other factors.”
  • Alternatively, hold that our present level of development is the perfect balance between opportunity and stability.
  • Argue that future people matter less than he thinks.
  • Argue that the proper list of inviolable human rights is so extensive as to make economic growth practically impossible. I sometimes worry that this is the unstated implication of a political leftism to which in other ways I subscribe. A signature feature of Tyler’s writing is that he asks us to specify the limiting conditions on otherwise platitudinous positions we hold. In this case, “What is the right balance between growth and inviolable rights?” is a hard question that people seem reluctant to answer.

Personally, I think my agreement with Tyler’s view hinges on whether economic growth is the right way to characterize the creation of conditions for human flourishing. In other words, is growth as good for pluralism as Tyler thinks it is? He argues that wealthier societies bring greater access to the arts and education and minimize the tyranny of birth position, location, and class. “We are more mobile, more able to shape our selves, more able to choose our friends, and more able to weave together diverse cultural traditions when constructing our personal narratives.” I agree with this characterization of progress, but I am open to the idea that further such progress could take place largely through political and cultural innovation and need not necessarily have a technological component. Tyler and I both recommend The Moral Consequences of Economic Growth for thinking more about this issue.

1. Flight to the bottom
This is a bit late, but of all the essays about what’s wrong with the airline industry in the wake of the United fiasco, my favorite was this one by Steve Randy Waldman. He cuts through the debate about whether the airlines should have been deregulated with this: “By its nature, a sustainable air travel business is going to be regulated by something other than straightforward price competition. The question isn’t whether the industry will be regulated, but how and by whom, whether the state or a tacit cartel is more likely to do a better job.” He argues that one key benefit of federal airline regulation would be to guarantee robust service to small cities which airlines do not find profitable to serve. He even gets you thinking this issue of Midwestern airline service is pretty relevant to the “ways that we find ourselves fraying as a nation.”

Finally, I really enjoyed his takedown of this common argument that flying sucks because we as consumers have made it clear we don’t care by relentlessly shopping for the cheapest flights. First, consider whether comparably priced European air travel is much better. Second, “Aggregate outcomes are not in general or even usually interpretable as an aggregation of individual preferences.” We don’t interpret the prisoner’s dilemma as evidence that both players want to go to prison. He points out that the quality of a flight is highly uncertain, so we “rationally discount small, extremely uncertain quality differentials to near zero” and shop on price alone. Competitive races to the bottom are of course quite common. In other arenas, we solve them by coordinating, like through regulation.

2. Risk, seeking or not
Jonathan Levy’s book Freaks of Fortune: The Emerging World of Capitalism and Risk in America is one of the best books about the origins of our financial sector. It’s a mostly 19th century story about how financial risk engineering evolved from being purely a matter of maritime insurance to something that affected every household through life insurance policies, mortgage-backed securities, and agricultural commodity futures–all of which were widespread by 1900. Although the New York Stock Exchange (or at least its precursors) is older than most of these financial products, it didn’t directly affect the lives of regular people until the 1920s.

I was particularly struck by how this financial history is essential to understanding the history of American agriculture, and why in the late 19th century farming began to shift from a way of life to a business. Farm mortgages exerted disciplinary pressure on farmers, forcing them to switch from subsistence production to market-oriented monoculture, especially exclusive wheat production in the West. This had all kinds of bad consequences in the long-run like the Panic of 1893 when the wheat market crashed, and later the Dust Bowl, of which monoculture was probably one cause among several.

Levy also has some fascinating financial perspectives on slavery and emancipation. The profit motive could get slaveholding Southerners to say the damnedest things. Like after a slave insurrection on an inbound ship, the insurance company’s (Yale-educated, Confederate official 🙁) lawyer argued that the slaves were humans and had made themselves free, so the loss of property was due to “act of man” rather than “act of God,” and thus the insurance company was not responsible. After the War, Levy tells the story of the Freedman’s Bank, where Northern abolitionists convinced former slaves to pool their savings in a federally chartered bank. Because this was the 1870s, you shouldn’t be surprised to learn that the bank’s chief investor turned around and spent that money on railroad bonds marketed by his own brother, America’s leading railroad speculator. Half of the deposits at the time of the bank’s failure in 1873 were never paid back. If by ’40 acres and a mule’ you meant sharecropping and stolen savings, right on.

3. The American dream is to get ripped off by a stockbroker
I promise there are reasons I’ve been doing so much financial history. Julia Ott’s book When Wall Street Met Main Street continues the story of household financialization up to the Depression, focusing on the origins of the idea that everyone should be a stock owner. It’s not really a story of why the 1929 crash occurred so much as a cultural history of this idea of a “shareholder democracy” that was popular in the 1910s and 1920s.  In the early 20s, America’s hottest economist was Thomas Nixon Carver, whose “New Proprietorship” ideology espoused widespread stock ownership. He thought if everyone owned stock, the lines between capital and labor would blur (which was desirable, I guess, in the context of the Red Scare). In reality, small shareholders of the 1920s had much less power than Carver promised they would. The most common holdings were employer-based stock ownership plans, which largely served to keep workers tied to one company and disincentivized to form a union. Buying one’s own shares in public companies was risky in the time before the SEC. One common move was to merge two companies and in so doing transform their voting shares into non-voting ones.

An interesting theme in this book is how the origins of libertarianism can be found on Wall Street in a time when business opposition to government regulation had not yet been stoked to its modern levels by the New Deal. The “shareholder democracy” people felt really strongly that transparency regulations would ruin individual freedom and ambition. Our friend Thomas Nixon Carver started the nation’s first libertarian think tank, with charming posts today like “MIT Is Making Kid-Friendly Communist Propaganda” and “It’s Never Been a Better Time to Be Poor in America.”

4. How to cook
Ok, something completely different. I enjoyed this essay about what makes a good cookbook. I’m on the same page that most celebrity chef cookbooks are beautiful but mostly useless, because you’re never going to cook the exact dishes some world-class restaurant made famous. I much prefer cookbooks that give intuition into how to think about cooking from a particular perspective and empower you to improvise on top of a baseline understanding of techniques and ingredient combinations. In this light, the author agrees with me that Kenji Lopez-Alt’s The Food Lab is one of the best. But his top recommendation was the newly released Salt, Fat, Acid, Heat by Samin Nosrat.  So I bought it, and it’s pretty great so far. It’s an illustrated guide to the basic techniques that apply to any cuisine. So far I’ve only read through the Salt section, and I’ve basically learned that I should be salting stuff more–more salt in pasta water, more salt to brine meat a day ahead of time. It doesn’t feel advanced at first, but I think if you really internalize these lessons and apply them to everything you cook, quality can compound over time in a way that doesn’t happen with isolated recipes. There are also awesome diagrams, like which kind of oil to use with which kind of food, and a matrix of vegetable x cooking method color coded by proper time of year.

Pragmatic Utopia #30

Diego Rivera mural of autoworkers at the Detroit Institute of Art. Historians debate whether the United Auto Workers should be blamed for undercutting campaigns for expanded Social Security and health insurance in signing their own generous contracts with the Big Three car manufacturers in the 1950 “Treaty of Detroit.”

I’ve been learning a bit about pensions and Social Security lately, and I find it can be hard to keep some facts about the respective retirement programs straight. For a while I figured it was just my ignorance not being able to tell them apart. And while that may be true, I think it makes sense to speak about pensions and Social Security (and 401(k)s) in the same breath. Their histories are intertwined. In her book For All These Rights: Business, Labor, and the Shaping of America’s Public-Private Welfare State, Jennifer Klein investigates why we have a divided retirement savings system–why the public system needs a private, employer-based supplement.

You may recognize a familiar ring to this question from other books I’ve mentioned lately: the age-old question of why we can’t have nice things they have in Europe. Sometimes people answer this question with appeals to American values–faith in individualism, distrust of government, etc. I find such arguments a bit unsatisfying on their own; I want to know exactly who stood up for which values in which battles. In Klein’s book, the insurance industry emerges as the big culprit. It makes sense. As single-payer advocates will tell you, the government is a natural insurance company and a nation is the largest possible risk pool, ideal from a social perspective if not an actuarial perspective oriented toward maximum profit. So insurance companies have long been on edge about the prospect of the government stealing their business.

Before getting to shady insurance practices, I should mention two key pieces of conventional wisdom that Klein is trying to disprove. First, historians often talk about how the 1920s were the age of “welfare capitalism,” where big companies paternalistically looked after their workers (think free meals, on-site housing, health clinics, etc.) in order to forestall confrontational labor disputes. But then the conventional idea is that thanks to the New Deal and World War II, we moved past welfare capitalism and instituted a public welfare state.Klein is saying there is actually more continuity than change–the reliance on employer-based pensions and health insurance in the postwar decades means we’re basically still living in the welfare capitalist world.

Second, even among people who agree with Klein on that point, the conventional wisdom is that the large industrial unions (like the United Auto Workers) were culpable for undercutting the New Deal push for a public welfare state by scooping up generous contracts for themselves and then losing interest in the broader fight. This story centers on the 1950 “Treaty of Detroit,” where the auto workers signed the most generous contracts (e.g. health, unemployment, and pension benefits) in American labor history with Ford, GM, and Chrysler.

Klein convincingly shows that the unions had a strong preference for either a government-run insurance system or union-controlled insurance funds and group medical plans, fought hard for those things over decades, and only settled for employer-based insurance after losing political fights to the insurance companies and their own bosses. For example, some unions wanted to start their own medical plans. But under heavy lobbying from the American Medical Association, many states passed laws in the 1940s requiring any would-be medical plan to get approval from the state’s medical society (i.e. the incumbent doctors). Not going to happen.

Ok, on to the insurance companies. They weren’t all bad; in fact it’s their ambivalent commitment to worker-friendly policies that makes them so interesting. During the Progressive Era, there was a healthy competitive dynamic between academic reformers who called for public old age insurance and insurance companies (Equitable Life, Metropolitan Life) who took those ideas, watered them down, and sold policies to private employers. Yes, this undercut the public movement, but at the end of the day more people (only steadily employed white men) won old age insurance.

You might expect the insurance companies to have opposed the Social Security Act, and some did at first, but they quickly came around to support it, recognizing that it was the perfect advertisement for their business model and that they could sell more extensive plans on top of it. But they insisted that Social Security be limited in particular ways. They stressed that public aid should flow only to elderly or disabled people, not able-bodied workers. They modified private pension plans to count Social Security payments toward the originally promised payouts, making the plans cheaper for employers. And they lobbied to make Social Security a pay-as-you-go system rather than allowing it to build up a substantial trust fund.

The private welfare state is a relationship between workers and insurance companies.Employers, of course, sit awkwardly in the middle of that dynamic. Whose side are they on?According to economists, employers want to buy their employees the best possible benefits package for the price or risk losing out to competitors.

But in surveying pension plan politics in the postwar decades, Klein shows how insurance companies collude with their corporate clients to skimp on benefits. At the end of each year, insurers kick back a portion of their surplus to management as a dividend, even when workers had paid a portion of the premium in the first place. Unions struggle to contest this because information on the true cost of their benefits is shared only with management. Next, since insurance companies are actually financial companies, they often double as lenders to the same corporations who buy their benefits packages. Klein suggests that this dynamic gives employers little incentive to negotiate on pension plan costs.

An attractive takeaway from Klein’s book is that private insurance markets are inferior to public ones, both because fewer people end up included and because corporations and insurers have an interest in skimping on benefits (I haven’t even mentioned the companies who just refuse to pay the promised pensions). There’s a different way to say this, which involves the semantic point that health benefits and old age benefits aren’t really insurance.A more restrictive definition says it’s only insurance if you hope you’ll never need to receive the benefits. Flood insurance, fire insurance, and renter’s insurance all fit this bill. Needing the payout is bad news.

But healthcare and old age income support are different–we all get old, we all get sick, and when you sign up for the policy you expect to use it. In this light, you can see that Social Security (and Medicaid and Medicare) aren’t really insurance policies; they’re just social transfers (the Supreme Court agreed with this reasoning in Fleming v. Nestor (1960)). At times this has been a conservative argument: only by privatizing Social Security, they say, can we establish property rights on our future Social Security payments like you have on a private annuity. But I think the logic goes exactly the other way. Health and old age benefits don’t work in an insurance framework, so we should just get over our fetish for “contributory” programs and provide basic economic security as a right of citizenship.

1. Fair but unequal?
Interesting piece of research (h/t Thomas Smyth) from psychologists arguing that even though we’ve started framing lots of issues around inequality, people don’t care about inequality–they care about fairness. So then the question is: what do people think is fair? The authors suggest that people are pretty comfortable with income inequality, which they perceive as the outcome of fair competition in the labor market. But I suspect (hope) that people are less comfortable with inequality from capital income, i.e. how hard do I really work for my capital gains?

2. Hooray for do-nothing executives?
I really enjoyed this story (h/t Jessica Cole) about two law professors who  tried to mimic activist hedge funds by investing their savings in a struggling public company and trying to shake up management. The big surprising lesson they learn is that the executives at the public company actually feel less pressure from investors than they had when working at private companies. This is because so many shares are held by passive mutual funds who don’t bother to intervene in a “tiny” $500 million company’s management. The result is that the executives get to sit around, pay themselves huge salaries, and not do much of anything. Funny enough, in this case I’m quite happy to see them not doing anything because “doing something” would involve developing pristine ranchland between Los Padres National Forest and Bakersfield, extending Southern Californian sprawl deeper into the Central Valley.

3. Parents can be dependents too
I was excited to see the news that Starbucks is extending health coverage to the parents of its Chinese employees. Based on my comments on the American case, you might think I’d say something like “It would be better if they just had Medicare for the elderly.” But I have no idea how difficult it would be to perform such an aggressive cross-cultural transplant, and I’m trying to respect national differences in institutions and norms. Here’s some more info on the state of healthcare for the elderly in China. Given the value they put on caring for one’s parents, it might make more sense to deliver elderly care through children’s insurance than we do here. Whether that insurance itself should be tied to the workplace is another matter. In the short term, it’s nice to see that this is the way Starbucks is trying to make a beachhead in China (as opposed to paying off regulators or the like).    

Pragmatic Utopia #29

I find the postwar decades (like 1945-1972) in American history really fascinating. It’s the time when we locked in the suburbanization and residential segregation that became so fundamental to our political geography.  It was the “Great Exception,” as Jefferson Cowie and Thomas Piketty both argue, when we reaped the benefits of the New Deal and became more equal, all while sowing the seeds for the backlash of Nixon and Reagan. It was the time of the last great anti-modernist mass movement and several of the last great rights-based movements as well. And it was the childhood of my parents and the rest of their generation–one that has had outsized influence, for better or worse, in shaping the modern world.

People standing outside the home of the Myers family, the first black family to move into Levittown, PA. 

This week I read two books about the postwar decades. Lizabeth Cohen’s A Consumers’ Republic is a broad survey from the 1930s to 1970s. Her organizing move is to say that America became a “consumer society” during that period and to trace the influences of mass consumption on geography, stratification, politics, and culture.

For Cohen, consumption can be a political identity in addition to an economic one. For example, consumer boycotts were the oldest tool in the civil rights movement playbook, from boycotts of Harlem retailers that didn’t hire any black clerks in the 1930s to the more famous sit-ins thirty years later. During World War II, “housewives’ battalions” went store to store enforcing price controls.

Some of the most interesting parts of the book are the extended treatments of the women’s rights and civil rights movements, which Cohen frames largely through this lens of consumer politics. It’s fascinating and infuriating to learn how single women with good credit history would watch it go down the drain upon getting married, because retailers only counted the husband’s credit toward a joint account. At the same time, reducing these movements to their consumer aspects is a bit of a stretch, like when Cohen discusses the 1968 urban riots as responses to predatory lending and exploitative retail prices (hence why so many shop windows were smashed). That story is true, but crime, unemployment, and the murder of Martin Luther King, Jr. were pretty important too.

In contrast to these examples of collective consumer politics, Cohen  argues that the mainstream (i.e. white, middle class) consumer politics that emerged in the period was an individualistic one. Here Cohen’s tells the familiar story about suburbanization, white flight, the rise of “property value” as the most important political issue, and other consequences of suburban home ownership. This story is essential and I don’t mind it being re-told, but I don’t think the consumerism frame much helps tell it. Instead, Cohen’s unique contribution is a deep dive into the political history of suburbanization in…New Jersey!

New Jersey doesn’t get much love in history or elsewhere. But this is the perfect topic to devote a case study to it; New Jersey is the quintessential Baby Boom suburban state (Tyler Cowen on the benefits of growing up in North Jersey). Here’s a crazy fact: New Jersey’s population increased by 2 million people from 1940-1960, but not a single one of its cities gained population! Cohen presents the greatest hits of New Jersey suburban history: the lowest state taxes in the country and massive inequality via property taxes, suburban legal independence and the absence of regional planning, the class action suits against Mount Laurel Township for exclusionary zoning, the Abbott v. Burke lawsuits on equitable school funding, and the privatization of public space in shopping mall after shopping mall. If you’re looking for suburbs giving the finger to cities, New Jersey has got it all.

Cohen’s student Louis Hyman zeroes in on what he sees as the most important institutional enabler of postwar affluence: cheap credit. His book Debtor Nation is a history of the most important consumer lending practices from the 1920s to the present: from loan sharks to legalized small loans to independent installment financing to amortization of FHA and VA-backed mortgage loans to revolving credit to credit cards to home equity loans. If you have a vague sense of what those words mean, as I did in some cases, this is a great book to nail down the nitty gritty of how consumer lending has worked.

Hyman’s gift at getting inside the heads of borrowers and lenders is both the book’s greatest strength and possible weakness. He is really good–better than most financial journalists–at explaining the logic of any given lending scheme.

Like why 1920s furniture retailers would lend to customers they knew couldn’t afford it–they were happy to collect a few installment payments and then repossess the furniture–whereas an independent finance company, upon buying the debt from the store, would rather the customer be able to pay so as not to deal with repossession.

Or how 1960s department store credit managers came to realize that it’s possible for your customers to have too low a default rate. Prior to revolving credit, department store credit was purely a convenience to help people afford their purchases. But managers came to realize that it could also be a source of profit. Revolving credit allows customers to extend the repayment period and rack up larger outstanding balances, and thus pay more interest over a longer period of time. Who knew there were bitter inter-department-store turf battles in the 1960s between managers who wanted to spend on inventory and those who wanted to spend on advancing credit to customers? The latter service eventually became unnecessary to perform in-house when Bank of America launched the Bank Americard (later Visa).

I say this explanatory strength may also be a weakness because Hyman comes to identify too closely with the credit managers he is studying.  He holds up as possible only what they saw as profitable. The central argument of the book is that capital goes where it is most profitable, and so policies that help capital find new productive outlets work while policies that give capital no profitable options fall flat.

In this vein, Hyman writes approvingly of the FHA mortgage insurance program. There were regulatory aspects—interest rates were capped at 5%–but these were more than outweighed by attractive propositions for lenders, who were freed from diligence responsibilities. Similarly, Hyman approves of Fannie Mae, Ginnie Mae, and Freddie Mac, which pooled mortgages and created secondary markets for mortgage-backed securities, attracting much larger streams of capital (especially from pension funds) to the housing industry. These were successful acts of market creation, Hyman suggests, because they were fundamentally good deals for capital. Due to rising wages, borrowers rarely defaulted. If they did, government entities covered the losses.

Contrast these efforts with what Hyman sees as failed efforts to regulate and channel lending. In response to the 1968 urban riots, Senator William Proxmire led a series of hearings seeking to address black city-dwellers’ grievances with the credit system. Some banks took up Proxmire’s call to provide more small business financing to the inner cities while the Office of Economic Opportunity set up credit unions. Both initiatives discovered that income and capital accumulation were just too low among the poor to support meaningful loans. Hyman’s conclusion is that regulation of credit markets always fails unless it gives the financial industry a profitable opportunity.

I think this conclusion makes sense only if you are unwilling to commit the full force of the state to a policy priority. The government could have insured loans to urban residents in the 1960s as it did for suburban borrowers in the 1940s and 1950s. Various tax advantages might have been offered to lenders in exchange for seeking out credit-starved communities. There could have been unconditional cash grants or child allowances to held build up urban wealth and close the historical racial wealth gap. Unequal access to credit and to capital is a fundamental element of our economic history, but I resist any tendency to think of it as natural or inevitable. It has been a political choice.

1. The cheating-death tax
Talking about some of the royal families of American politics this week, Josh R. said something about how we need a higher estate tax. That got me wondering whether the ultra-rich actually pay the estate tax. This excellent, detailed Bloomberg article confirmed my fears. It’s a deep dive into the Walton family’s estate tax maneuvering, but it introduced me to the techniques anyone can use.

The most important one is the Charitable Lead Trust, also known as a Jackie O. Trust. You put your money in an ostensibly charitable trust before you die. It gives a predetermined amount to charity each year. And then after 20-30 years, it liquidates, and sends the remainder to a beneficiary–like your heirs–entirely tax-free. How is this ok???

2. Against Uber…but less so than usual

You may have seen this NYT feature about how Uber uses lots of nudges and game elements to keep its drivers working longer hours. I’m going to resist my natural urge to say something about how this is the sign of a creepy dystopian future. Partly this is because I’ve seen ex-Uber drivers commenting that of all the things they don’t like about Uber, these nudges are near the bottom of the list. It’s also because I’m aware that gamifying work is not new.

Probably the most famous book in the last 50 years of industrial sociology is Berkeley sociologist Michael Burawoy’s Manufacturing Consent, which examines how a machine tool factory in the 1970s convinced its employees to work hard. The answer involved an extended metaphor about games, wherein management encouraged employees to compete with one another to produce the most pieces while also capping production to prevent perverse incentives to skimp on quality. So, it’s probably not new and dystopian, but it’s definitely a key piece of the Marxist perspective on how managers keep employees distracted from their collective interests.

3. Matt Bruenig’s favorite Supreme Court case
An interesting Supreme Court case popped up twice for me this week: both in A Consumers’ Republic and in Matt and Elizabeth Bruenig’s talk at Harvard Law (video here). The case is Shelley v. Kraemer (1948). It’s known as the “restrictive covenants” case because it’s about a black family who bought a house in St. Louis which, unbeknownst to them, had a restrictive covenant attached to the property barring it from being sold to black people. A neighbor sued, and the Missouri courts agreed that the covenant was enforceable because it was a purely private contract.

The Supreme Court agreed with those courts that racially exclusionary contracts are not prohibited by the Fourteenth Amendment (so private parties can choose to abide by them), but stressed that a court can’t enforce such a contract, because enforcement would constitute a state action and bring the Fourteenth Amendment back into play. Matt Bruenig says this is his favorite case ever because, for a brief moment, the Supreme Court recognized that there is no real difference between public and private activity; everything is public because everything is eventually enforced by courts and police power. This belief that state action doctrine is incoherent is a signature position of critical legal studies.

4. Manager fees are a scam, part 9,142,394
I’m doing some research involving pension funds and social wealth funds, so was pleased to see this news story about the newly elected North Carolina Treasurer who aims to crack down on the fees money managers suck out of the state’s $90 billion employee pension fund. Costs as a share of assets have gone up 7x for the fund since 2000, largely due to long-term contracts his predecessors signed with expensive hedge funds and private equity firms. The pension fund pays 80% of its fees on 20% of its assets–that is NOT the 80/20 rule anyone has ever recommended. Are the fancy managers worth it? “If North Carolina had owned a vanilla stock-and-bond index portfolio instead of shifting into alternative assets, it would have earned an additional $20 billion over the seven years through June 2016, estimates Ron Elmer, an accountant and indexing advocate.”

5. And now for something completely different
The secret logic of the political compass has finally revealed itself. Three cheers for gluttony amid days of wrath.

Pragmatic Utopia #28

You’ve probably seen or heard Tyler Cowen promoting his new book The Complacent Class over the past two weeks. The book argues that American life has lost its dynamism in matters economic, political, geographical, cultural, and personal. The accusation of “complacency” proves a powerful, if unwieldy, concept because it applies equally to individuals, groups, and civilizations. The title is somewhat misleading in this way–although affluent Americans tend to lead the vanguard of complacency, the argument describes not so much a particular class as an entropic force which drives us toward stasis. If the thermodynamic equilibrium of a universe is heat death, the equilibrium of a rich society may be complacency.

After sharing what I found interesting about Complacent Class, I’d like to introduce one of my favorite newly discovered social theorists, Roberto Unger. Everything about Unger’s political philosophy is oriented toward disrupting complacency and entrenchment. While Cowen proposes several visions of a less complacent future, we can’t magically wish them into existence except by hoping for technology as deus ex machina. Here I find Unger’s thinking on the relationship between ideology and institutions much more helpful.

Teams and companies move around the country (like the Raiders to Las Vegas), but people no longer do

Complacent Class is is the third entry in Cowen’s trilogy of books about the challenges America has faced since the end of the mid-century golden age (see my post on the “Great Exception”). The first two books were creative takes on mainstream economic questions: The Great Stagnation was about “the new normal” of slow economic growth and Average is Overaddressed the future of inequality. Complacent Class is a more unusual book; you can think of it as addressing the social and cultural backdrop of the stagnation.

You can get a sense of what Cowen means by complacency through his primary examples, each of which gets a chapter of interesting factoids. First, Americans have stopped movingto different towns and states compared to historical rates.

Second, segregation is by some measures at its all-time worst, especially if you include not just racial segregation (which has gotten worse in schooling and housing since the 80s) but also segregation by income and education.

Third, the rate of entrepreneurship and new business creation is down–even in the San Francisco Bay Area!–famous exceptions notwithstanding.

Fourth, both violent crime and physically disruptive political protest have declined,although this may be changing, and America’s current drugs of choice are mostly sedatives rather than stimulants.

Finally, although many people hoped (and Cowen still does) that the digital revolution would prove disruptive, it hasn’t yet. Instead, the most important digital technology has beenmatching, which reduces search and transaction costs and helps us find things and people we already know we’ll like. 

The amazing thing about Complacent Class is it presents Cowen (affiliated with George Mason; a friend of the Austrian School) at his most liberal. I advance this claim hesitantly, especially given the delight Cowen takes in hiding his real meaning and practicing hermeneutics on others. Check out his best-ever “Straussian” reading, when he argued convincingly that the Snow White movie “Mirror, Mirror” starring Julia Roberts was actually allegory for the Indira Gandhi assassination.

Fittingly, you can find people arguing that Complacent Class represents a neoreactionary worldview:  “The task for an innovator of the next twenty years is to construct a quasi-governmental organization capable of maintaining segregated, high-trust, eucivic networks and use it to escape democratic pathology for good in a Great Reset.” But they had to read the chapters in reverse to conclude that, so whatever. 

I am saying this is a newly liberal Tyler Cowen because most of his diagnoses of complacency can be reframed as problems of entrenched power and rent-seeking. Where Cowen sees complacency, I see power disparity: typically, someone who benefits from the status quo alongside someone who does not, one with no interest in change and the other with no leverage.

Cowen nearly admits as much in his discussion of new business formation, when he observes that startups gain less traction in part because incumbents–especially in the healthcare, banking, telecommunications, and retail sectors–rarely fail.  He even includes a sub-heading on monopoly power and corporate concentration! Is this the same Tyler Cowen who wasdismissive of Lina Khan’s Amazon antitrust article on Twitter?

Cowen also points out that immigrants bring the strongest brand of anti-complacency to American life (this is a more predictable libertarian point, but still welcome). By definition, immigrants make bold geographical moves and tend to be socially and economically mobile as well. If we wanted to take a stand against complacency, celebrating immigration in our popular culture and public discourse would be one way to start

Politics is another arena where complacency may be defended or challenged. Cowen frames recent political turmoil as the result of the complacent class being unable to articulate any vision beyond marginal adjustments to the status quo, which then leaves a vacuum for demagoguery. He proposes we measure complacency in political life by the extent of the budgetary chains in which we have bound ourselves. By 2022, 90% of the federal budget will have been allocated to non-discretionary purposes, leaving relatively little available for significant changes–if we could even agree on such a thing.

Cowen says “true democracy,” on the other hand, is when you are unbound by past commitments and are free to try new things. This was truly striking to me because it is nearly exactly the language of Roberto Unger, the Brazilian philosopher.

Unger says that a “high-energy democracy” (sorry, Jeb) must meet three tests. It subjects the structures of society to effective challenge and revision. It diminishes the dependence of change on crisis. And it weakens the power of the dead over the living. The goal of such a society is to free people from “the prewritten script” provided by hierarchy, social position, and the division of labor. The purpose of such freedom is, well, freedom: to allow all people to freely recombine all opportunities and experiences. 

Cowen paints several pictures of a post-complacent future. In each, society is energized (for better or worse) by something new: more residential mobility, a wave of African immigration, the arrival of cheap clean energy, the ascent of artificial intelligence, a revolution in fertility rates and family size, or the threat of crisis and terrorism.

It seems there are two categories of things here: external “solutions” that may or may not drop from heaven without much input from most of us, and new patterns of behavior in which we’d all take part. The first category is a totally plausible source of change, but one to which we can only react. Because I am interested in democracy and self-determination, I tend to prefer thinking about the second category.

So does Unger. One of his central ideas is that institutions and ideology are intertwined. This means: what we think we want is limited by the institutions we’ve experienced (e.g. democracy, communal agriculture, military conscription, religious monasticism), and the institutions we can imagine creating are limited by what we think we want.

The recipe for change, then, is to notice the competing alternatives in our current institutions and nourish each of them, incrementally inventing new ways of living based on little hints from what we already have. “Let a hundred flowers bloom,” indeed, but the buds are already hidden in our midst.

In what I’ve read so far, Unger mentions four (relatively…) concrete institutional innovations that might help overcome complacency and the entrenched social hierarchy that I think is the real issue.

First, he would remake our system of property rights, abolishing consolidated property in favor of temporary, provisional rights to property allocated through a “rotating capital fund.”

Second, he would replace the classic bilateral executory contract with “relational contracts” that govern ongoing relationships rather than discrete deliveries of goods or services.

Third, he would create “structure-revising structures” such as a citizen’s right to disrupt and reorganize entrenched political bodies or companies.

Fourth, he would institute “plasticity-enabling endowments” like portable healthcare and/or basic income which enable individuals to take risks and participate in the much more dynamic economy presupposed by the first three innovations. Unger develops these ideas at more length in Democracy Realized: The Progressive Alternative, which I have not yet read.

Everything I’ve cited so far comes from Unger’s book on the Critical Legal Studies movement. In that book, he argues that legal theory is the most natural place to pursue these assaults on tradition and sclerotic institutions, and criticizes the various other tasks jurists have taken up instead. I’ll admit that I understand less than half of this book, perhaps because I’m not yet familiar enough with the traditions in legal thought that he is critiquing.

One useful point for thinking about complacency is his argument that society is always bound by a a particular legal order and that order–in this case the New Deal–goes through three phases: foundation, normalization, and darkening. The New Deal moment was the most recent foundation, the last American Revolution (this is what Bruce Ackerman says too).

In the normalization period–postwar through the 1970s–legal doctrine has its heyday, as jurists strive to defend the system over which they are designated custodians. In the darkening period, where we’ve been since Reagan, the order is under attack but there is no new alternative in sight (note that this theory offers a supercycle to Stephen Skowronek’s theory of presidential cycles; the Reagan cycle is still part of the longer FDR cycle).

I expect to write about Unger again here as I work slowly through his massive CV. He is hard to read and frustratingly unspecific. But one thing that really resonates is that he is a leftist thinker who values cooperation, creativity, and innovation more than almost any libertarian. He forces us to consider whether there is something a whole lot freer than the “free markets” we know. I find this very powerful.

1. One more industry you didn’t know was extorting you
On Twitter someone gave David Dayen a complimentary epitaph option: “extremely good at shining light on obscure middlemen and complex systems that are causing harm.” That he is. This week Dayen dropped this detailed look at the Pharmacy Benefit Manager (PMB) industry, which boasts three of the largest 25 companies in the Fortune 500: Express Scripts, CVS Caremark, and OptumRx, which together control 80% of the market. These companies are the middlemen between drug companies and pharmacies, and it turns out they have a lot of leverage to decide how much drugs will cost. For one, they get rebates from drug companies for including a certain drug in their network, but don’t have to inform health plans of the inflated cost. “Express Scripts’ adjusted profit per prescription has increased 500 percent since 2003.” A Republican Congressman says:  “They show no interest in playing fair, no interest in the end user. They act as monopolistic terrorists on this market.”

2. Antitrust as civil right
How about another article about monopoly. This essay reviews the connection between the civil rights movement and black-owned small business. I hadn’t thought about how small businesses were one of the few independent sources of power for black people even in the 1960s, and that many such business owners funded movement infrastructure. Moreover, they explicitly used antitrust law as a civil rights wedge: “In 1961, the owners of ten independent medical practices used the Sherman Antitrust Act against sixty-one local hospitals and medical organizations in Chicago [representing 75% of market share] that barred black Americans from the medical staff.” Thurgood Marshall, one of the last major defenders of antitrust, was the grandson of two independent grocery store owners.

I saw some people say that this article should have made a bigger deal about the double-edged sword of segregation, which guaranteed a captive customer base to black-owned businesses. I think that’s totally fair as an explanation of the past, but doesn’t refute the importance of business ownership in the present. Also, “According to a 2013 study of TARP investments, black-owned banks were ten times less likely to receive bailout money than nonminority-owned banks” (what about if you control for size? But that’s the point I guess).

3. Job guarantee vs UBI
There is a fun little inter-left policy war heating up: job guarantee vs universal basic income.Here, Jeff Spross makes the case for the job guarantee in Democracy Journal. The way it would work: local government agencies and nonprofits submit jobs they would like to have done to a central database; local administrators match job-seekers to a job based on proximity and skills; the state or federal government pays the wage at roughly $25,000/year.

Matt Bruenig (a UBI partisan), says the problem with a job guarantee is that it is supposed to be a cyclical safety net (to pick up slack during private sector recessions) but very few of the jobs Spross imagines are actually cyclical. We either need more teachers or we don’t, need to build more bridges or we don’t, so such jobs should be permanent, not cycle-stabilizing. By the way, if the answer is yes we need more of these things, why can’t expanding public sector employment be the plan irrespective of job guarantee? Anyway, Pavlina Tcherneva is a major jobs guarantee booster to follow if you’re interested in this. She argues that “low capital intensity projects are in great shortage, can vary with the mood swings of the economy, and are not make-work.” As examples she mentions jobs removing invasive species from a river and jobs helping restore historical architecture. I just have no idea how far such local short-term projects get you. 

4. Sociology vs journalism
Two UCLA sociologists read Dreamland (the book about opioids) and wondered–what’s the difference between journalism and sociology, again? Jeff Guhin concludes what most sociologists would, namely that we both tell stories, but sociologists are more interested in the theory exemplified by the story. Personally, I think this often leads to shallow storytelling stretched to make claims it can’t possibly substantiate.

Gabriel Rossman gives several nice examples of sociological concepts present in Dreamland, from competitive social display (the Mexican dealers showing off when back home in Xalisco) to social capital (why it works to pay the rookie dealers on salary rather than commission, because you know all their friends and family back home) to the obfuscation of the production of scientific claims (see Latour and Woolgar, here represented by doctors’ credulous acceptance of the idea that “only 1% of Oxy patients become addicted”).

Does it matter to know these concepts have official names when you’re reading the book? It’s certainly useful to know about these concepts because they’ll help you make sense of the next story where they pop up. But you can notice and appreciate these concepts (as my book club comrades did) without caring about their names. In this light, journalism is just about as explanatory as sociology, and much better written.