The Deleted Clause of the Declaration of Independence

As a tribute to the great events that occurred 241 years ago, I wanted to recognize the importance of the unity of purpose behind supporting liberty in all of its forms. While an unequivocal statement of natural rights and the virtues of liberty, the Declaration of Independence also came close to bringing another vital aspect of liberty to the forefront of public attention. As has been addressed in multiple fascinating podcasts (Joe Janes, Robert Olwell), a censure of slavery and George III’s connection to the slave trade was in the first draft of the Declaration.

Thomas Jefferson, a man who has been criticized as a man of inherent contradiction between his high morals and his active participation in slavery, was a major contributor to the popularizing of classical liberal principles. Many have pointed to his hypocrisy in that he owned over 180 slaves, fathered children on them, and did not free them in his will (because of his debts). Even given his personal slaves, Jefferson made his moral stance on slavery quite clear through his famous efforts toward ending the transatlantic slave trade, which exemplify early steps in securing the abolition of the repugnant act of chattel slavery in America and applying classically liberal principles toward all humans. However, this very practice may have been enacted far sooner, avoiding decades of appalling misery and its long-reaching effects, if his (hypocritical but principled) position had been adopted from the day of the USA’s first taste of political freedom.

This is the text of the deleted Declaration of Independence clause:

“He has waged cruel war against human nature itself, violating its most sacred rights of life and liberty in the persons of a distant people who never offended him, captivating and carrying them into slavery in another hemisphere or to incur miserable death in their transportation thither.  This piratical warfare, the opprobrium of infidel powers, is the warfare of the Christian King of Great Britain.  Determined to keep open a market where Men should be bought and sold, he has prostituted his negative for suppressing every legislative attempt to prohibit or restrain this execrable commerce.  And that this assemblage of horrors might want no fact of distinguished die, he is now exciting those very people to rise in arms among us, and to purchase that liberty of which he has deprived them, by murdering the people on whom he has obtruded them: thus paying off former crimes committed against the Liberties of one people, with crimes which he urges them to commit against the lives of another..”

The second Continental Congress, based on hardline votes of South Carolina and the desire to avoid alienating potential sympathizers in England, slaveholding patriots, and the harbor cities of the North that were complicit in the slave trade, dropped this vital statement of principle

The removal of the anti-slavery clause of the declaration was not the only time Jefferson’s efforts might have led to the premature end of the “peculiar institution.” Economist and cultural historian Thomas Sowell notes that Jefferson’s 1784 anti-slavery bill, which had the votes to pass but did not because of a single ill legislator’s absence from the floor, would have ended the expansion of slavery to any newly admitted states to the Union years before the Constitution’s infamous three-fifths compromise. One wonders if America would have seen a secessionist movement or Civil War, and how the economies of states from Alabama and Florida to Texas would have developed without slave labor, which in some states and counties constituted the majority.

These ideas form a core moral principle for most Americans today, but they are not hypothetical or irrelevant to modern debates about liberty. Though America and the broader Western World have brought the slavery debate to an end, the larger world has not; though countries have officially made enslavement a crime (true only since 2007), many within the highest levels of government aid and abet the practice. 30 million individuals around the world suffer under the same types of chattel slavery seen millennia ago, including in nominal US allies in the Middle East. The debates between the pursuit of non-intervention as a form of freedom and the defense of the liberty of others as a form of freedom have been consistently important since the 1800’s (or arguably earlier), and I think it is vital that these discussions continue in the public forum. I hope that this 4th of July reminds us that liberty is not just a distant concept, but a set of values that requires constant support, intellectual nurturing, and pursuit.

The Old Deluder Satan Act: Literacy, Religion, and Prosperity

So, my brother (Keith Kallmes, graduate of the University of Minnesota in economics and history) and I have decided to start podcasting some of our ideas. The topics we hope to discuss range from ancient coinage to modern medical ethics, but with a general background of economic history. I have posted here our first episode, the Old Deluder Satan Act. This early American legislation, passed by the Massachusetts Bay Colonists, displays some of the key values that we posit as causes of New England’s principal role in the Industrial Revolution. The episode: 

We hope you enjoy this 20-minute discussion of the history of literacy, religion, and prosperity, and we are also happy to get feedback, episode suggestions, and further discussion in the comments below. Lastly, we have included links to some of the sources cited in the podcast.


Sources:

The Legacy of Literacy: Continuity and Contradictions in Western Culture, by Harvey Graff

Roman literacy evidence based on inscriptions discussed by Dennis Kehoe and Benjamin Kelly

Mark Koyama’s argument

European literacy rates

The Agricultural Revolution and the Industrial Revolution: England, 1500-1912, by Gregory Clark

Abstract of Becker and Woessman’s “Was Weber Wrong?”

New England literacy rates

(Also worth a quick look: the history of English Protestantism, the Puritans, the Green Revolution, and Weber’s influence, as well as an alternative argument for the cause of increased literacy)

Paradoxical Geniuses: “Let us burn the ships”

In 1519, Hernán Cortés landed 500 men in 11 ships on the coast of the Yucatan, knowing that he was openly disobeying the governor of Cuba and that he was facing unknown numbers of potential enemies in an unknown situation. Regardless of the moral implications, what happened next was strategically extraordinary: he and his men formed a local alliance, and despite having to beat a desperate retreat on La Noche Triste, they conquered the second largest empire in the New World. As the expeditionary force landed, Cortés made a tactically irrational decision: he scuttled all but one of his ships. In doing so, he hamstrung his own maneuverability, scouting, and communication and supply lines, but he gained one incredible advantage: the complete commitment of his men to the mission, for as Cortés himself said, “If we are going home, we are going in our foes’ ships.” This strategic choice highlights the difference between logic and economists’ concept of “rationality,” in that illogical destruction of one’s own powerful and expensive tools creates a credible commitment that can overcome a serious problem in warfare, that of desertion or cowardice. While Cortés certainly increased the risk to his own life and that of his men, the powerful psychology of being trapped by necessity brought out the very best of the fighting spirit in his men, leading to his dramatic victory.

This episode is certainly not unique in the history of warfare, and was not only enacted by leaders as a method of ensuring commitment, but actually underlay the seemingly crazy (or at least overly risky) cultural practices of several ancient groups. The pervasiveness of these psychological strategies shows that, whether each case was because of a genius decision or an accident of history, they conferred a substantial advantage to their practitioners. (If you are interested in how rational choices are revealed in the history of warfare, please also feel free to read about hostage exchanges and ransoming practices from an earlier blog!) I have collected some of the most interesting examples that I know of, but the following is certainly not an exhaustive list and I encourage other episodes to be mentioned in the comments:

  • Julian the Apostate
    • Julian the Apostate is most famous for his attempt to reverse Constantine the Great’s Christianization of the Roman Empire, but he was also an ambitious general whose audacity gained him an incredible victory over Germanic invaders against steep odds. He wanted to reverse the stagnation of Roman interests on the Eastern front, where the Sasanian empire had been challenging the Roman army since the mid-3rd century. Having gathered an overwhelming force, he marched to the Euphrates river, took ships from there to the Sasanian capital, while the Sasanians used slash-and-burn tactics to slow his advance. When Julian found the capital (Ctesiphon) undefended, he worried that his men would want to loot the capital and return homeward, continuing the status quo of raiding and retreating. To prevent this, in a move much like that of Cortés, he set fire to his ships and forced his men to press on. In his case, this did not end with stunning victory; Julian overextended his front, was killed, and lost the campaign. Julian’s death shows the very real risks involved in this bold strategy.
  • Julius Caesar
    • Julian may have taken his cue from a vaunted Roman historical figure. Dramatized perfectly by HBO, the great Roman general and statesman Julius Caesar made huge gamble by taking on the might of the Roman Senate. Despite being heavily outnumbered (over 2 to 1 on foot and as much as 5 to 1 in cavalry), Caesar committed to a decisive battle against his rival Pompey in Greece. While Pompey’s troops had the option of retreating, Caesar relied on the fact that his legionaries had their backs to the Mediterranean, effectively trapping them and giving them no opportunity to rout. While Caesar also tactically out-thought Pompey (he used cunning deployment of reserves to stymie a cavalry charge and break Pompey’s left flank), the key to his victory was that Pompey’s numerically superior force ran first; Pompey met his grisly end shortly thereafter in Egypt, and Caesar went on to gain power over all of Rome.
  • Teutones
    • The impact of the Teutones on the Roman cultural memory proved so enduring that Teutonic is used today to refer to Germanic peoples, despite the fact that the Teutones themselves were of unknown linguistic origin (they could very well have been Celtic). The Teutones and their allies, the Cimbri, smashed Roman armies which were better trained and equipped multiple times in a row; later Roman authors said they were possessed by the Furor Teutonicus, as they seemed to posses an irrational lack of fear, never fleeing before the enemy. Like many Celtic and Germanic peoples of Northern Europe, the Teutones exhibited a peculiar cultural practice to give an incentive to their men in battle: all of the tribe’s women, children, and supplies were drawn up on wagons behind the men before battles, where the women would take up axes to kill any man who attempted to flee. In doing so, they solved the collective action problem which plagued ancient armies in which a few men running could quickly turn into a rout. If you ran, not only would you die, but your wife and children would as well, and this psychological edge allowed a roving tribe to place the powerful Roman empire in jeopardy for a decade.
  • The Persian emperors
    • The earliest recorded example of paradoxical risk as a battle custom is the Persian imperial practice of bringing the women, children, and treasure of the emperor and noble families to the war-camp. This seems like a needless and reckless risk, as it would turn a defeat into a disaster in the loss of family and fortune. However, this case is comparable to that of the Teutones, in that it demonstrated the credible commitment of the emperor and nobles to victory, and used this raising of the stakes to incentivize bravery. While the Persians did conquer much of the known world under the nearly mythical leadership of Cyrus the Great, this strategy backfired for the last Achaemenid Persian emperor: when Darius III confronted Alexander the Great at Issus, Alexander’s crack hypaspist troops routed Darius’ flank as well as Darius himself! The imperial family and a great hoard of silver fell into Alexander’s hands, and he would go on to conquer the entirety of the Persian empire.

These examples show the diversity of cultural and personal illustrations of the rational choice theory and psychological warfare that typified some of the most successful military leaders and societies. As the Roman military writer Vegetius stated, “an adversary is more hurt by desertion than slaughter.” Creating unity of purpose is by no means an easy task, and balancing the threat of death by frontline combat with the threat of death during a rout was a problem that plagued leaders from the earliest recorded histories forward (in ancient Greek battles, there were few casualties on the line of battle and the majority of casualties took place during flight from the battlefield. This made the game theoretical choice for each soldier an interesting balance of possibly dying on the line but living if ONLY he ran away, but having a much higher risk of death if a critical mass of troops ran away–perhaps this will be fodder for a future post?). This was a salient and even vital issue for leaders to overcome, and despite the high risks that led to the fall of both Julian and Darius, forcing credible commitment to battle is a fascinating strategy with good historical support for its success. The modern implications of credible commitment problems range from wedding rings to climate accords, but very few modern practices utilize the “illogical rationality” of intentional destruction of secondary options. I continue to wonder what genius, or what society, will come up with a novel application of this concept, and I look forward to seeing the results.

P.S.–thanks to Keith Kallmes for the idea for this article and for helping to write it. Truly, it is his economic background that leads to many of these historical questions about rational choice and human ingenuity in the face of adversity.

Japanese adoption

A recent article in the Economist describes the results from a study of an interesting Japanese custom. Traditionally (and according to the civil code until 1945), company ownership and leadership were passed on through primogeniture. This custom has continued to be practiced, and the study found solid evidence that family-managed companies outperform professionally managed companies. It could be argued that family unofficial training, continuity, and trust are at the root of this, but the authors find a different reason: adoption.

Japan and the US lead the world in adoption rate, but Japanese adoption is not necessarily what you would think. Over 90% of Japanese adoptions are of adults, who are usually men adopted into childless (or more specifically son-less) families for business purposes. This is also quite traditional, and since Japanese birth rates are extremely low, Japanese businessmen are likely to continue adopting talented, ambitious single men. This is often also accompanied by marriage to the daughter of the businessman (while women participate in business in Japan, they are more rarely the executives), which is referred to as mukoyoshi and combines familial with business ties.

This practice has the advantage of allowing for the trust, mutual investment, and long-term planning and teaching based on family relationship while avoiding the risk of having an unfit successor. In fact, in reading this, I am reminded of another culture’s custom of adoption: ancient Rome.

Ancient Rome also had a custom of adoption among its upper classes because of the prestige associated with old patrician family names and the incentives of inheritance laws (for a time it also served as a political means of a patrician gaining the tribuneship, as the Gracchi did). Similarly to the Japanese businessmen, adopted sons tended to excel (the earliest and best example is the Republican general Scipio Aemilianus), and it served as a method of political alliance and developing shared interest. It also became a typical method of succession for Roman emperors in the case that no son was available, a deal needed to be made between factions, or an emperor had a favored successor to whom he was not related. Adopted emperors included Trajan (adopted by Nerva as deal with the army, successful and beloved military leader), Hadrian (great builder and patron of the arts), and Marcus Aurelius (famed general and philosopher), and were generally well-reputed and effective leaders. In contrast, the sons of emperors (such as Domitian and Commodus, who were both infamously insane and harmful, or Maxentius, whose usurpation followed a blood-based claim) or blood-based successors (such as Caligula, who was blood-thirsty and childish, Nero, who was brutal and wasteful, and Elegabalus, who had was more interested in orgies than leadership).

It seems that the same potential reasons underlying Japanese business success through adoption were also at work in antiquity: emperors who were chosen and bred based on their abilities provided the continuity associated with heredity but with the advantage of meritocratic selection. This raises the question of whether this advantage has somehow been passed over by the Western world in those cases where we have avoided family-based succession in business (based on worries about nepotism and/or to gain the advantages of meritocratic selection). Even more interesting, does the adoption practice maintain the freedom of choice and opportunity found in Western careers while also conferring the ability to maintain trust and continuity that family-based succession offers?

Auftragstaktik: Decentralization in military command

Many 20th century theorists who advocated central planning and control (from Gaetano Mosca to Carl Landauer, and hearkening back to Plato’s Republic) drew a direct analogy between economic control and military command, envisioning a perfectly functioning state in which the citizens mimic the hard work and obedience of soldiers. This analogy did not remain theoretical: the regimes of Mussolini, Hitler, and Lenin all attempted to model economies along military principles. [Note: this is related to William James’ persuasion tactic of “The Moral Equivalent of War” that many leaders have since used to garner public support for their use of government intervention in economic crises from Great Depression to the energy crisis to the 2012 State of the Union, though one matches the organizing methods of war to central planning and the other matches the moral commitment of war to intervention, but I digress.] The underlying argument of the “central economic planning along military principles” was that the actions of citizens would be more efficient and harmonious under direction of a scientific, educated hierarchy with highly centralized decision-making than if they were allowed to do whatever they wanted. Wouldn’t an army, if it did not have rigid hierarchies, discipline, and central decision-making, these theorists argued, completely fall apart and be unable to function coherently? Do we want our economy to be the peacetime equivalent of an undisciplined throng (I’m looking at you, Zulus at Rorke’s Drift) while our enemies gain organizational superiority (the Brits had at Rorke’s Drift)? While economists would probably point out the many problems with the analogy (different sets of goals of the two systems, the principled benefits of individual liberty, etc.), I would like to put these valid concerns aside for a moment and take the question at face value. Do military principles support the idea that individual decision-making is inferior to central control? Historical evidence from Alexander the Great to the US Marine Corps suggests a major counter to this assertion, in the form of Auftragstaktik.

Auftragstaktik

Auftragstaktik was developed as a military doctrine by the Prussians following their losses to Napoleon, when they realized they needed a systematic way to overcome brilliant commanders. The idea that developed, the brainchild of Helmuth von Moltke, was that the traditional use of strict military hierarchy and central strategic control may not be as effective as giving only the general mission-based, strategic goals that truly necessitated central involvement to well-trained officers who were operating on the front, who would then have the flexibility and independence to make tactical decisions without consulting central commanders (or paperwork). Auftragstaktik largely lay dormant during World War I, but literally burst onto the scene as the method of command that allowed (along with the integration of infantry with tanks and other military technology) the swift success of the German blitzkrieg in World War II. This showed a stark difference in outcome between German and Allied command strategies, with the French expecting a defensive war and the Brits adhering faithfully and destructively to the centralized model. The Americans, when they saw that most bold tactical maneuvers happened without or even against orders, and that the commanders other than Patton generally met with slow progress, adopted the Auftragstaktik model. [Notably, this also allowed the Germans greater adaptiveness and ability when their generals died–should I make a bad analogy to Schumpeter’s creative destruction?] These methods may not even seem foreign to modern soldiers or veterans, as it is still actively promoted by the US Marine Corps.

All of this is well known to modern military historians and leaders: John Nelson makes an excellent case for its ongoing utility, and the excellent suggestion has also been made that its principles of decentralization, adaptability, independence, and lack of paperwork would probably be useful in reforming non-military bureaucracy. It has already been used and advocated in business, and its allowance for creativity, innovation, and reactiveness to ongoing complications gives new companies an advantage over ossified and bureaucratic ones (I am reminded of the last chapter of Parkinson’s Law, which roughly states that once an organization has purpose-built rather than adapted buildings it has become useless). However, I want to throw in my two cents by examining pre-Prussian applications of Auftragstaktik, in part to show that the advantages of decentralization are not limited to certain contexts, and in part because they give valuable insight into the impact of social structures on military ability and vice versa.

Historical Examples

Alexander the Great: Alexander was not just given exemplary training by his father, he also inherited an impressive military machine. The Macedonians had been honed by the conquest of neighboring Illyria, Thrace, and Paeonia, and the addition of Thessalian cavalry and Greek allies in the Sacred Wars. However, as a UNC ancient historian found, the most notable innovations of the Macedonians were their new siege technologies (which allowed a swifter war–one could say, a blitzkrieg–compared to earlier invasions of Persia) and their officer corps. This officer corps, made up of the king’s “companions,” was well trained in combined-arms hoplite and cavalry maneuvers, and during multiple portions of his campaign (especially in Anatolia and Bactria) operated as leaders of independent units that could cover a great deal more territory than one army. In set battles, the Macedonians showed a high degree of maneuverability, with oblique advances, effective use of reserves, and well-timed cavalry strikes into gaps in enemy formations, all of which depended on the delegation of tactical decision-making. This contrasted with the Persians, who followed standards into battle without organized ranks and files, and the Greek hoplites, whose phalanx depended mostly on cohesion and group action and therefore lacked flexibility. [Also, fun fact, the Macedonians had the only army in recorded history in which bodies of troops were identified systematically by the name of their leader. This promoted camaraderie and likely indicates that, long-term, the soldiers became used to the tactical independence and decision-making of that individual. Imagine dozens of Rogers’ Rangers.]

The Roman legion: As with any great empire, the Macedonians spread through their military innovations, but then ossified in technique over the next 150 years. When the Romans first faced a major Hellenistic general, Pyrrhus, they had already developed the principles of the system that would defeat the Macedonian army: the legion. In the early Roman legion, two centuries were combined into a maniple, and maniples were grouped into cohorts, allowing for detachment and independent command of differing group sizes. Crucially, centurions maintained discipline and the flexible but coordinated Roman formations, and military tribunes were given tactical control of groups both during and between battles. The flexibility of the Roman maniples was shown at the Battle of Cynoscephalae, in which the Macedonian phalanx–which had frontal superiority through its use of the sarissa and cohesion but little maneuverability–became disorganized on rough ground and was cut to pieces on one flank by the more mobile and individually capable Roman legionaries, This (as well as many battles in the Macedonian and Syrian Wars proved) showed the value of flexibility and individual action in a disciplined force, but where was the Auftragstaktik? At Cynoscephalae, after defeating one flank, the Romans on that flank dispersed to loot the Macedonian camp. In antiquity, this generally resulted in those troops becoming ineffective as a fighting force, and many a battle was lost because of pre-emptive looting. However, in this case, an unnamed tribune–to whom the duty of tactical decisions had been delegated–reorganized these looters and brought them to attack the rear of the other Macedonian flank, which had been winning. This resulted in a crushing victory and contributed to he Roman conquest of Greece. Decentralized control was also a hallmark of Julius Caesar himself, who frequently sent several cohorts on independent campaigns in Gaul under subordinates such as Titus Labienus, allowing him to conquer the much more numerous Gauls through local superiority, lack of Gallic unity, and organization. Also, at the climactic Battle of Alesia, Caesar used small, mobile reserve units with a great deal of tactical independence to hold over 20 km of wooden walls against a huge besieging force.

The Vikings: I do not mean to generalize about Vikings (who could be of many nations–the term just means “raider”) when they do not have a united culture, but in their very diversity of method and origin, they demonstrate the effectiveness of individualism and decentralization. Despite being organized mostly based on ship-crews led by jarls, with central leadership only when won by force or chosen by necessity, Scandinavian longboatmen and warriors exerted their power from Svalbard to Constantinople to Sicily to Iceland and North America from the 8th to 12th centuries. The social organization of Scandinavia may have been the most free (in terms of individual will to do whatever one wants–including, unfortunately, slaughter, but also some surprisingly progressive women’s rights to decisions) in recorded history, and this was on display in the famous invasion of the Great Heathen Army. With as few as 3,500 farmer-raiders and 100 longboats to start, the legendary sons of Ragnar Lothbrok and the Danish invaders, with jarls as the major decision-makers of both strategic and tactical matters for their crews, won a series of impressive battles over 20 years (described in fascinating, if historical-fiction, detail in the wonderful book series and now TV series The Last Kingdom), almost never matching the number of combatants of their opponents, and took over half of England. The terror and military might associated with the Vikings in the memories of Western historians is a product of the completely decentralized, nearly anarchic methods of Scandinavian raiders.

The Mongols: You should be sensing a trend here: cultures that fostered lifelong training and discipline (and expertise in siege engineering, which seems to have correlated with the tactics I describe, as the Macedonians, Romans, and Mongols were each the most advanced siege engineers of their respective eras) tended to have more trust in well-trained subordinates. This brought them great military success and also makes them excellent examples of proto-Auftragstaktik. The Mongols not only had similar mission-oriented commands and tactical independence, but they also had two other aspects of their military that made them highly effective over an enormous territory: their favored style of horse-archer skirmishing gave natural flexibility and their clan organization allowed for many independently-operating forces stretching from Poland to Egypt to Manchuria. The Mongols, like the Romans, demonstrate how a force can have training/discipline without sacrificing the advantages based on tactical independence, and the two should never be mixed up!

The Americans in the French and Indian War and the Revolutionary War: Though this is certainly a more limited example, there were several units that performed far better than others among the Continentals. The aforementioned Rogers’ Rangers operated as a semi-autonomous attachment to regular forces during the French and Indian War, and were known for their mobility, individual experience and ability, and tactical independence in long-range, mission-oriented reconnaissance and ambushes. This use of savvy, experienced woodsman in a semi-autonomous role was so effective that the ranger corps was expanded, and similar tactical independence, decentralized command, and maneuverability were championed by the Green Mountain Boys, the heroes of Ticonderoga. Morgan’s Rifles used similar experience and semi-autonomous flexibility to help win the crucial battles of Saratoga and Cowpens, which allowed the nascent Continental resistance to survive and thrive in the North outside of coastal cities and to capture much of the South, respectively. The forces of Francis Marion also used proto-guerrilla tactics with decentralized command and outperformed the regulars of Horatio Gates. Given the string of unsuccessful set-piece battles fought by General Washington and his more conventional subordinates, the Continentals depended on irregulars and unconventional warfare to survive and gain victories outside of major ports. These victories (especially Saratoga and Cowpens) cut off the British from the interior and forced the British into stationary posts in a few cities–notably Yorktown–where Washington and the French could siege them into submission. This may be comparable to the Spanish and Portuguese in the Peninsular War, but I know less about their organization, so I will leave the connection between Auftragstaktik and early guerrilla warfare to a better informed commenter.

These examples hopefully bolster the empirical support for the idea that military success has often been based, at least in part, on radically decentralizing tactical control, and trusting individual, front-line commanders to make mission-oriented decisions more effectively than a bureaucracy could. There are certainly many more, and feel free to suggest examples in the comments, but these are my favorites and probably the most influential. This evidence should cause a health skepticism toward argument for central control on the basis of the efficiency or effectiveness demonstrated in military central planning. Given the development of new military technologies and methods of campaign (especially guerilla and “lone wolf” attacks, which show a great deal of decentralized decision-making) and the increasing tendency since 2008 to revert toward ideas of central economic planning, we are likely to get a lot of new evidence about both sides of this fascinating analogy.

Would regulation stop the mistakes of rating agencies that contributed to the 2008 crisis?

I remember watching The Big Short and feeling great indignation at the S&P employee who told Steve Carell that rating agencies were pressured into issuing unreasonably high ratings because they were beholden to their customers. If true, this represented an unbelievable moral hazard, which is often cited as the reason for the failures of the ratings agencies–and as a reason for regulating these agencies.

However, more in-depth research and consideration reveals that this answer is incomplete and, in many ways, incorrect. Claire Hill, a law professor at the University of Minnesota Law School and director of the Institute for Law and Rationality, clearly and convincingly critiques this simplistic explanation by recognizing market influences and proposing alternate causes, which also means that if we are looking to avoid a future crisis, we need to look to alternative solutions to the regulatory measures that we currently employ. I don’t think it could be said better than she does in her abstract:

Why did rating agencies do such a bad job rating subprime securities? The conventional answer draws heavily on the fact that ratings are paid for by the issuers: Issuers could, and do, “buy” high ratings from willing sellers, the rating agencies.

The conventional answer cannot be wholly correct or even nearly so. Issuers also pay rating agencies to rate their corporate bond issues, yet very few corporate bond issues are rated AAA. If the rating agencies were selling high ratings, why weren’t high ratings sold for corporate bonds? Moreover, for some types of subprime securities, a particular rating agency’s rating was considered necessary. Where a Standard & Poor’s rating was deemed necessary by the market, why would Standard & Poor’s risk its reputation by giving a rating higher (indeed, much higher) than it knew was warranted?

Finally, and perhaps most importantly, giving AAA ratings to securities of much lower quality is something that can’t be done for long. A rating agency that becomes known for selling its high ratings will soon find that nobody will be paying anything for its ratings, high or low.

In my view, that issuers pay for ratings may have been necessary for the rating agencies to have done as bad a job as they did rating subprime securities, but it was not sufficient. Many other factors contributed, including, importantly, that rating agencies “drank the Kool-Aid.” They convinced themselves that the transaction structures could do what they were touted as being able to do: with only a thin cushion of support, produce a great quantity of high-quality securities. Rating agencies could take comfort, too, or so they thought, in the past – the successful, albeit short, recent history of subprime securitizations, and the longer history of successful mortgage securitizations.

“Issuer pays” did not so much make the rating agencies give higher ratings than they thought were warranted as it gave the agencies a “can do” mindset regarding the task at hand – to achieve the rating the issuers desired, working with them to modify the deal structures as needed. That the issuers were paying motivated the agencies to drink the Kool-Aid; having drunk the Kool-Aid, the agencies gave the ratings they did. My account casts doubt on the efficacy of many of the solutions presently being proposed and suggests some features that more efficacious solutions should have.

I very much recommend reading the full article, which gives more nuance and information about the weaknesses of proposed solutions for rating agency mistakes or malfeasance. This should also be food for thought concerning the general perspective we should have in examining “market failures,” as there are often market feedback systems that mitigate problems, and turning to regulation by reflex can cause unintended harm or even miss the mark entirely.


Reference: Hill, Claire. “Why Did Rating Agencies Do Such a Bad Job Rating Subprime Securities?” University of Pittsburgh Law Review (2010): 10-18. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1582539.

How to take over Syria, Roman edition

While Trump’s decision to bomb a Syrian airfield in response to use of chemical weapons by the Syrian government got the lion’s share of the press attention about American involvement in Syria (probably because of the contrast with Obama’s preference for diplomacy despite his “red line” threat), the more important strategic operations have not been discussed as fully. Building upon the successful establishment of two airfields last year, the US has expanded or established bases at crucial locations and begun to attack key targets in the northern part of Syria that show an excellent understanding of the topography and logistics of the region. These developments may be the linchpin in choking off traffic and crippling supply and movement of ISIL, and should contribute to the long-term goal of securing Hasakah and Raqqah provinces. What is interesting in all of this, perhaps due to the historical expertise of National Security Adviser H.R. McMaster, is that this logistical focus mimics the attack routes that were vital to invasions of the area from Alexander the Great down to Julian the Apostate.

The Euphrates River as an ancient supply highway

In the era of Alexander the Great, supply and communication were important constraints on military action; the logistics of his march through Syria are extremely well described by Donald Engels. Essentially, because of the lack of water sources in surrounding areas, the rough Taurus Mountains to the north and Arabian Desert to the south, and the provisions and easy transport supplied by it, the Euphrates River was a common “highway” for military movement in antiquity. Controlling and utilizing it was essential to control of the trade and military actions between the Mediterranean coast and Mesopotamia. In his defense against Alexander, Darius III kept his army on the Euphrates, and Alexander surprised him by crossing northern Mesopotamia to follow the Tigris River (near Mosul, which ISIL also recognized as vital) instead. However, almost every major invasion of the area from the west has gone through what is now southeastern Turkey to reach the headwaters of the Euphrates, including those of Trajan, Septimius Severus, and Julian the Apostate. Crassus reaped the gruesome rewards of avoiding the Taurus/Euphrates route.

The Euphrates valley was important not only as a military route, but also as a source of agricultural income and a crucial portion of the early Silk Road. Therefore, the nation that controlled the northern Euphrates valley could finance their military through control of trade and taxation (which Zenobia’s husband used to assert his own quasi-independence from a city that ISIL has ironically destroyed), a fact that has changed only in the economic transition from agricultural production to petroleum extraction. Now, ISIL not only taxes and sells oil to support its endeavors, but it knew from the outset to seize strategic locations on the route and even wanted to use the Euphrates river as its logo!

The mountains north of the Euphrates

The famous historian and general, Xenophon, was part of an army that followed the Euphrates down to a fateful battle at Cunaxa, and his retreat through the Taurus Mountains and ancient Armenia involved encounters with natives who were extremely capable in skirmishing on mountainous terrain. Both Xenophon and Mark Antony learned how difficult this route was, and the successful Kurdish defense of the Sinjar mountains and victories in the mountains of northeastern Syria using small arms and mobile forces while conceding villages is reminiscent of these ancient raiding methods. Though bombing obviously differs in technology and methods from ancient infantry, it also involves avoiding direct battle in order to destroy resources and harass enemy armies in motion, and so the American strategies based on assaults from the Rmeilan and Incirlik airfields over the past year have used the same attrition tactics to wear down ISIL strongholds.

What comes next?

If ancient campaigns can tell us anything, it may be that the US is transitioning from bombing from afar to more direct assaults on the cities, roads, and resources of ISIL along the northern Euphrates. The US still holds bases in northwestern Syria, defending the western flank of Kurdish-controlled territory and providing a buffer to Turkey (which, along with Turkish efforts to stop individual penetration of the border, should mitigate ISIL recruitment and international travel). Now that it has augmented this by creating bases that choke off routes to the headwaters of the Euphrates and allow closer engagement with ISIL since January, the US seems to be poised to contain ISIL attacks with greater alacrity and support Kurdish ground assaults on the ISIL capital of Raqqa. The escalation may be as support in the race to Raqqa and to take advantage of victories in eastern half of the campaign in Mosul, and comparison to the campaigns cited above would indicate that the US and Kurds are moving much slower than ancient campaigns, but using the same routes, attacking targets in similar ways, and with the same respect for topography and logistics.