Elite Anxiety: Paul Collier’s “Future of Capitalism”

Paul Collier, the controversial Oxford professor famous for his development work and his acclaimed books Exodus and The Bottom Billion, is back. But the author of Exodus and The Bottom Billion is long gone. The compelling writing and carefully reasoned world that made Bottom Billion impossible to put down has somehow disappeared. In The Future of Capitalism, Collier is tired. He is bitter. And he is sometimes quite mad – so mad that his disdain for this or that group of thinkers or actors in society consumes his otherwise brilliant analytical mind.

Instead of having his editors moderate those of his worst impulses, he doubles down on his polemic conviction. Indeed, he takes pride in offending people in all political camps, believing that it supports the book’s main intellectual point: ideologues of every persuasion are dangerous, one-size-fits-all too constricted for a modern society and we should rather turn to a communitarian social democratic version of pragmatism – by which he means some confused mixture of ideas that seem to advocate “what works” on a case-by-case basis.

Yes, it’s about as nutty as it sounds. And he is all over the place, dabbling in all kinds of topics for which he is uniquely unqualified to offer advice: ethics, finance, education, family, social policy and on and on and on.

One reason The Future of Capitalism went awry might have been the remarkable scope: capturing all the West’s so-called ‘Anxieties’ – and their solutions – in little over 200 pages of non-academic prose. Given the topic, a very unfitting sort of hubris.

Apart from the feeble attempt at portraying a modern society that has “come apart at the seams,” there’s no visible story, no connection between the contents of one paragraph and the next and hardly any connection between one chapter and another. Rather, it’s a bedlam of foregone conclusions, appeals to pragmatism, dire stings to ideological ‘extremists’ on either side and a hubris unfitting for someone like Collier. I guess this is a risk that established academics run at the end of their careers, desperately trying to assemble all their work into One Grand Theory.

The most charitable thing I can say about Collier’s attempt is that it offers a lot of policy prescriptions – tax unearned land rents, tax-and-redistribute productivity increases, expand housing supply through local governments, have governments direct the Silicon Valley-clusters of tomorrow, cap mortgage finance, benefits for families, expand ethical responsibilities of firms, encourage marriage, create a new G6 (EU, US, Russia, India, Japan, China) that could overcome the global collective action problem (good luck with that!), expand Germanic vocational training and workers’ representation on company boards, embrace patriotism but never nationalism, detach ownership from control and place control with stakeholders (workers, suppliers, local homeowners).

The common denominator seems to be an imperative to do all these things that seem to have worked well in some time or place or utopia, conveniently ignore institutional or cultural reasons, while espousing all ideological positioning and political capture.

Just voicing the suggestions ought to spark at least some fruitful conversations.

Chapter 8, ostensibly concerned with the Class Divide, is an illuminating case study. It takes Collier about 36 pages (out of 37) to mention ‘class’ (not that I blame him: the concept is way too nebulous and politically infected to be meaningfully dealt with in such short space). Instead, Collier discusses all kinds of topics whose relevance to class is quite unclear: public policy for single mothers, German vocational training, lawyers and the rule of law, a Yorkshire project to encourage reading in school kids – not to mention a ten-page digression into the institution of marriage for stable families.

When his polemics, dry writing, unsupported analysis or incomprehensive treatment of a topic hasn’t put me off (I gave up on the book at least four times during the last couple of months), some of the picture Collier paints does resonate with me. There is a social and geographical divide in Britain: the economically flourishing South-East, dominated by the well-educated English and the cosmopolitan accents of almost every language on the planet, is posited against the collapsing towns of the backward Midlands or the North. If this divide is real – in support of which Collier offers next-to-no evidence – it is not clear to me that it wasn’t already captured in, say, David Goodhart’s The Road to Somewhere or Branko Milanovic’s Global Inequality, or for that matter the countless of magazine articles trying to outline the fractures that Brexit unearthed about British society. Considering the effort those authors put into mapping their divides, Collier’s attempt seems frivolous.

He can do better. Much better.
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My fellow Notewriter Rick is organising a summer reading group around Feyerabend’s Against Method. The equivalent Collier reading group could be aptly named Against Ideology.

Back in Brazil: bureaucracy

After two years away, I’m trying to put my life back on tracks in Brazil, and one of the main obstacles for doing so is the country’s crazy bureaucracy. Maybe this will come as no surprise for many, but Brazil is known for its big fat bureaucratic system, and basically, any rational analyst I’ve ever heard or read believes that this is one of the main obstacles for the country’s economic growth.

One of the problems I’m facing is getting the money from my FGTS. FGTS stands for “Fundo de Garantia do Tempo de Serviço”, a compulsory savings account that all Brazilian workers are forced to have. The moment you get a job, your employer is responsible for putting a percentage of your salary in the account. In case you are fired (or retire, or get cancer – seriously), you can get the money.

FGTS was created in 1966, at the beginning of the military regime that lasted from 1964 to 1985. Funny enough, people on the left, who demonize the Military governments, are today the main defensors of FGTS. Reality is, as you can probably tell, that this does little to help workers. FGTS has a very low interest rate, lower than the country’s inflation. That means that you actually lose money with it. Any other private investement would be better. Besides, it is clear that its reason to be is not to help workers. FGTS was created because bureaucrats realized that Brazilians had no culture of savings, therefore the government had to create one in order to have some money reserve to use. And using it government did. FGTS accounts have frequently been used by the government to try to boom the economy Keynesian style. Trying to get your FGTS money is crazily hard. Bureaucracy turns into a maze and can win you by fatigue. Perhaps I should just leave my money with the government.

The Bolsonaro government is trying to modernize the economy, and part of the process might involve putting an end to FGTS and other peculiarities created by Brazilian bureaucrats in the past. The left, however, complains that workers are losing rights. I can tell by personal experience that I would be losing my right to have a very poor savings account that I didn’t choose and that I have a very hard time to get access to. But try to explain this to millions of workers that are still hostages for labor unions and left-wing political parties.

Dunbar’s Number

One of my favorite ideas in social science is Dunbar’s number: the cognitive limit to the number of relationships our brains can handle. It’s something like 150. That’s about the number of people our ancestors might have shared their tribe with 20,000 years ago.

Our sense of social propriety is tuned to dealing with people within our circle. Economics often seems counter-intuitive because it’s largely about how to interact with people outside that circle.

Here’s the example I use in class:

You’ve got a date tonight. You stop at a florist to pick out a bouquet and start wondering if maybe chocolate would be a better gift. Dark chocolate or milk? Or maybe something else. You think back to your economics classes and realize that if your date had $20 cash, they could buy this bouquet if it’s what they really wanted, or chocolates if that’s preferred. So when you knock on the door, instead of offering a bouquet, you hold out a crisp $20 bill.

What happens next?

If you aren’t dating an economist, you get the door slammed in your face.

So you run back to the florist, buy the flowers, run back, and nobody answers the door. Your date probably went to the bar with friends. You call a cab. When it pulls up to your door, the fare is $20. You just spent $20 on these flowers. You try to pay for your fare with the flowers.

What happens next?

The driver refuses and insists on cash.

So what’s better, flowers or cash? Is your date irrational, or the cab driver? Neither. Both are rational within the context they’re acting in. The driver is a stranger and market rules are appropriate. In this context, $20 is worth more than $20 worth of flowers. Maybe the cab driver wants flowers, but cash gives them the option to buy whatever best meets their needs.

You and your date were trying to cease being strangers. The cab driver is outside of Dunbar’s number, but your date would have (could have) been inside that inner circle. At that point, the signaling value of the flowers would trump the economic value of the cash.

Economics has a lot to tell us about how to behave with those inside and outside of our Dunbar’s number. But that dividing line calls for different rules on either side: the rules of family and neighbors on one side, and the rules of the market on the other.

I’m thinking about Dunbar’s number because I just finished a recent episode of EconTalk where they talked about a classic example from behavioral economics: An Israeli daycare, tired of late pickups started charging fines to late parents. Ironically, this resulted in an increase in late pickups that persisted even when the policy was reversed.

The daycare example is often trotted out to say “see! Sometimes adding an incentive backfires! Raising the price from $0 to $x increased the quantity of lateness demanded. People are irrational!” Of course it only takes about 5 seconds of thinking to realize that we aren’t holding all else equal here. As usual, there’s a lot of interesting stuff hidden in the ceteris paribus assumption.

The more sophisticated interpretation of this example is that attaching a price shifted parent’s interpretations of the norms. In my language: the inclusion of money in that interaction shifted the rules of behavior from those of neighbors to those of strangers.

(Roberts brought up an important point I hadn’t considered with this example: the price was too low. Prices communicate information about how onerous it is to produce a product, and that price told parents “it’s not a big deal if you’re late…”)

More generally, when we’re looking at some social scientific question, Dunbar’s number demarcates a point separating the assumptions we can make about sharing and monitoring–whether it’s about the practicability of communism (the real kind, not the kind with mass murder), corporate bureaucracy and firm size, or the tenability of informal institutions.

Back in Brazil: more impressions

Another thing that calls my attention in Brazil (or rather, in Rio de Janeiro) are the crazy traffic jams. All day long, traffic moves painfully slowly. Really. There is no rush hour. Every hour is rush. The reason is not hard to understand: there are way too many buildings for too few streets and poor options in mass transportation.

Thinking about this, I came across this excellent text. It is in Portuguese, so for those who can’t read it, I’ll summarize. Basically, zoning laws in Rio de Janeiro through the 20th century were completely crazy, following a very nasty relationship between politicians and real state companies. A company wanted to build taller buildings and profit, the city hall would not oppose, especially when a luxurious apartment was waiting for the mayor. The result is that old neighborhoods like Tijuca and Botafogo simply have no space on the streets for so many cars.

But what is the problem with many tall buildings? That’s what New York is all about, and I simply love the Big Apple! Well, that’s true, but NY has something that Rio doesn’t: a great mass transit system. Rio has four subway lines. Or three. Wait, maybe it’s just one. Here is the thing: on paper, Rio has four subway lines, which already makes no sense, since it only has lines 1, 2 and 4. Line 3 was planned but never built. Line 4 is just an extension of line 1, and line 2 trains enter line 1 (!). Although the system was privatized in the 1990s, it is very clear that it maintains a very suspicious connection with the state government. Sergio Cabral, Rio’s former governor, and presently in jail, was married to a lawyer who defended the Metro company. It is also clear that bus companies subsidize politicians who maintain their interests. In sum, Cariocas are hostages to a terrible public transport system that favors a criminous relationship between big companies and politicians.

Rio ends up representing very well a problem we see all over Brazil: people believe this is capitalism. Because of that, they vote for socialist parties. It should be painfully obvious from the examples of USSR, Cuba, Venezuela, Nicaragua, North Korea, China, Vietnam, Eastern Europe, and so many others that socialism simply doesn’t work. But here is the thing: people in Rio (and actually in Brazil and Latin America in general) suffered and suffer so much under crony capitalists that they can’t help but thinking that socialism might be the answer.

Hear, World! Socialism failed, just like Mises predicted. But as long as people suffer under crony capitalists, it will still be appealing, be it in a poor neighborhood or a college campus in the US, be it in a poor country in Latin America. The job is not done. Freedom isn’t free. We still have a long way to go freeing people from evil.

Back in Brazil: first impressions

After almost two years living in the US, I’m back in Brazil, more precisely in Rio de Janeiro, for a short visit. When I left Brazil two years ago, I was hoping that Bolsonaro would be elect president and that with that things would start to change for the better. I still have hope, but change is slower than I would wish.

Things in Brazil are crazily expensive. One liter of milk is almost 4 reais. One liter of gasoline is 5 reais. Considering that a poorly skilled worker makes less than 2 thousand reais, imagine how much it costs to live in Rio de Janeiro. If you live in the US, just remember how much you pay for a gallon of milk or gasoline. And also how much a poor, very simple worker makes in the US.

But thankfully Brazil has universal healthcare! Only that hospitals have always been terrible here. Seems to me that Brazilian TV has a video that they just play in a loop, showing how terrible it is. Sadly, mainstream media continues to ask the government for better health (and better education, and better services in general) instead of admitting that government-run services will simply never be good.

Brazilians (or at least people in Rio) are also very aggressive. I believe I understand why. Everyone here has been deeply hurt.  “It´s the law of the jungle”. Or “grab what you can and let the devil take the hindmost”. Injustice has hurt these people pretty deeply.

So, yeah. Keeping desiring Socialism! Keep supporting the likes of Bernie Sanders and Alexandria Ocasio-Cortez. Nothing has helped poor people over the years more than free markets. Few things have hurt them more than socialism. Coming back to Brazil, I can tell.

Economists, Economic History, and Theory

We can all come up with cringeworthy clichés for why history matters to society at large – as well as policy-makers and perhaps more infuriatingly, to hubris-prone economists:

And we could add the opposite position, where historical analysis is altogether irrelevant for our current ills, where This Time Is completely Different and where we naively disregard all that came before us.

My pushback to these positions is taken right out of Cameron & Neal’s A Concise Economic History of The World and is one of my most cherished intellectual guidelines. The warning appears early (p. 4) and mercilessly:

those who are ignorant of the past are not qualified to generalize about it.

We can also point to some more substantive reasons for why history matters to the present:

  • Discontinuities: by studying longer time period, in many different settings, we get more used to – and more comfortable with – the fact that institutions, routines, traditions and technologies that we take for granted may change. And does change. Sometimes slowly, sometimes frequently.
  • Selection: in combination with emphasizing history to understand the path dependence of development, delving down into economic history ought to strengthen our appreciation for chance and randomness. The history we observed was but one outcome of many that could have happened. The point is neatly captured in an abscure article of one of last year’s Nobel Prize laureates, Paul Romer: “the world as we know it is the result of a long string of chance outcomes.” Appropriately limiting this appreciation for randomness is Matt Ridley’s rejection of the Great Man Theory: a lot of historical innovations seems to have been inevitable (When Edison invented light bulbs, he had some two dozen rivals doing so independently).
  • Check On Hubris: history gives us ample examples of similar events to what we’re experiencing or contemplating in the present. As my Glasgow and Oxford professor Catherine Schenk once remarked in a conference I organized: “if this policy didn’t work in the past, what makes you think it’ll work this time?”

History isn’t only a check on policy-makers, but on ivory-tower economists as well. Browsing through Mattias Blum & Chris Colvin’s An Economist’s Guide to Economic Historypublished last year and has been making some waves since – I’m starting to see why this book is quickly becoming compulsory reading for economists. Describing the book, Colvin writes:

Economics is only as good as its ability to explain the economy. And the economy can only be understood by using economic theory to think about causal connections and underlying social processes. But theory that is untested is bunk. Economic history provides one way to test theory; it forms essential material to making good economic theory.

Fellow Notewriter Vincent Geloso, who has contributed a chapter to the book, described the task of the economic historian in similar terms:

Once the question is asked, the economic historian tries to answer which theory is relevant to the question asked; essentially, the economic historian is secular with respect to theory. The purpose of economic history is thus to find which theories matter the most to a question.

[and which theory] square[s] better with the observed facts.

Using history to debunk commonly held beliefs is a wonderful check on all kinds of hubris and one of my favorite pastimes. Its purpose is not merely to treat history as a laboratory for hypothesis testing, but to illustrate that multitudes of institutional settings may render moot certain relationships that we otherwise take for granted.

Delving down into the world of money and central banks, let me add two more observations supporting my Econ History case.

One chapter in Blum & Colvin’s book, ‘Money And Central Banking’ is written by Prof. John Turner at Queen’s in Belfast (whose writings – full disclosure – has had great influence on my own thinking). Focusing on past monetary disasters and the relationship between the sovereign and the banking system is crucial for economists, Turner writes:

We therefore have a responsibility to ensure that the next generation of economists has a “lest we forget” mentality towards the carnage that can be afflicted upon an economy as a result of monetary disorder.” (p. 69)

This squares off nicely with another brief article that I stumbled across today, by banking historian and LSE Emeritus Professor Charles Goodhart. Lamentably – or perhaps it ought to have been celebratory – Goodhart notes that no monetary regime lasts forever as central banks have for centuries, almost haphazardly, developed its various functions. The history of central banking, Goodhart notes,

can be divided into periods of consensus about the roles and functions of Central Banks, interspersed with periods of uncertainty, often following a crisis, during which Central Banks (CBs) are searching for a new consensus.”

He sketches the pendulum between consensus and uncertainty…goodhart monetary regime changes

…and suddenly the Great Monetary Experiment of today’s central banks seem much less novel!

Whatever happens to follow our current monetary regimes (and Inflation Targeting is due for an update), the student of economic history is superbly situated to make sense of it.

Those revenue-raising early central banks

In a piece on a rather different topic, George Selgin, director for the Center for Monetary and Financial Alternatives and editor-in-chief of the monetary blog Alt-M, gave a somewhat offhand comment about the origins of central banks:

For revenue-hungry governments to get central banks to fund their debts is itself nothing new, of course. The first central banks were set up with little else in mind. (emphasis added)

Writing about little else than (central) banks in history, you can imagine my surprise:

Reasoned response: Selgin ought to know better than buying into this simplified argument.

Less reasoned response, paraphrasing one of recent year’s most epic tweets: you come into MY house?! 

Alright, let’s make a quick run-through, then. Clearly, some simplification and lack of attention to nuances is permissible under the punchy poetic licenses of the economic blogosphere – especially so when the core of an argument lies elsewhere. But the conviction that early central banks

(a) were created as revenue-raising devices for their governments, or
(b) all central banks provided their governments with direct fiscal benefits,

is a gross simplification of a much broader and much more diverse history of early public banks. Additionally, the misconception entails what Italian banking scholar Curzio Giannini derisively referred to as overly-narrow “fiscal theor[ies] of central banks”. Since too many people believe some version of the argument, let’s showcase the plethora of early central banks and illustrate their diverse experiences.

Initially, the banks-as-fund-raisers argument may seem reasonable; a few proto-central banks definitely were set up with this purpose in mind, with the Bank of England’s series of monopoly charters beginning in 1694 as the prime example. David Kynaston, the great historian of the Bank, eloquently characterized the relation between the government and the Bank as a ‘ritualistic dance’ in light of the periodic renewals of its monopoly charter; the Bank provided the government with funds and in return received some new privilege in addition to lucrative interest payments.

Among the dozen or so other candidates reasonably fitting the description “first central banks”, we see a wide variety of purposes, not all of which were principally – or even at all – concerned with funding their governments.

Banco di San Giorgio (Genoa, 1407), was essentially a precursor of money market funds with investors holding the City state’s debt and receiving taxing rights. Here, as in many of the northern Italian city-state banks of the 14th and 15th century, the banks-as-fund-raisers argument seems applicable (we might mention others here too, like the Catalonian Taula de Canvi, 1401, that is often considered the first public bank). Whether or not these first generation banks may be counted as  “central banks” is much less doubtful, but a topic for another day.

Amsterdam Wisselbank (1609), a much-studied institution and a trailblazer in the history of central banking, was primarily set  up to facilitate payments, specifically to simplify the chaotic muddle of coins and payment methods that abounded in the Low Countries during the 1500s and 1600s. The Bank’s lending was circumscribed, and the lending that did take place often went to the Dutch East India Company – of course, we might argue that the Dutch East India Company, with its directors appointed by the Dutch provinces, actually constituted an arm of the government and so counting this lending as government financing. Besides, the City only began using the Wisselbank for financing purposes firstly through a loan in the 1650s and then more frequently towards the end of the 17th century. Regardless, those are (decades removed) outcomes – not initial purposes.

Hamburger Bank (1619) was similarly set up with monetary stabilization in mind and adopted many of the features of the Wisselbank. Contrary to the Wisselbank, it had a credit department that right away engaged in lending to private parties on collateral. However, it seems that most of its funds were lent to the Kämmerei (municipality treasury). In economists William Roberds and Francois Velde’s account, the

problems with circulating coinage in early seventeenth-century Hamburg were, if anything, worse than in Amsterdam.

A partial vindication, at best, for the banks-as-fund-raisers argument since the Hamburger Bank was clearly set up with monetary stabilization in mind rather than government financing. In practice, however, it did finance the city.

The Riksbank: (Stockholm, 1668). Picking up from its failed predecessor ‘Stockholms Banco’, what later became known as Sveriges Riksbank (frequently credited with being the first – surviving – central bank) was tasked with facilitating trade and upholding the value of the domestic currency. In practice, this meant influencing the foreign exchanges as they stood in Hamburg or Amsterdam. Initially, the bank was explicitly prohibited from extending funds to the crown (in early 2019 there has emerged a dispute over this point among some Swedish financial historians). What is clear is that for the first fifty years or so of the bank’s existence, the rule seems to have mostly held up; not until the Great Northern Wars in the early 1700s did the Riksbank to any meaningful extent advance funds to the government.

Bank of Scotland (1695) and the Royal Bank of Scotland (1727), were both – a bit like the Riksbank – chartered to advance and improve the functioning of the domestic economy, and they were prohibited from lending to the crown. Despite the well-known political conflicts leading to the chartering of the Royal Bank, the Scottish case of rivaling banks were clearly created to advance the North Sea trade, not to finance the government or manage its debt. The third chartered Scottish bank, the British Linen Company (1745) was formed in order “to carry on the linen manufactory”. As is often the case in banking history, the Scottish case might thus be the clearest counterpoint to an argument. Further, the Scottish banking historian Sydney Checkland pointed out that the Bank of Scotland was “solely dependent on private capital, and […] wholly unconnected with the state.”. Again, the No True Central Bank objection might be raised, but it would send us tumbling into a dark definitional hole that has to wait for another time.

Banco del Giro/Wiener Stadtbank (Vienna, 1703 and 1705) were both established as a result of “the poor state of Austrian public finance” Like in Venice and Genoa, the banks were meant to enhance the liquidity of the government’s debt, actively contributing to reducing the State’s and the City’s interest rates respectively – and then gradually pay back their debt. While both banks did accept private deposits, and like its Hamburg and Dutch predecessors facilitated payments through their ledgers, these operations were clearly not their prime purposes. Money-raising argument vindicated.

This brief overview of some early central banks illustrate the point: banking history contains much wider experiences than a simplified money-raising argument implies. Indeed, even the First Bank of the United States – clearly an aspiring candidate to the title of ‘first’ central banks’ – seems to primarily have had trade-enhancing and economic development purposes in mind. This I say much hesitantly, since early American banking is definitely not my forte and I fully expect Selgin (and others) to correct me here.

Regardless, to claim that early (central) banks were set up with government finance in mind, is clearly an overstatement.

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The title is a play on my favorite of George Selgin’s many brilliant articles, ‘Those dishonest goldsmiths’.

For the record, George Selgin is well-versed in this literature, and I’m merely using his quote as a stand-in for a common conviction among the not-so-well informed academic crowd.