Category: History

How does one person’s wealth affect another’s?

Matt Bruenig attempts to disprove a conservative talking point about income inequality, that one person’s wealth doesn’t have an effect on another person’s:

First, even if you wrongly think of wealth as a store of money and property created long ago, the distribution of it still impacts people’s lives, especially in America.

I’m already confused. Wealth, as far as I understand it, is the net value of the entity being examined. Net income is a measure of wealth over time. Is there some kind of obfuscation going on here? It seems that there’s imprecise jargon here. “Wealth” isn’t a store of “money,” but “money” is a store of value.

Modern life is fraught with very expensive risks lurking around every corner. A sudden illness or accident could render you disabled and unable to work. A recession or economic restructuring could render you unemployed and render the skills you’ve spent your life learning useless. Reaching old age with inadequate savings could mean living your golden years in poverty.

By what measure is modern life riskier than than the pre-modern era? When exactly was this golden age of low-risk living? This is not just a pedantic semantic objection. By modern standards, life in the pre-modern era was characterized by utter poverty. Until about 1800,  no society had experienced sustained growth in per capita income. So, while it may be true that there was less risk in the pre-modern era, because pre-modern people didn’t have as much wealth to lose, I don’t think Bruenig is trying to celebrate the massive gains in per capita wealth after the Industrial Revolution.

Many societies have created robust social insurance systems to protect their populations from these kinds of risks. The U.S. has done so as well, but to a much lesser extent. Because social insurance in the U.S. is so inadequate, it is incumbent upon people to self-insure against these risks. That means they need to have enough wealth to draw upon as a cushion if they end up facing hard times. But here’s where the social contract fails: When the bottom half of the country owns basically none of the country’s wealth, they can’t self-insure against these risks. Instead, they must lead a relatively perilous life in which one misstep or mistake could wreck them and their families.

I think this is confusing because there’s an unstated assumption here, that social insurance is just a state program that redistributes money from the wealthy to the poor. This isn’t Bruenig’s fault, but “social insurance” has become a kind of Newspeak term for state redistribution from the wealthy to the poor. Before the rise of the welfare state, there was a robust history of mutual aid societies. That kind of social insurance wasn’t deployed through governments, and wasn’t relevant to the tax code. In fact, that kind of social insurance often functioned to counteract government institutionalized racism.

There’s an unstated premise that redistribution from the wealthy to the poor would lessen the poor’s vulnerability to financial risks. This is true but irrelevant. Bruenig still hasn’t laid out what the exact negative externality is.

Second, wealth is not just a pile of dead value created in years past. When utilized properly, wealth ensures its owners a share of future income, too.

What is this term “dead value?” What does that even mean? Does it refer to a kind of Marxist labor theory of value, or a marginalist subjective theory of value? What is this caveat, “When utilized properly?” Show your work!

It seems that there’s another unstated assumption here, about capital accumulation. The underlying theory is that once an entity has collected a certain amount of capital, the capital will start generating returns without much attention, and that owners of capital can passively collect interest.

It seems obvious to me that there are significant costs to managing capital, but maybe it’s not so obvious. Most startups fail. Venture capitalists and investment banks are constantly assessing and lending capital from household savers to cash-poor entrepreneurs. The total economic surplus generated by the few successful companies outweighs the deadweight loss from overproduction of failed businesses. Investing isn’t simple; it’s not inevitable that once an entity has a certain amount of capital, there will be easy and steady returns.

 Most people seem to equate income with working: You go to your job, do your tasks, and get a paycheck. But this is only half of the story. At a macro-economic level, a nation’s income is divided between owners and workers, with the part flowing to the owners called “capital’s share” and the part flowing to the workers called “labor’s share.” In recent years, capital’s share of the national income has been as high as 37 percent, which is to say 37 cents of every dollar of income in a year goes to passive owners of wealth.

I had hoped when I started reading Bruenig’s article that I might find something other than rehashed social conflict theory. If Bruenig wants to abandon the neoclassical paradigm, he should say so explicitly. If not, then it’s not useful to talk of conflict between capital and labor. Both are mere inputs.

I think I can make Bruenig’s argument stronger than he formulated it here. Bruenig never explained what the negative externality was, but I can hazard a guess. The negative externality exists from whatever institutional arrangements preserve the inequality. That may sound obvious, but I’ll unpack it.

What Bruenig should have argued is not that the wealthy are only wealthy by withholding capital from the poor, but that the wealthy have historically used their wealth in the political process to calcify their social position. Why is a donation to the opera tax-deductible? Why are there home ownership deductions? If there is political power available to be purchased, it will be purchased.

How do conflict-generated diasporas affect homeland conflicts?

Edward Said claimed,1 and Noam Chomsky agreed, that the acceptable range of political attitudes about the Israeli-Palestinian conflict are much more diverse among Israeli Jews than American Jews. I’ve been searching for some hard evidence that American Jews are more hawkish toward Palestinians than Israeli Jews, but haven’t found any.

The claim is plausible, though. Conflict-generated diaspora groups might feel a stronger urge to demonstrate in-group loyalty to compensate for their absence. Terrence Lyons explains in his 2004 paper,

One dynamic that tends to make conflicts in the homeland more protracted, therefore, is the existence of certain types of diaspora groups with strong symbolic attachments to a territory and uncompromising views on how conflict there should be understood and contested.

The hawkishness from without actually seems to aggravate the homeland conflict. Paul Collier and Anke Hoeffler hypothesize in their 1999 paper,

A further potentially important source of start-up finance for rebellion is a diaspora living in OECD countries. Such diasporas are usually much richer than the population in their country of origin. They are better-placed for collective action: emigrants have a cultural incentive to create diaspora organizations which can then discipline free-riding. They do not suffer the consequences of the conflicts they finance. As with grievance among the local population, in the greed-model grievance among the diaspora is assumed to be manufactured by the rebel organization rather than being an original cause of conflict. Hence, the diaspora increases the risks of conflict renewal, but not the initial risk of conflict. We measure the size of diasporas in the USA relative to the population in their country of origin.

They find,

By far the strongest effect of war on the risk of subsequent war works through diasporas. After five years of post-conflict peace, the risk of renewed conflict is around six times higher in the societies with the largest diasporas in America than in those without American diasporas. Presumably this effect works through the financial contributions of diasporas to rebel organisations.

Collier and Hoeffler also controlled for how large diasporas might be because of the size of conflicts themselves.

The case of the Israeli-Palestinian conflict in particular isn’t so straightforward. Jonathan Rynhold, writing in 2008, explains, “Prior to the 1980s Diaspora identification with Israel was expressed in unwavering support for Israeli policies. Since then Diaspora support for Israeli policies cannot be taken for granted.” Rynhold holds that the 1982 Lebanon War dissolved the unanimity of opinion in the diaspora, due to the media coverage of Sabra and Chatilla. The 1980s brought the Jonathan Pollard affair, as well as the First Intifada, which impelled liberals to contemplate the policies in the Palestinian territories.

It would be useful to collect opinion data from emigrant communities connected to current ongoing conflicts, and compare them to opinion data in the homelands. Where can I get some good, current research on this?

1 Edward Said, and Christopher Hitchens, Blaming the Victims, (London: Verso, 1988), 9-10.

What is meant by the term “Third World?”

Third World

The term Third World is a peculiar linguistic artifact from the Cold War. Usage in the English language accelerated in the mid-1960s, peaked in the mid-1980s, and has steadily declined ever since.

It originally described all the nations not aligned with either the United States or Soviet Russia during the Cold War. B.R. Tomlinson explains,

Like so much of the terminology used by historians and social scientists in the second half of the twentieth century, the notion of a Third World grew out of the rhetoric of the Cold War in the late 1940s and 1950s. The phrase had its origins in the idea of a ‘third force’ or ‘third way’ in world affairs (distinct from American capitalism or Soviet socialism) that was identified in the polemical literature of the non-communist European left in the late 1940s. The term was coined in August 1952 by the demographer and economic historian, Alfred Sauvy, in an article in the French socialist newspaper L’Observateur, entitled ‘Trois Mondes, Une Planète’, which stressed the disempowerment of the newly-independent countries of Asia and Africa, concluding that ‘the Third World has, like the Third Estate, been ignored and despised and it too wants to be something’.

This grossly oversimplified trichotomy seems to have framed dependency theory and later, world-systems theory. The research paradigm was fertile soil for grand historical narratives with extremely weak predictive value.

Why would a firm choose vertical integration?


American Apparel has long bragged that they’re completely vertically integrated. Their strategy seems to stem more from ideologically avoiding sweatshop labor than serious fundamental analysis,

Our average factory worker makes $12 to $14 dollars an hour—the highest pay worldwide for the manufacturing of apparel basics, and significantly more than California’s minimum wage. For us, higher pay means heightened efficiency, a better and more consistent quality of work, stronger employee morale, and ultimately, retention rates of skilled operators. For them, higher pay is often a path to the American Dream for their families.

We don’t have to do things this way, we just believe it’s the right way.

Avoiding sweatshop labor might be effective marketing for their progressive hipster clientele, but not effective enough to avoid the brink of bankruptcy. The positive sentiment for the brand doesn’t seem to translate into enough of an increase in sales to offset the increased labor cost.

So, even though American Apparel might be the most famous example of vertical integration, it doesn’t seem to be a good example of vertical integration undertaken for profit maximization.

Why would a profit-maximizing firm choose vertical integration? Recall from Coase that firms exist to minimize transaction costs. If transaction costs between lessors and lessees are high enough, vertical integration is attractive. According to the widely cited 1978 paper by Benjamin Klein, Robert G. Crawford, and Armen A. Alchian, we might see vertical integration from a specific kind of transaction cost: post-contractual opportunistic behavior. A production technology with high fixed costs that cannot be recovered by being scrapped into alternative uses will tend to be vertically integrated into the rest of the product’s production process. What are some implications of this? The paper explains:

  •  Fisher Body once supplied specialized metal dies that would stamp entire automobile bodies for General Motors. Fisher repeatedly tried to extract monopoly rents from GM, but eventually, in 1926, the companies merged.
  • Oil refineries are usually vertically integrated with oil pipelines, but not with oil tankers. An independent oil refinery would be hostage to a monopsonistic pipeline lessor, but an oil tanker has a potential appropriable rent near zero, because an oil tanker could easily be repurposed for shipping other goods.
  • Owners of highly perishable crops are quite vulnerable to collective demands by their laborers. Slavery was a form of vertical integration, but now, absent slavery, long-term labor contracts with unions consist of rigid wages with layoff provisions so that employers can’t opportunistically claim false reductions in demand.
  • Franchise relationships mimic vertical integration because, although a franchisee is technically an independent firm, the franchisee is essentially renting a brand, and is subject to certain controls by the franchisor.
  • Specific capital investments that have high fixed costs and can’t be easily repurposed could be subject to opportunistic behavior by workers, so the owners of firms tend to own specialized capital investments. Owners of firms use detailed employment contracts to prevent the appropriation of specialized capital by their employees. Such detailed employment contracts mimic the function of vertical integration.

Does vengeance underlie social justice?

Django Unchained reminded me of a Louis C.K. bit from an old post by The Last Psychiatrist.

Is vengeance a premise of social justice? If it actually is, it would be incendiary to say so directly. Though I’m not certain social justice is even a coherent concept, restitution as a justification seems way more palatable than retribution.

The conflation of restitution and retribution seems to plague discussions of privilege and social justice. Is the language in discussions of social justice deliberately ambiguous to conceal the retribution premise?

I have no answers. I have only questions.

Cottage industries preceded the Industrial Revolution

An oft-forgotten period of history in England and the United States was the putting-out system. Cottage industries served as the precursors to the factories we associate with the Industrial Revolution.

Manufacturing didn’t begin in factories. It began when technological progress allowed people to manufacture raw materials right out of their homes. Eventually, when it became politically viable to do so, larger firms formed to minimize transaction costs.

What’s my point? In contrast to what you might hear from Marxist historical narratives, Western Europe didn’t morph from feudalism to capitalism. The Industrial Revolution wasn’t a transformation of feudalistic exploitation into capitalistic exploitation. It was a spontaneously ordered progression from empowered, decentralized manufacturers.

Are limited liability arrangements unjustified economic interventions?

Are limited liability arrangements unjustified economic interventions?

The familiar Western legal concept is a creation of the state, originally crafted for trade expeditions. The first trade expeditions were highly risky, capital-intensive ventures, so to mitigate risk for such trading companies, European governments limited the liabilities of such trading companies by designating them joint-stock enterprises.

The earliest joint-stock enterprise was London’s Muscovy Company, established to trade with Russia in 1555. Limited liability was also granted to the famous British East India Company and Dutch East India Company, in the 17th Century. America’s first limited liability law was passed in 1811.

What’s the point of a joint-stock enterprise? The transaction cost of borrowing capital is decreased by allowing small shareholders to invest directly in a company without needing to interface directly with its proprietors. A joint-stock enterprise protects shareholders’ personal assets from any of the enterprise’s creditors. The benefit of limiting liability is that companies are able to raise capital from the long tail of the population, not just wealthy elites. The cost is manifested through increased moral hazard.

Would it really be such a bad thing if investors actually paid closer attention to what they are investing in? Without limited liability arrangements, prudent investors would need to hash out deals with proprietors, regularly conduct fundamental analysis, and determine a rate of interest. If bankruptcy laws didn’t exist, investors and proprietors would need to set their own terms for failed ventures.

Limiting liability through shareholder arrangements aggravates the principal-agent problem. Though corporations vaguely attempt to “maximize shareholder value,” rationally ignorant small shareholders don’t hold management of any one company accountable, since the amounts of money at stake are relatively small. Small shareholders with diversified portfolios of large mutual funds and index funds suffer from the local knowledge problem, just like socialist governments. They can’t possess enough meaningful knowledge of all the different individual agents to direct resources so as to maximize societal value.