Economic and technological determinism

Mind blowing stuff

A while ago now I discussed technological determinism, and the existence of economic laws, even if not in the same sense that in the so-called hard sciences. This semester I'm teaching a class for first year students (non Econ majors, to clarify for those outside the US) titled somewhat facetiously 'From Fire to Uber.' In fact, the first reading is Heilbroner's 1967 paper discussed in the first link provided above, on whether machines make history.

Bob was on the side of technological determinism. The epigraph was Marx's famous dictum according to which: "the hand-mill gives you society with the feudal lord; the steam-mill, society with the industrial capitalist." And he essentially argued that the computer (he also discussed atomic energy technology, but not biotechnology. The computer, the bomb, and DNA were all part of the immediate techno-scientific developments of the post-war period) would essentially gives us the society with the technician. In fact, reading recently David Graeber's new book (original discussion here), on bullshit jobs, I was reminded of Bob's prediction. Bullshit jobs are essentially the result of the 'computer mill,' that gives society with the bureaucrat.*

Heilbroner and almost anybody else that uses that particular citation of Marx seems to suggest that historical materialism, or Marx's conception of history, requires technological determinism. While it is clear that the idea that the economic structure determines the cultural, political and social superstructure of society is a type of economic determinism, it is less clear to me that Marx accepted technological determinism. And as I noted in a previous post, Marx's conception of history, even if permeated by some economicism (I seem to recall that John Kenneth Galbraith suggested that he agreed on that point with Marx, the prominence of economics, but cannot find the quote anywhere), does not imply historical determinism. Not only he has very little to say about the future of society (including communism), but also all his laws of tendency allowed for countervailing forces that could reverse the original course of events.

In that sense, Marx's economic determinism is a sort of soft determinism, which allows for sociopolitical factors to affect economic developments. Here I'm echoing Nathan Rosenberg (pp. 61-62) who suggested long ago that "Marx's position... cannot be reduced to a crude technological determinism." So one may very well ask why I think that Marx's (or Heilbroner's) soft economic determinism does not imply technological determinism. Ultimately the reply hinges on what drives technology, which is a component of the supply side of the economy, and what drives the economy, supply side forces or demand side factors.

In my view, as stated too many times in this blog, the process of growth is demand driven. The adoption of machines (investment) in general results from the needs to adapt productive capacity to demand. In that sense, the computer and the society with the bureaucrat that it created are the result of growing economy and for the most part, as much as in the case of the society with the steam-mill, the one with the computer has been heavily dependent on the role of the state. In fact, there are few sectors in which the role of the state in the development of a technology are more evident than in the case of the computer (see here, for example), the internet and the derived technologies. Sure, I'm probably, like Bob a soft determinist, but with reverse causality.

Probably population growth (which was the main, or only, source of growing demand in pre-modern societies) and the State, and more importantly inter-State warfare, have been the driving forces for socioeconomic change, and technological developments have been the result. Of course, if the Military-Industrial Complex gives you the computer, then the computer may require the bureaucrat. So there are feedback mechanisms. It's the proverbial chicken and egg story. But in my view, demand driven stories of growth break with the technological determinism of the mainstream (neoclassical) and certain Marxist interpretations of history.

* In Graeber's view is not really information technology though. Bullshitization is a development of financialized or neoliberal capitalism (I'll discuss my views on that in another post). I should add that Graeber thinks that the computer has led to a new economic mode of production that he refers to as Managerial Feudalism.

History of Central Banks Tutorial - Before Central Banks II

As promised, one more installment on the history of central banks, and why the early Italian (and Spanish and Dutch) public banks were not seen as central banks. We must start with Italian banking. Even though the Medici Bank is probably the most well-known of the Italian banks of the Renaissance period the two key cities to understand the development of modern banking, and the precursors of central banks, are Genoa and Venice. And as noted before, central to the story is the emergence of public debt, one of the few innovations that was not known in antiquity.

The records for the floating of public debt go back to 1149 in Genoa and to 1164 for Venice. Local governments essentially sold the rights to collect taxes for a determinate period in exchange for a fixed amount of money. Public debt was originally compulsory,  since the city-states were always hard-pressed for funds, and constantly fighting for their very survival in economic and political terms, in the complicated and unstable political disputes between the Papacy and the Holy Roman Empire. Public debt was also relatively illiquid, since it was difficult to transfer the tax farming rights.

Over time public debt become voluntary, rather than compulsory, perpetuities were issued, and secondary markets for government bonds developed.  In other words, public debt was an early and persistent feature of the Italian financial markets. The importance of public debt was that it provided a relatively secure asset for the functioning of the financial system, even when in reality there were periods of crises and situations in which interest payments were interrupted and consolidations of older debt took place frequently. Unlike private debt in which there is little recourse in case of default, the latter was considerably less likely in the case of public debt. Historically disputes between creditors and debtors are at the center of class conflict. Debt peonage, were the creditor coerces the debtor to repay with work, or debtor’s prisons, for those unable to repay, were common solutions for the problem of private default until the 19th century (see David Graeber's Debt).

Public debt was denominated in local currency, and a formal commitment from the local government to match taxes to the required needs to service debt was relatively easy to obtain, in particular since the merchant class and bankers, the creditors of the state, had a hand in the administration of the city-state.  Except perhaps in the case of the complete collapse of the economy, associated to military defeat, the possibility of default was limited. Public debt could be sold and bought in secondary markets and it could be used as collateral by the banking system.

Banks, then, reemerged in Europe after the crusades in the context of the commercial revolution, which connected long distant trade between the Levant and the fairs in Champagne and other northern European markets through the Italian city-states.  In the context of pre-modern Europe, with political and economic fragmentation, and with a significant large number of currencies, one of the central activities of early bankers was to provide foreign exchange.  Traders required not only exchange services, but also the ability to transfer funds from one place to the other, and the international settlement of accounts was useful not just for traders with business in many cities, but also for the church.

Moneychangers and bankers operated in a world with an extensive number of currencies, and coins that were often debased, with an actual metallic content below its face value.  As noted by Peter Suppford in Money and Its Use in Medieval Europe, not only there were a myriad of coins, but also, and more importantly, there were as many units of account. In fact, many coins that actually disappeared continued to be used as units of account, what Spufford refers to as ‘imaginary money.’

The necessity of a unit of account to make economic calculation possible was certainly one of the reasons for the development of public banks, after all money is as noted by John Maynard Keynes essentially money of account. In this sense, money developed not as a device to facilitate transactions, i.e. the means of exchange, but as a result of the power of city-states, and merchant bankers to determine the unit of account (for the chartal origins of modern money see Rochon and Vernengo, 2003). The introduction of a unit of account, and a relatively safe asset were central not so much because they were needed to provide a payments system, as noted by some mainstream authors, although that was a positive externality, but because the determination a unit of account provided the ability to create a relatively safe asset, reduce the risk of default and support the expansion of the of the mercantile activities that were seen as required for the survival of the city state.

Public banks were the culmination of a process by which the state tried to both fund its activities at a relatively low cost, creating in the process a secure asset to anchor financial markets, and that a unit of account was established by the Prince. The question then is why the public banks that preceded the Bank of England (BoE) are not often seen as central banks in the proper acceptation of the word.

One reason for the neglect of the previous public banks derives from a certain view of what central banks do, which, in turn, results from a particular perspective about the functioning of macroeconomic variables. In the conventional view, central banks must provide banknotes, a means of payments, to facilitate exchange but cannot provide too much of them, otherwise inflation would follow. But given the risks of bank runs they must be willing to provide liquidity in moments of crisis (lender of last resort function, LOLR). That is why banknotes and the LOLR function are often seen as the hallmarks of central banking.

Presumably the reason why the initial public banks are not considered central banks is that they were not emission banks. Early public banks provided a centralized clearing system that was guaranteed by the state. In the case of the Banco Giro, the successor to the Rialto in Venice, and the Bank of Amsterdam they had a monopoly over the clearing mechanism. However, there was an active exchange of the lire de paghe, the money of account, of the Banco di San Giorgio as bank money, and, hence, at least some precedent to the emission banks. Besides a giro system, in which credit and debit accounts are centrally cleared might be as powerful to provide liquidity as a system of banknotes.

In that sense, it is a bit arbitrary to consider the BoE, or the Bank of Sweden for that matter, as the first central banks. The most likely reason why that has become common sense is that all the other public banks vanished in the post-Napoleonic Wars period. The reasons for their disappearance, is certainly tied to the disappearance of autonomous municipalities, but the causes are more profound. Note that the rise of public banks follows more or less the evolution of control of trade with Asia, first the Mediterranean control of trade with the Levant, and subsequently the transfer of the dynamic center to the Atlantic, once the Portuguese had opened the trade routes around Africa. In other words, what city-states did not have was an edge in the process that was central for economic development, the control of the trade routes with the East. Also, there were technical problems associated with the printing of paper currency (Eric Helleiner in his The Making of National Money, shows that only in the late 19th century, with the technical advances in counterfeiting is that the State could impose territorial currencies)

In addition, neither the Mediterranean city-states, which were politically fragile, nor the Dutch Republic, which was under constant threat of the Spanish and French crowns, controlled a large domestic economy that could rival with the emergent nation states in terms of political and military power. England, on the other hand, was the first nation state with a public bank large enough to benefit from the positive effects of the expansion of international trade with the Orient, and that could challenge the military hegemony of other European powers.

More importantly, with the advantage of hindsight, it is clear that the financial revolution in England in the 18th century, even if it was in part an evolution of a long process of development of financial practices and institutions in Western Europe, was indeed groundbreaking, and occurred right before the Industrial Revolution. It is the eventual victory in the Napoleonic Wars, and the rise to global hegemonic power that made the Bank of England, retrospectively, the first central bank. By then the rules of what a central bank should actually do where changing according to the interests of the British industrialists and merchants, and that view, the Victorian view of central banks became dominant. And history, including the history of central banks, is written by the victors.

PS: To read the first two posts in the Tutorial series just click on the label below History of central banks.

Debt and the deep sources of inequality

In a previous post I noted that economists (particularly mainstream ones, like Brad DeLong) could actually learn quite a bit from anthropologists like David Graeber. One thing that they (anthropologists, not mainstream economists) seem to understand is that debt is a social relation that evolved with the creation of inequality. Debt servitude or slavery being quite old, as a result. As noted by Flannery and Marcus, in their The Creation of Inequality:

"The first step in such a process is to loan food and valuables to impoverished neighbors. The second step is to foreclose on the loan. Families who accept food and shelter from wealthy neighbors are in a poor position to deny the latter’s claims to luxury items and hereditary privileges."

As much as historians (noted here and here before), anthropologists do work with the concept of surplus. For that reason they note that societies in which there is a significant surplus have more opportunities for inequality. The basis of Flannery and Marcus' explanation for the deep causes on inequality are associated to the work of another anthropologist, Irving Goldman, who suggested three causes for inequality, namely: a religious life force associated to a leader, a particular kind of expertise, and physical and military prowess. Often a combination of three were necessary.

So you can think of early agricultural societies as ones in which certain social groups were capable of extracting surplus from other groups, as a result of their technical expertise, and a combination of religious and military power. And as much as societies have changed throughout the millennia, it is still essentially true that it is the ability of one group to extract surplus from another that determines income distribution.

Mechanisms have changed, so weakening trade unions, maintaining higher average unemployment through macroeconomic policies, using trade and tax policies to weaken labor and strengthening corporations and so on are a few of the instruments used now to create inequality. And yes, debt still is a way of subjugating particular classes and countries.

PS: By the way, Flannery and Marcus say that: "the worst inequality results not from the granting of new privileges to the people on top but from the removal of existing privileges from the people on the bottom." And this is based on historical and archeological records, not the current right-wing strategy of eliminating the protections of the Welfare State.

More on David Graeber’s Debt

Indebted? No problem we have a (minimum wage) job!

David (Fields) posted a link to Geoff Ingham’s review of Graeber’s book. Graeber is an anthropologist, recently hired by the London School of Economics, and that has often been associated with the Occupy Wall Street movement. Note that several mainstream economists have posted recently on the topic, and have been, as is often the case, barking at the wrong tree. Two mainstream takes on Graeber that are typical are from Noah Smith and Brad DeLong.

Noah wrote a post, a while ago, on David Graeber's views on debt. According to him Graeber is "a sort-of-leftish guy with a tendency to fight with other people on the left." Noah would be, by the same token, a sort of neoclassical-liberalish (in the American sense of progressive) economist fighting other people within neoclassical economics. And here lies the problem, because mainstream (neoclassical) notions about debt are really problematic, and there is quite a bit that could be learned by the profession from anthropologists like Graeber (or sociologists like Ingham; see for example this book).

Noah's complaint seems to be that David is confusing or confused or both. In his words: “his [Graber’s] pronouncements on the subject are vague or seemingly contradictory on all of the questions listed above.” In all fairness, Debt is a very long book, which deals both with one might call a Chartalist view of money, and (in my reading) a vaguely Marxist (certainly non-neoclassical) view of the functioning of the economy, but discussing the evolution of debt and economic development more or less since the beginning of Civilization.

But the basics are not difficult to get. Money does not appear as the efficient mechanism to reduce transaction costs (avoid the double coincidence of wants) in barter economies, but is the result of certain social groups ability in imposing a unit of account. As Keynes put it in his Treatise on Money: “money-of-account, namely that in which debts and price and general purchasing power are expressed is the primary concept of a theory of money.” And what is behind money of account is the power to determine what is the unit to be used, or as Keynes says, the power “to enforce the dictionary but also to write the dictionary.” Further, the classical political economy (and Marxist) approach, is not about market efficiency (not even for Adam Smith by the way, but that’s for another post) of individuals making uncoordinated decisions, but about capital accumulation in particular historical conditions, which involve class relations.

So debt is not bad per se, or good (Noah thinks that David’s point is that debt is bad, or something, as he says). Debt is an instrument that can be used by a social group to extract surplus from other social groups, from the elites in early civilizations that could command work from peasants and determine the means by which they were going to be compensated for their work, to countries that need to pay their debts in a foreign currency (normally dollars, which became the dominant currency after the victory in World War-II). Debt is then a way to force social groups and countries into situations of dependency (Noah himself is probably still paying student loans, with interests that he does not control, since he was told this is the respectable path to a happy life; yes he had a choice, but what are the choices for middle class kids with no money for college? Working for Taco Bell?).

Mind you, not all debt is bad. For example, the increase in debt to pay for unemployment insurance during this crisis is good, and in fact, too small to do any good (yes we need more spending and more debt). But not the kind of private, unsustainable debt that shackles workers to badly paid, unrewarding jobs, or that forces countries into economic arrangements that are contrary to their national interests (it was the debt crisis of the 1980s that forced most Latin American countries to accept the Washington Consensus policies).

Brad's complaint is more complicated to describe, and he is angrier it seems, but it appears to be associated to the fact that he believes David is not open to criticism, while his book contains too many factual mistakes. And yes there are some controversial points in David’s book, unavoidable in a book that is this ambitious and inter-disciplinary on top, including in chapter 12 (not sure why Brad was specially picky with that chapter). I do have also some disagreements on minor issues, but overall the framework of analysis seems to correctly point out the relevant social conflicts that arise from debtor/creditor relations, which have been absent in the mainstream analysis. At any rate, my two cents on the issue.

PS: The idea of Chartal or Cartal money is defended by 'serious' mainstream authors, and central bankers like Charles Goodhart, by the way (here). Not that it makes it more relevant. Authority has (or should have) little relevance when it comes to scientific evidence.

O sacred hunger of pernicious gold! What bands of faith can impious lucre hold?

Sociologist Geoffrey Ingham has written a review of David Graeber's Debt: The First 5,000 Years, which can be viewed here (subscription required). According to Ingham, while Graeber's monumental inquiry is much to be admired, there is quite a bit of room for critical refutation, specifically with respect to the exact nature of money, and its essence as a moral base for economic life.