TWO USES FOR CONDOMS Another book I've been reading is William Easterly’s “The Elusive Quest for Growth,” which is basically a history of World Bank and IMF policies toward the developing world. Easterly was a World Bank economist at the time of writing, but his rather critical take on his employer's tactics caused him to be forced out. He's now at NYU. I generally like this book, as it does a good job of outlining the various prescriptions and metrics used in each time period, and evaluating the consequences. I especially like his rant against the "necessary investment" Harod-Domar model used through much of the 60's and 70's.

In other arenas, however, I feel that Easterly draws conclusions a bit quickly. For instance, Easterly has a section about “the myth of unwanted births.” He asserts that most large families in the developing world are intentionally large, and that if women wanted condoms, the market would provide them and they would buy them. Children cost a lot, but they are also sources of pleasure and labor. The failure of condoms to catch on in the developing world must reflect the preferences of the people. Easterly’s arguments appear impeccable. Yet if we have a “myth of unwanted births,” we must also have a “myth of unwanted HIV.” While there are rational reasons a person might want many children, there are no rational reasons a person would want a deadly disease. As a protection against AIDS, condoms could not have failed to penetrate developing markets simply due to preferences. There must be a market failure somewhere along the line. And if condoms are being undersupplied to stop AIDS, they are probably also being undersupplied to stop unwanted pregnancies. Something must be wrong with Easterly’s account.

CAPITAL, MYSTERIOUS OR OTHERWISE So I’ve been very quiet for a while now—I back in school now, and never got around to posting about the last few books I read. So here’s what I’m going to do: post on a few of the more interesting things I read in the last month, then bid this research project goodbye.

One book I found particularly interesting was "The Mystery of Capital" by Hernando de Soto (not the explorer, the Peruvian economist). His thesis is that poor countries are poor not because they don't have enough stuff, but because they lack the legal framework to turn that stuff into useful capital. He and his team went around five large third-world cities (Mexico City, Jakarta, Lima, etc.) and, block by block, painstakingly estimated the value of the property they found there. His rough estimate for the value of property held by poor people worldwide is over $9 trillion. Even if this figure is a bit of an overestimate, the number still dwarfs the amount of foreign aid that has ever flowed into these people’s countries. I wish I had the book in front of me (someone recalled it to the library) but my memory is that $9 trillion is about 13 times all foreign aid ever given. The main point, whether or not you believe this particular figure, is that the stuff that poor people have managed to accumulate by themselves is quite substantial, more substantial than any aid they can expect to get from rich countries.

So given this large stock of stuff, how come poor people aren’t getting much richer? De Soto thinks it all comes down to property rights. The majority of property in the developing world is undeeded. Without a deed or title, a person cannot use their property as collateral. Without good collateral, one cannot get a loan, without a loan one cannot start a business, and so on. In the US, the single largest source of funds for new businesses is home mortgages. Such a thing is impossible in a place without an integrated system of property rights, where claims to ownership are recognized by those within a few blocks, and no farther. In such a situation, people can only reliably do business with those near them, those for whom social ties can make contracts binding. This drastically limits the scope of possible loans and business transactions, and de Soto believes it cripples the developing world’s poor.

This is all an interesting story, but it’s hard to tell how far to believe it. I was emailing about this with my friend Brian Shillinglaw and he had the following comments:

> I think there's a whole school of people who argue along de Soto's lines
> re European history -- that europe took off b/c of getting property right
> incentives just right ... North and Douglas come to mind but I can't
> remember their book. there's a whole program somewhere that does this
> stuff. "new institutional economics" I think they call themselves.
>
> but I've never been too convinced by it all b/c europe was accumulating a
> shitload of wealth when its property rights were still super local and
> changed every 5 miles, a complete mess from a capitalist's or a state
> bureaucrat's point of view. or so it seems to me. read Eric Williams
> *Capitalism and Slavery*?
>
> also there is the whole issue in titling customary assets in that it is a
> power struggle, what is not titled can't be taxed, who gets to title
> assets, etc. You might have a house but 5 people might claim ownership to
> that house, some of them more powerful than you. if it would be a good
> idea to shift the black/grey economy into the formal economy through
> titling, would it work well or equitably given how rare democratic
> governance is in latin america? dunno.

I don’t have number comparing the wealth accumulated in Europe in the era before standardized property systems with the weath accumulated in today’s third world, but it would be interesting to see if what Brian says is true—that Europe really was leaps and bounds ahead even without property law.

One of the most interesting parts of the book for me was de Soto’s account of how the US integrated all its various local property systems into one official system. As the frontier moved west, squatters tended to settle areas first, leading the way for formal government and incorporated townships to follow. They tended to have ad hoc systems for staking their claims, usually by making improvements to the land. In de Soto’s view, government actions like the Homestead Act of 1862, which granted land to anyone willing to live on it, were not so much government altruism as they were efforts to legalize and incorporate claims that had already been made. De Soto lays out many instances where the US government made passed laws, not to change how people settled land, but to bring existing behavior into the fold of legality and so make it compatable with land holdings in the rest of the country.

There are of course many crucial differences between 19th century America and today’s developing world, not least of which is that the US had a seemingly boundless supply of land, and it was just being settled. It may be much easier to incorporate land claims in the context of new, expanding economic space where the rules are just being written. In today’s developing world not only is land, and the material wealth it brings, often at a premium, current informal property systems are not in such a state of flux. Still, the American experience suggests that laws incorporating existing practices may be able to help even there.

NEAR-RATIONALITY VS. SIMPLE CONFUSION I just finished Peddling Prosperity by Paul Krugman and I want to say again that it is fabulous book. Go out and read it. In Krugman's tale of the resurgence of Keynesianism, he presents the "near-rationality" theories of George Akerlof. Why, asks Krugman, do housing markets, like Boston's in the early nineties, sometimes malfunction by failing to lower prices fast enough? In Boston it took several years of persistently high prices and unsold houses for sellers to finally lower their prices enough for the market to clear. Why the big delay? Why didn't prices adjust immediately? The traditional conservative explanation for a housing recession (or any recession) is that sellers are confused about the state of the market, and so thing their' prices are appropriate. The price correction comes as soon as the confusion abates. But a delay of several years is too long -- everyone knew a recession was happening, but still prices did not adjust. Enter George Akerlof. Akerlof made the point that in many cases, acting with what economic model would consider perfect rationality (which would involve marshalling all available information about the state of the world before making a decision) is actually not rational at all for real people. Real people have jobs, and deadlines, and other things to do, so it is probably best for them to act with "near-rationality," in other words, so gather some information and make a best guess. Akerlof believes, and Krugman agrees, that a market full of approximators, cognizant of the recession but not responding to all cues, might have kept prices irrationally high.

But at least to my eyes, there is nothing in Krugman's story of Akerlof's work to explain why the thousands of approximations always err in the same direction, the too-expensive direction. If everyone is just winging it, shouldn't about as many land below the market equilibrium as above it? Shouldn't near-rationality lead simply to a greater spread of prices in a non-homogenous market, not a recession?

There are probably a number of ways to counter that argument. For instance, it may on the whole be safer to remain in one's current house longer than one wants than to be out on the street with less money than one should have gotten -- it may be safer for families to err on the side of high prices. Also, there may be an effect whereby families are biased against re-analysis. If the cost of doing a new analysis is high, it may be best to stick with the old, which in this case would mean to ask a higher price. Still, as soon as one talks about the choice not to do an analysis, the story begins to sound like the conservatives' tale of persistent confusion. But there is one crucial difference: here the confusion is intentional. Therefore, intentional analysis and action, as by a government, can still help.

This whole discussion brings up an idea I've been tossing around for a while. The idea is that perhaps you don't need a population confused or near-rational people at all to get a recession. Perhaps all you need is a few. A few people behaving irrationally might change the market enough that rational people would be forced to change their behavior too. For instance, suppose a house that once sold for $200,000 now ought to sell for $150,000.If everyone was rational and everyone knew everyone else to be rational, the price would drop and the house would be sold. But suppose that a small segment of the population is irrational, and despite lower wages and the like, would still buy the house at $200,000. Suddenly a rational seller's calculus chances because of the chance of encountering such an irrational person. It may now be rational to lower the price only to $175,000. Futhermore, if every rational seller makes this decision, and every like house is priced at $175,000, it may appear as if the market has equilibrated, reinforcing the behavior. Now all rational buyers who would have paid up to $180,000 for the house (and gotten a deal at $150,000) can now be sold to at $175,000, so rational sellers has little reason to drop much below the price everyone else is asking.

The above example begs the question, do we need the irrational people at all? Perhaps it is enough to have the perception among otherwise rational people that a few irrational people exist. The simple expectation that there are people who will buy at the wrong price may be enough to start the cycle. Furthermore, do we even need that expectation? Why not just the expectation that some have the expectation or, throwing off the layers of infinite regress, the simple expectation that the housing market will be slow to adjust. Since it is always slow to adjust, this seems a rational expectation, despite the fact that the expectation itself creates the sluggishness. Think of it as two equilibria: an unstable one where prices adjust quickly, and a stable one where prices adjust slowly.

RENT CONTROL No, this posting is not about the policy, made famous in NYC, of holding the price of an apartment fixed for as long as the apartment is occupied by the same tenant. It is intead my musings on the power that comes with landownership. In summing up the century of 1750-1850 in Europe, Rondo Cameron writes that "most workers... improved their situation slightly, but the incomes of those who depended mainly on rent, interest, and profit rose in greater proportion." This is a familiar story. While there have certainly been places and times when people at all income levels improved their lot by roughly the same proportion (1947-1973 in America, according to Paul Krugman) tales of widening income gaps are far more common (for instance, 1973-present). And it is hard to find stories of narrowing income gaps anywhere at any time.

Why is this? No one really knows, but there are theories. In the specific case of 1980s America, Krugman mentions several. He believes that while tax policy certainly favored the rich (the Congressional Budget office estimates that the median family paid more in overall taxes [taxes plus Medicare and Social Security] in 1989 than in 1980, compared with a drop from 36.5% percent of income to 26.7% for the richest 1%) this alone cannot account for the widening gap in pre-tax income. Some theories for the gap go as follows: technological change placed a new premium on skilled labor, that technological change created temporary shortages and thus huge windfalls for certain types of skill labor, and that mass communication has allowed greater numbers of people to employ the services of those few companies or people perceived to be the best, the so-called "superstar" theory. But while any of these might explain the particular case of the 80s, none explains why the world over income gaps often widen and almost never narrow.

For what it's worth here is my own best guess, good across time and place: the rent power of landowners. Landownership is different from most other types of gainful employment, because you don't actually have to do anything. In fact, the cost of owning land is zero (some people pay for upkeep, but this is not strictly necessary). Futhermore, barring space expedition or the raising of Atlantis, there is a limited amount of usable land. In a free market the rents paid to landownership, given its marginal cost of zero, would themselves be driven down to zero. But the limited amount of land means that normal people cannot become new landowners at will and drive down prices. There is no free market, so landowners can and do receive rents. I think this may be a large part of the reason why wealth consistently gets concentrated at the top. At the end of any chain of business transactions is a person who can make money just be holding a deed, and that person has an incredible advantage in any sort of bargaining. There are of course many other important types of wealth nowadays, but I feel (I don't have the tools to demonstrate) that landownership in some way underwrites them all.

Supposing for a moment that I'm right, what can be done to limit the inexorable ascendency of landowners? I haven't a clue. Public land has its own extensive set of problems. It would seem a progressive state that taxes the rich and provides services for the poor is as good a band-aid as anything else.

HOW BIG A PROBLEM WAS THE DEFICIT OF THE 80s? I've taken a bit of a detour from the depths of the European past to read a book about economic policy in the recent American past, Peddling Prosperity by Paul Krugman (Norton, 1994). The book follows several economic ideas from their conception among professors, through their perversion in the hands of people he calls "policy entrepreneurs" -- mostly pundits, journalists, and think-tankers -- and into practice in the American economy. Then he tries to evaluate the effect they had. I'm already a big Krugman fan from his columns in the New York Times, but this book puts him over the top. It's one of the most interesting, well-thought-out, well-researched, and well-written pieces of work I've read in a long time. I read and read and can find almost nothing I can quarrel with.

Until today, at least. Given Krugman's usual meticulous attention to accounting details, I'm a little suspicious that I might be misunderstanding him. He is trying to estimate the how much richer the US would be if Reagan had not run up the budget deficit over the course of the 80s. During that decade the debt increased by $3 trillion, or about half a year's GDP. According to Krugman, and I have no reason to disagree, public debt crowds our private investment because money that could have been invested productively now must be spent on bonds and so forth. So how much wealth did the debt cause us to lose? Assuming that the $3 trillion was instead invested privately, and got the average real rate of return (6% over those years), the loss would be 1/2 of GDP times 6%, or 3% of GDP. Not crippling, though still quite large.

But something seems amiss. In order for Reagan to have cut the deficit he would have had to do one of two things: raise taxes (or in his case, cut them less) or cut government spending more. Suppose he raised taxes and left government spending untouched. Then at least some of that $3 trillion dollars spent to finance the deficit would not have been in the hands of private investors in the first place. Suppose instead that he had cut spending on services and let taxes be. Govenment spending on education, public works, and a great many other things is not money down a hole -- it is investment, though not private investment. To cut spending would have been to lower public investment at the expense of higher private investment. Whether he raised taxes or cut spending, a deficit reduction would have eaten into some form of investment. It seems to me the 3% of GDP figure ought to be significantly lower because of this.

GOLD "FRONTING" I've been reading about the wacky economic theories of mercantilism, a term no one seems quite sure how to define. It seems to be nothing other than whatever the trade policies of European sea powers happened to be in the 17th and 18th centuries. One thing the mercantilists were quite concerned about was the "balance of trade," the gap between what a country exported and what it imported. They thought that a country would become richer to the extent that it exported more than it imported, keeping the difference in precious metals. The practice of hoarding gold and silver became known as "bullionism."

It may be a waste of time to criticize these already much-maligned theories of trade, but a few things leap to mind nonetheless. First is the observation that not all countries can follow this advice at once. One country's export is another's import, so the aggregate balance of trade can never be anything other than zero. I don't think this bothered the mercantilists, as it seems they saw trade as something of a war between nations--you got yours at the expense of others. But second and more importantly, what good is a "favorable" balance of trade? What good is amassing bullion? Though some surely take pleasure in the sight of gleaming vaults of gold bars, and gold and silver jewelry has always been in fashion, the main use of gold and silver is what you can buy with it. But bullionism effectively eliminates that use. Cameron says that bullion hoards served as warchests, insurance against sudden times of high expense. A war breaks out and you sell your gold, right? But even that use may have been undermined. Imagine that everyone has a hoard, a war breaks out, and now everyone wants to use their gold to buy arms and other supplies. What happens? There's a glut of gold, prices go down, there's a run on arms, prices go up. Suddenly a lot of gold can buy only a very little. Gold is fairly useless without goods that it can buy. In a way, it's the reverse of gold backing, where a currency's value is insured by the gold is stands for. Call it "gold fronting" or whatever, but gold will do nothing without something to buy. What's the solution? I suppose it is to invest wealth in capital improvements rather than to keep it in vaults. If they had used the gold to pay workers to build a factory, that might be better insurance if a war breaks out.

PIRATES, AHOY! All this reading about sea trade has made me interested in pirates again, so I went and got a bunch of books about pirates. I feel like a twelve year old boy. In general, I'm very interested in the ways that systems fail to work, either by encouraging unwanted behavior within the system (like corruption in the commenda) or by forcing people to go outside the system (like excessive taxation under Diocletian, below). Piracy is an example of the latter. J. L. Anderson's article "Piracy in the Eastern Seas, 1750-1850: Some Economic Implications" (in Pirates and Privateers ed. by David J. Starkey et. al., 1997) describes three basic forms of piracy and the reasons behind them. The first is "parasitic piracy." Parasitic piracy feeds on trade and as such, according to Anderson, will be a parabolic function of trade. As trade volume rises so do potential profits from piracy, and more pirate "firms" and drawn into the "industry." But the larger the volume of trade the greater the economies of scale of protection; it will cost less per ship to protect them against pirates. With a sufficiently high volume a full-time fleet can be employed to combat the pirates, and profits will diminish, causing exodus from the industry. Anderson writes that this was the major type of piracy in the years 1750-1850. The second kind of piracy, "episodic piracy," is roughly an inverse function of trade. This type of piracy can be thought of as a response to problems in the job market. When there is a downturn in the profitability or availability of legal employment, otherwise normal sailors may turn to piracy for survival until the next upswing. The third type is "intrinsic piracy." This refers to piracy that was an intrinsic part of the normal functioning of a state. The Vikings and Mongols could be described as practicing intrinsic piracy.

I'm interested in the relationship between the first two types of piracy, because they seem to run counter to one another. At low levels of trade, one tells us that trade increase should increase piracy, the other that it should decrease it. It seems, however, that parasitic piracy dominated episodic priacy, and the general effect was one of increase. I also wonder if both types of piracy might limit themselves by feedback loops. Parasitic piracy would diminish the profitability of the trade on which it depended, lowering the volume of trade and thus its own profitability. Episodic piracy would take pressure off the job market, leading to high wages among the legally employed and perhaps drawing people back.

The losses from piracy came in the form of dead-weight losses, as would tariff on shipping; piracy created a need for increased defence, effectively raising the price of shipping. Unlike a tariff or tax, piracy was unpredictable, and so created further losses through risk. Though it is easy to ennumerate the theoretical types of losses, it is difficult to estimate gross total losses, in no small part because companies may have had incentive to misrepresent them in government documents. In a petition imploring their governor to take meaures against piracy, a group of Chinese merchants in 1833 estimated their yearly posses at $15,000-$20,000. This number is to low to be believed, as some single boats at that time carried cargoes worth in upwards of $200,000. Why the low estimate? According to Anderson, it may be because the merchants knew that, in exchange for eliminating the pirates, the government would be justified in taxing them up to the value of their losses. It was best to say they needed help, but to downplay how much they needed it.

I also read some non-economics books on piracy just for fun, notably Sodomy and the Pirate Tradition by Barry R. Burg. It's actually a fascinating and quite academic book that makes the case that homosexual pairing was the norm in pirate culture, and flips around our current association of male homosexuality with effeminateness. Pirate society may have also been notable for its egalitarianism, if Marcus Rediker's "Hyrarchy and Libertalia: The Utopian Dimensions of Atlantic Piracy in the Early Eighteenth Century" is to be believed. He says that while fictional accountd of pirate utopias are likely false, the chain of command on pirate ships was more egalitarian than any other in the world. Captains ate and lived with crewmen, and generally only used their authority in times of battle. If a captain was unliked by his crew he was simply put ashore and replaced. Rediker writes that pirate ship also exhibited a great deal of racial harmony. Many were evenly split between black and white, and all races were afforded equal rights onboard. So pirates -- there's a lot you might not know.

PRINCIPAL/AGENT PROBLEMS IN THE COMMENDA? Cameron writes that, with the advent of large-scale sea trade, one of the first forms of economic partnership to evolve was the commenda. And older, more established merchant would provide the capital for a younger merchant to undertake a trading expedition, and the profits would be shared between them--an early method of investment. My question is, wasn't this institution extremely susecptible to principal/agent problems and corruption? In other words, wouldn't it be very easy for the younger partner to screw around and do a poor job (his money didn't stand to be lost) or to misrepresent the size of the profits (there would be no way for the partner to know). Given that the commenda appears to have thrived, I'm interested in find out ways in which these problems were dealt with, if at all. I'll see what I can dig up.

SLAVERY AND INNOVATION, REVISITED Cameron mentions that, though the manorial system kept its peasants in a condition near slavery, in which they had little hope of realizing the gains of any innovations they produced, nonetheless the system gave rise to much productivity-enhancing technological change (the 3-crop rotation, heavy-wheeled plows). This contradicts his (I thought rather bogus) earlier point that slavery stifling innovation helped lead to the fall of Rome. But here, as before, he doesn't really need to make the point. It is enough to have a few enterprising lords with some technical know-how and you have a possible innovator.

THE INEFFICIENCY OF WEALTH I've been reading lately about the labor that peasants "owed" to their lords, and the sheer volume of it is staggering. In many cases men were required, as a condition of their land holding, to work four days a week on their lord's fields. Women spun or wove in the lord's workshops, and children worked as servants in the manor. This surely left little time to work on one's own farms or in one's own household. In addition to the labor tributes, peasants owed their lords many dues in kind. They were customarily required to give he lord a number of sheep or chickens on holidays, on occasion of the peasant's marriage. As time went on, these transfers in kind were often commuted to money rents. Historians estimate that 13th-century British peasants were often obliged to turn over 50 percent of their income to their lords.

In economics, the word "efficient" is bandied about quite a bit, usually when referring to a system that is producing as much as it can in the cheapest way that it can. A system is optimal if it can't be rearranged to produce more stuff (actually it's optimal if no reorganization would make some people better off and none worse off, but given that with more stuff we can give everyone at least what they had before, this works out to the same thing). Because there is no sure way to compare the happiness (usually called "utility") of one human with another, the "stuff" referred to in efficiency is products and services, which are then thought to create happiness. We can't measure and aggregate happiness so we measure and aggregate stuff, which produces happiness, and we know that if we have more stuff we have more happiness, so that is an improvement. Fine. But the thing is, though we can't compare the happiness or two people like we can can compare the houses or two people, I think we can make some pretty decent assumptions. For instance, we can assume that different people have, more or less, the same capacity for happiness--at least they're probably the same order of magnitude. For instance, my happiness on a good day is probably not 10,000 times greater than my friend's happiness on a good day. It's maybe twice, or one half, or roughly equal. Another thing I think we can safely assume is that most people have an upward sloping, concave-down utility curve. In plain English, this means that they derive more benefit from their first $1000 of wealth than they do from their 900th $1000. The first $1000 can get them food, clothing, and a bed--things that it would be hard to do without. The 900th $1000 will get them a very fancy pen. The fact that most people seem averse to risk is consistent with this model. And it seems almost self-evident that, once a person reaches a certain level of material comfort, further material comforts can do little to further improve his or her well-being.

If we make these assumptions about humans (roughly commensurate capacities for happiness and generally decreasing returns to wealth) the picture painted of 13th-century feudal England, in which everyone labors long for the benefit of so few, is a travesty of utility maximization. And indeed, even today whenever wealth is extremely concentrated there is the potential for efficiency gains (happiness, not stuff) through redistribution. Redistribution will lead to efficiency losses (in stuff; redistribution schemes, such as taxation, are thought to entail unrecoverable dead-weight losses) which will eventually counterbalance the gains, so the trick is to find the point where one exactly offsets the other--this ought to be the utility maximum. In general, I'd like to see the word "efficiency" used more often to refer to the creation of utility, not just of stuff. I think the above assumptions about human utility functions are reasonable. Why not use them?

INSURANCE VS. INCENTIVE The matter below about the scattered farms plots has prompted me to wax philosophical about the basic tension between the need for safety nets and the need for realizable gains, in other words between insurance and incentive. It seems the more you have of one, the less you necessarily have of the other. Insurance, more or less, is any method of spreading losses so that no person or group of people is hit so catastrophically that their lives are destroyed. Incentives for hard work, innovation, etc., are based on the promise of gains that are not spread (at least they are weaker in proportion to the degree of spreading). So how can we spread losses and consolidate gains? We can't, or at least we can do it only imperfectly. This is because there is no magical line that separates losses from gains: every loss is a gain forgone, and vice versa. People who are insured have a diminished incentive to not fail (to make gains). The case of communalism is an extreme example, in which gains are spread as much as losses, but every system of spreading losses is in some way also a system of spreading gains.

SCATTERED FARM PLOTS Cameron talks about the communalism of the feudal manor as if it were some sort of dreary, unchangable fact of life, regrettably stifling innovation and growth without any positive benefits. For instance, he writes that the peasants' habit of scattering an individual's plots throughout the whole field system meant that plowing had to be undertaken in common. But he never mentions why they might have done such a rash thing as scatter their plots. Donald McClosky writes in his article "English Open Fields as Behavior Towards Risk" (Research in Economic History, 1976) that plot scattering might have functioned as a primitive form of insurance. Given that crop yields were uncertain, and might vary greatly over a space of only a few miles, two farmers living sufficiently far away from one another could insure against total failure by giving each other a plot of their land. A farmer with plots scattered across a wide area would almost certainly see some of them fail, but would almost never see all of them fail. Miles Kimball argues in "Farmers' Cooperative as Behavior Towards Risk" (The American Economic Review, March 1988) that, under certain levels of risk averson, that full-scale farming cooperatives may have been a rational response. It seems communal farming on feudal manors may have been more than just agrarian sentimentality.

SLAVERY AND INNOVATION Cameron offers and interesting argument about the economic stagnation that contributed to the fall of the Romans. He says that almost all of the manual labor done in the empire at the time was done by slaves, and slaves have very little incentive to innovate. Any gains they make will be enjoyed not by them but by their masters. A device to make work faster will only result in more work assigned. There were also many free people in the Roman Empire with technical knowledge, but were more interested in building momumental architecture than in improving the efficiency of slaves, and anyhow, owing to the extreme class separation, had little intimate knowledge of how manual work was done. Cameron asserts that slavery created an environment in which no labor-saving innovation could take place.

The basic thesis--that slaves have little incentive to innovate--seems sound. But I wonder a little at the idea that rich slave owners would totally ignore the efficiency of their production, if the material payoffs might really be so large. And weren't there indeed labor-saving innovations? I mean, what were those giant aqueducts if not labor savers? And, if I have my facts right, weren't slaves a large part of Roman culture during both its rise and its fall? Where were those stifling forces back when the Empire was prospering?

AVOIDING TAXES A great example of humanity's prodigious ability to avoid taxes (and, generally, the propensity for regulation to distort behavior in unintended ways) comes from the plight of Diocletian at the close of the Roman Empire. The Empire was strapped for money, in large part because the estates of rich nobles had been made tax-exempt. As Diocletian tried to raise money by squeezing the poor with higher taxes, and then tribute in kind, the poor began to flee the land and place themselves under the rule of the nobles. The tax base dwindled as simultaneously the wealth and power of the tax-exempt estates swelled. In a last-gasp effort, Diocletian tried to fix all prices and wages, and then to make all occupations and offices compulsorily hereditary, but despite the large punishments for disobedience the people continued to flee to the "protection" of the nobles. By the end of the 4th century the Empire had essentially collapsed, and the rich private estates were ripe for feudalism.

WHAT SORT OF A NAME IS RONDO, ANYWAY? In an uncharacteristically whack-job moment, Rondo Cameron writes, "Possibly the organizers of the earliest Sumerian city-states were alien conquerers who imposed themselves on a preexisting neolithic population." Huh? This from the guy who drones dryly for chapters about the Hanseatic trading league. I'm not sure if this is meant as humor or genuine speculation. Maybe Rondo is gunning for a consultancy at Fox. Or maybe "Rondo" knows something we don't...

OPTIMAL POPULATION SIZE Yesterday's post on logistics brings up an even more speculative topic, that of optimal steady-state population. Economists usually have in the back of their minds some kind of utilitarian model of social good. Means don't matter, only results, and whichever course of action results in the greatest aggregate happiness is the best course of action. Utilitarianism makes internal sense so long as you deal with a fixed population, but population growth sends it haywire. How do you value the happiness of the person who isn't there? Which is better, a population of 2 at 100 happiness each, or a population of 100 at 2 happiness each? More generally, is it better to have a few extremely happy people or many fairly miserable ones?

Standard utilitarian thinking would seem to suggest that, so long as the addition of a person increases net happiness, it is better to have them in the world than not. If we make the assumption that adding more people does not affect the happiness of others, this implies that it is best for the social good to add people up to the point where their happiness is zero, in other words, to the point where they are so miserable they are indifferent between living and dying. I don't know if this is my idea of a social optimum, but the theory would seem to suggest it. Now if we assume (more realistically) that adding another person to a crowded population will indeed lower the happiness of others, we see that the utilitarian optimum will be reached slightly before everyone becomes suicidal. However, the optimum is not the equilibrium, and each person will still have a positive incentive to live, even if their life creates a net utilitarian loss. Utilitarians would then presumably recommend population control to solve what is in effect a commons problem, though every form of population control I can think of would result in welfare losses perhaps greater than the benefits. We may be stuck with an overpopulated world.

LOGISTIC CURVES I've been reading A Concise Economic History of the World (Oxford 1997, 3rd ed.) by one Rondo Cameron (ridiculous name, anyone?). It's a good bit to try to bite off, for both me and Rondo. You can tell Rondo is a Europeanist who has tacked on a few sections like "Non-Western Economies on the Eve of Western Expansion" as a way to make his title more impressive. But I'm being perhaps too harsh. We live in a world that operates on a Western economic system, so it's not so crazy to devote several hundred more pages to Europe in 1650 than to Africa in 1650. But I digress. In his intro, Rondo has a section about the logistic curve of growth. The basic idea is that a growing thing, like a population, will when left to its devices follow an S-shaped path of slow growth, then fast growth, then slow growth. To learn more about logistics check out this rather weird site that uses Muslim conversion as an example, or this one for the mathy among us. Anyhow, the reason it does this is that growth does not occur in a vacuum, it occurs in a context. And most contexts can only support so much growth. To take population as an example, growth will speed up as population increases, but will eventually level off as the land nears its carrying capacity. In this context, an improvement in technology is anything that increases the carrying capacity of the land.

Human population, according to Rondo at least, has followed several great logistics in the last several hundred years: the 9th to 13th century, ending with the Great Plague, the 15th to 17th century, the 18th to WWI, and WWII onward. He also observes that the average standard of living (in Europe at least) was on the increase during the early and middle parts of these logistics, but then stagnated or even declined towards the end. Rondo writes that "Adam's Smith's remark... that the position of the laborer was happiest in a "progressive" society, dreary in a stationary one, and miserable in a declining one takes on a new significance." He adds that all of the logistics ended with (causing or caused by?) periods of large-scale war or social turmoil.

What does this all mean for the world? Well, one thing it might mean is that the gaps between the logistics saw large-scale technological advances (think of technology broadly construed; not just electronic gadgets but systems of transportation, financial instruments and institutions, ideas about industrial organization can count as technological advances) which effectively raised the bar of possible production and allowed more people to live on Earth. But this seems like backwards reasoning: the theory predicts that you can't start a new logistic without some epoch-making innovation, so therefore every time there has been a new logistic there must have been such an innovation. Some epoch-making innovations are easy to argue (the industrial revolution) but some a little harder (the plague). (Though it could be argued that the plague was a decisive factor in dislodging the feudal system, allowing the development of capitalism, greater sea trade, and so on...) Regardless of whether or not each logistic start can be linked to a specific innovation or suite of innovations, I think the logistic raising an even more interesting set of questions.

Imagine a simplified world in which technological change happens in discrete chunks, total output is only a function of technology (not population), and quality of life is dependent only on output per capita. Imagine tech change is not occurring. The population will then grow to such a point that any further growth will strain it enough to cause fertility to drop, creating an equilibrium. People will be at maximum capacity, and quality of life will be very low. Now tech change occurs. Suddenly, there are more than enough resources to go around. Quality of life rises, and with it population. But alas, as population continues to grow quality of life will go down again until at last it is no higher than before, at the point where strain lowers fertility. Technological change has not raised the standard of living, as it is usually thought to do--it has only increased the population.

Now how different is this from real life? I have uncoupled production from population, which is surely an unrealistic thing to do; population is a factor of production, and more people means more things. But it is not the only factor of production, and some of them (think land) are limited. Suppose now that population is potentially unlimited, but that capital is limited. The law of diminishing returns tells us that increasing population, coupled with fixed capital, can only produce so much. (A growing population will eventually reach a point where the production increase made possible by the population increase is so small it supports no further population increases.) Therefore, given a fixed level of capital and a fixed state of technology, there ought to be a fixed level of production, call it the Production Potential (PP), that is a constant. Now if we live in a world with variable population, variable technology, but fixed capital (again a simplification, but not as a great a one), one should be able to express PP as a function of technology only. Going back to the previous example, we can substitute PP for actual production and get the same result as before, namely that technological change, in the very long run, leads only to population growth, not actual increases in living standard. Temporary increases are again only due to the lag time in population growth.

How then do people improve (have people improved) their lot? Improved technology isn't the answer, because it only leads to more people. Instead, improving technology does the trick. What matters is not so much the absolute level as the direction of change. So long as there is steady increase, population will always lag behind carrying capacity, humans will always live in the upswing of the logistic, and standards of living can remain high. The higher the rate of technological change, the higher the living standard.

There is of course another set of possibilities. One can forcible limit population growth (think China's birth quotas) at a particular level, and enjoy above-subistence standards indefinitely. Once could also introduce inequality into the system. Both solutions would create unrest.

Before I go I need to mention that the things I'm saying are not well-attested in fact--we'd expect to see low birthrates in poor countries, but in fact the opposite is true. However, it is still possible that the predictions (everyone reduced to equal poverty) would hold true in the very long run. But we would never get there in our foreseeable collective future. The population would have to grow immensely to reduce us all to subsitence, and inequalities and population controls would surely interfere before then. And, of course, technology would keep resetting the bar.

SUMMARY OF WHAT I'M DOING Here's the deal with me: I'm a student at Harvard who's recent switched majors to economics. I've traditionally been a liberal-minded etc. etc. type of guy, and thus found the idea of studying economics rather distasteful. In my mind it was wedded to images of salivating stockbrokers clutching wads of paper and screaming about pork futures, and slick capitalists bulldozing indigenous villages for personal gain, and the general malaise of hideous strip malls full of Arby's, tanning salons, and Fashion Bugs sprawling their way from sea to shining sea. Economics for me equalled the science of ill-begotten windfalls, exploiting poor people, and proliferating a culture of excess... the farther away from it I could get the better.

But then my thinking began to change. More and more often I would read articles about one or another topic (the FTAA, the IMF, sweatshop labor, the Living Wage) and wish that I had some better way to understand them, to critique them, some body of knowledge by which I could come to an informed judgement. I took time off from school and went to work for a small NGO in Mexico that funds street children to go to school. The NGO was doing good work but doing it very inefficiently; how could it be redesigned to operate more efficiently and help more people with its limited resources? I gradually decided that I'd do well to learn a thing or two about economics. I started being tutored by a friend of mine who had majored in economics, then when I came back to school I took courses for myself. With time I saw that economics dealt with all the things I wanted to study--poverty, public health, education, housing, the environment--in ways that made sense to me. It was pragmatic and precise, and (ideally) grounded in hard data. After only a semester back I made the decision to change my major and study economics full bore.

Since childhood I've had a proclivity for math, and the mathematically-based theory side of economics came quite naturally. However, I've always been, to my shame, a bit history-phobic. Major events pass through my mind like water through a sieve. If I was going to be serious about studying economics (and through it, the world) I had to have some knowledge of history.

Enter the nice people at the Harvard College Research Program. I've finagled myself a grant to read economic history in my free time--very nice indeed. As part of the terms of this grant I've agreed to keep a weblog to comment on my reading. This is mostly for my own purposes (to keep me accountable and reading critically) but also as a means of sharing my work with my advisor Jeffrey Williamson and with my friends. (If you're neither my advisor nor a friend of mine I am franklyshocked; but if so read on, you're more than welcome.) So without further ado I'll start blogging.

It seems to work.

I'm testing out this crazy blog thing.