Disclaimer: I am now retired, and am therefore no longer an expert on anything. This blog post presents only my opinions, and anything in it should not be relied on.
What I am talking about here is a history of West Africa circa 1200-1850 called “A Fistful of Shells”, by Toby Green, and a white paper by Samuel Bowles and Wendy Carlin analyzing CORE’s “The Economy”, a new multi-sourced introductory Economics textbook. Both seem to me to provide different and troubling new ways to view economics as a whole; your mileage may vary.
Let’s start with Green. Imho, his argument runs something like this: a trade in gold (sub-Saharan Africa providing, North Africa/Europe/Middle East benefiting) sprang up, supplemented and then replaced by a trade in slaves. These slaves were a natural outgrowth of previous uses of slaves (acquired in warfare, or involving criminals and excess population) both in Africa and Europe/Middle East.
The initial result was positive economic growth. The single source of the gold was iirc in Senegambia, and the people there carefully protected themselves and their mining from discovery and takeover, so the rest of West Africa began to be drawn in as middlemen. Kings with control over some aspect of the trade arose, and were able to siphon off some of the profits to establish and maintain power. Thus the Mali and Songhay “empires”.
However, the trade relationship was fundamentally unequal. Cowrie shells, especially those imported from the Maldives, were used locally as currency (as well as cloth and iron bars), but the fact that cowrie shells were relatively easy to produce made any currency exchange highly unequal – there are records indicating that some kings attempting a pilgrimage to Mecca had to pay in gold along the way, finally running out and then incurring debts that eventually led to the downfall of their kingdoms. When the need for slaves for the New World surged, it effectively acted as a replacement in the economy for the decreasing demand for gold. And when export of slaves to the New World ended, it was replaced by slavery within the kings’ domains.
Moreover, the new slave-based economy had its own subtle traps. Carried to an extreme, as it soon was, it meant the impoverishment of those outside the kings’ and European traders’ political control, as they moved to isolated and protected communities to escape the slave raiders. Even within the scope of the new polities, the proportion of those in danger of slavery went up, and hence the economic benefits, such as they were, went to relatively few compared to the situation north of the Sahara.
Analysis of Green: Commodity/Currency-Based Economic Inequality
Green’s conclusion is, I think, worth quoting: “an expansion of trade on the one hand [from Europe and the Middle East] provoked less access to the wealth of capital on the other [for West Africa] … growing capital differentials [were] exacerbated by the trade of currencies that were losing economic value globally – such as cowries and cloths – for those that were either gaining or producing surplus value, such as gold and human beings … When currency imports to [West] Africa were not matched by trade goods, there was inflation of currencies used in Africa … When trade goods were also imported, these competed with local production and reduced extensive exports of African manufactures … This declining export deterred investment … in manufacturing …” In other words, a strong degree of participation in the global economy fostered from Europe from 1400 onwards did not result in comparable or even major improvements in living standards for most, or even GNP, in West Africa. We can say of the impoverished societies in East Asia that much of the explanation might be that they were not included in this globalization; clearly, that explanation does not hold for West Africa (and, I suspect, for some sub-Saharan East Africa as well).
This also ties in with an observation I have had in much other recent reading as well: countries that wind up in an unequal economic relationship in which they become “one-trick ponies” dependent on things such as gold or coffee or bananas typically don’t fare as well in the long run, as the value of these is much more volatile and prone to long strings of bad luck, and often is superseded as tastes or technologies change. So Argentina with its specialization in beef, Latin and Central America with its colonial focus on gold and silver, Puerto Rico with its history of specializing in whatever the US felt was its proper commodity, West Africa for slaves, El Salvador with switching over to coffee production and then finding it could no longer provide subsistence agriculture for its population, not to mention the great difficulty in the US before about 1815 in breaking out of its unequal “enforced commoditization” relationship with Great Britain. We view countries like Saudi Arabia with its ability to convert oil into a thriving economy as the norm, whereas they should perhaps be viewed from a global economic point of view as an exception.
I believe that we should perhaps view this kind of almost-zero-benefit unequal relationship as a fundamental feature of capitalism – because in many of the cases cited, the workings of trade and capitalism were proceeding to some extent independent of government action. We have congratulated ourselves on the rising tide of capitalism floating the boats of all nations willing to participate in global markets on capitalistic terms – if we are talking about countries producing computer chips, perhaps this is so; if oil, pace Venezuela, the picture is very mixed; if coffee, it seems not to be true. And the danger of capitalism is that, once a country commits to a particular narrowing of its economy, it may become harder rather than easier to recover from having the wrong product to export.
I find this to be a sobering thought. It suggests that rather than demanding a country or region fit into the needs of capitalism, sustainable economics will require that capitalism fit the needs of the country: e.g., diversified, sustainable agriculture to be enforced as the cheapest long-run product. It also suggests that a world economy that is a mix of governmental technocratic command-and-control and capitalism will actually do better in some cases than a capitalism-focused economy. Certainly Sweden suggests so.
Analysis of Bowles/Cardin: Economics as a Branch of Sociology
Over the last 10 years, the failures of many economists in the face of the Great Recession have led to calls to fundamentally rethink economics as a discipline and as it is taught. The recent white paper by Bowles and Cardin represents a comprehensive way that strands of economics that are presently treated as patches to economic models can instead be viewed as the essentials of a different way of looking at economics and teaching it.
Again, it is worth quoting the abstract: “new problems now challenge the content of our introductory courses: these include mounting economic disparities [income and wealth inequality], climate change, concerns about the future of work, and financial instability”; to which I would add that these also challenge the effectiveness of present macro- and micro-economics in guiding the analyst and decision-maker. What I believe the introductory textbook cited does is to place existing but under-used “tools” at the center of economic analysis – specifically, “strategic interaction, [operations of markets in cases of] limited information, principal-agent models, new [real-world] behavioral foundations [that can determine what economic models best fit real-world data], and dynamic processes including instability and path-dependence.”
By using word-frequency analysis, Bowles/Cardin establish clear differences between this and two previous generations of economics introductory textbooks as a proxy for the economic linguae franca of our world, the two previous generations being Samuelson’s post-WW II textbook and the recent textbooks of Krugman/Wells and Mankiw. In other words, the new textbook and the new approach to economics really are in some sense fundamentally different.
I would argue that the differences derive mostly from this: the tone and organization of the new textbook really treat economics as a branch of sociology. That is, they start with an analysis of economic group behavior as it shows up in current issues, not with a model of economic processes that then attempts to shoehorn in real-world data by assumptions such as rationality and self-interest. The result is a stance that asks where government regulation, command-and-control, operation outside the economy, and more unfettered markets are appropriate, rather than a treatment of the first four as patches to assumed (but rarely if ever achieved in the real world!) perfectly competitive “free” markets.
Here’s a (to me, startling) example of the new thinking: “it is impossible to write enforceable contracts for worker effort in an information-scarce environment,” so “firms will set wages so that there is always a cost of job loss for workers [i.e., a little higher than they might, so that workers clearly have an incentive to work because they care about their relative income when laid off or in another job] … As a result, there is involuntary unemployment at the equilibrium of the labor market. This is not … a deviation … caused by … wage rigidities, minimum wages, monopsony, or unions … the intersection of demand and supply functions does not exist and is [replaced] by the Nash equilibrium of strategically interacting principals (employers) … and agents (employees).” We’re not on Wall Street anymore, are we, Toto?
Implications of Both
It seems to me that both Green and Bowles/Cardin share one suggestion about the future of economics: It is no longer adequate to see capitalism as the answer to everything, to view it as everywhere superior to the alternatives, now and in the future. Rather, both suggest that we are dealing with a world in which, historically and now, government, capitalism, command/control, and non-economic activity are necessary parts, all of which must be viewed as operating in more and less effective ways than the others in both the short and the long run.
In particular, I view this as a challenge from economics to that peculiar libertarian dream, of combining little or no government with “free” markets. What Green and Bowles/Cardin are saying is that capitalism alone will lead to bad outcomes, if not to a reinstitution of (poorer) government by the capitalist in his or her own interests. I view bitcoin/blockchain as a direct confirmation of this: the ideal of self-regulating contracts, money, and markets simply leads to inefficiencies, greater imbalances between principal and agent, theft by hackers, and Ponzi schemes preying on the limited information of investors.
But I also gain hope from both of these texts. If there is a hope of sustainable economies in the future, it begins with placing the cart of capitalism behind the horse of sustainability, and accompanied by the carts of government, our own personal and societal efforts, and WW-II-like command/control of parts of the economy, at least in the short run.
It may not be the Grand Unified Theory of Economics, to replace what was smashed in 2008. But at least, for the first time in a long, long time, we might be beginning to say that what economics teaches us reflects fairly well what we see with our own two eyes in the real world – the altruism and its benefits, the self-centeredness and its costs, less obscured by frantic handwaving and theories.
Final note: in rereading this, I find I have underplayed the role of innovation/technology in the “new economics”. For those curious about this, I suggest they sample the CORE introductory economics textbook referenced above, available online.
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