Markets Are Thin

When people talk about a “market economy”, what exactly does that mean? You might assume it means a society where all or most economic decisions are made through markets. But this does not describe our own economy, or anything else that gets called a “market economy”. Most economic decisions are made inside particular organizations, which make their internal decisions according to hierarchical structures and individual judgment, taking markets into account as one factor among many. If two workers both want to avoid a Monday morning shift, or two department heads are arguing over hiring policy, or two engineers are debating which design to adopt, no one expects the people involved to start setting prices and bidding against each other like they would in a market. And yet markets are nevertheless crucial to our economic organization, in ways that are notably different from non-“market economies”. How, then, does the market fit in?

What markets make possible is smooth interaction between independent units. Organizations have hierarchical control over their own assets, including very complex social processes like medical schools or aircraft control towers, but they also need to coordinate with other parts of society external to the organization itself, like customers and suppliers. Markets make this easy and reliable. The market is a thin layer of crucial but simple social technology that lets an organization ignore the deep complexity of the people and organizations it interacts with. This is helpful because the market interface an organization presents to the outside world is so much simpler than the non-market-based coordination it uses internally.

In a way, the market is like the docking module between the Apollo and Soyuz rockets. It’s a crucial component, and without it the entire system couldn’t possibly function as a unified whole, but it’s still a relatively small fraction of the system’s mass and complexity. Understanding how it works won’t tell you all that much about how the Soyuz itself works.

Apollo-soyuz.jpg

Of course organizations don’t always relate to each other according to the rules of the “free market”. Perfect markets don’t and can’t exist, and large swathes of the current economy don’t even approximate markets (see e.g. Patrick McKenzie noting how success in venture capital is determined by “access”). Nevertheless, such exceptions are uncommon. Most of our economy is mostly market-based. This means that organizations and individuals can usually use the market as a reasonably accurate guide to how they should interact with the rest of society—and nothing more.

Book Review: The Great Illusion

Normal Angell’s The Great Illusion: A Study of the Relation of Military Power to National Advantage, published in 1910, is the author’s attempt to prevent World War I. At the time, tensions between Germany and Britain were running high, inflamed in part by rhetoric on both sides claiming that a nation’s prosperity—and even its ability to feed its population—depended on maintaining military supremacy. Angell dismantles those arguments, desperately trying to show that there is no economic reason for war before the shells start flying. The book is a strong analysis of the relationship between military power and wealth, and while it obviously did not keep Britain from going to war with Germany, Angell’s model predicted the war’s economic consequences with Cassandra-like accuracy. As a result, Angell was awarded the Nobel Peace Prize in 1933. However, Angell’s model utterly fails to describe the economic consequences of World War II, for reasons which expose the limits and assumptions of Angell’s theory.

Angell’s foes are a host of reputable journalists and academics who claim that trade and wealth are ephemeral without the backing of a strong military. Any nation that lacks a strong military, they argue, will lose the commercial war of all against all to nations willing to throw their weight around. Because international trade could be halted by blockade, or wealth could be seized by a conqueror, such events inevitably will happen to Britain unless she maintains military superiority over other nations in general and Germany in particular. (The warmongers Angell quotes speak with exactly the mix of bombast and pique that I’ve seen in cheerleaders for American wars like Iraq, Libya, and Vietnam, along with the preference for generalities and hypotheticals over concrete cases that is the hallmark of political hacks everywhere. Anyone born after 1995 or so should read Chapter 2 just to get a feel for the immortal rhetoric of jingoism.)

Angell’s main counterargument is that, as the world’s economy has financialized, wealth has become harder to seize. Rather than gold and jewels which can be carted away, wealth has come to consist of companies, shares, debts, and a host of complex financial instruments. The value of these instruments is tied up in the arcane web of international obligations and business ties, and in ordinary investors’ faith in market mechanisms. While it’s certainly possible to seize these financial instruments by force or threat of force, Angell argues, this would cause local market crashes, which would spread and become international market crashes, and the “winners” would lose more money in the crash than they gained in the seizure. So, while a conqueror can certainly destroy wealth, Angell denies that they can gain wealth by force.

Angell also notes that the ongoing prosperity and economic security of small states like Switzerland, Norway, and the Netherlands is a crushing counterexample to the jingoist economic model. These states were doing well in Angell’s time, and the century since then has only reinforced his argument that their people’s wealth is not threatened by their military inferiority, whether from raw plunder and extortion or from more complex international trade deals subtly weighted by military might. Since the book was published, some of these countries have in fact been conquered and occupied, and while this was important politically, it has had relatively little impact economically.

The aftermath of World War I would vindicate Angell’s claims more broadly. The Treaty of Versailles imposed heavy reparations on Germany, the main result of which was hyperinflation and the temporary ruin of the German economy. There was no corresponding boom in the victorious nations, and no British or French profiteers getting rich off of markets and businesses that had once been German. The French occupation of the Ruhr led to strikes and the shutdown of more German industry. Little wealth was transferred and much was destroyed. Many in France were primarily concerned with weakening Germany and so were content with this situation, but American diplomats and financiers tried to prevent the crash.

However, it only happened this way because the victorious nations limited their confiscations to the realm of finance. Note that Angell’s analysis focuses on financial wealth (e.g. gold, money, stocks) and not on the factors of production (e.g. farmland, labor, machine tools).

Angell is correct in noting that financial wealth became much harder to seize after the value of stocks and bonds eclipsed the value of gold and silver. However, military seizure of financial wealth has never been very important in determining the wealth of nations, even in raiding cultures like the Vikings. At most it allowed a few personal fortunes to be made and personal legends to be built. This sort of plunder has often been popular among the sort of risk-seeking young men who today dream of becoming star athletes or founding billion-dollar startups, but it has never been the economic foundation of a society.

The factors of production are a very different story. Military seizure of the factors of production has always been rare and difficult, and success at this task can reshape entire regions. Before industrialization, by far the most important factors of production were productive land and semiskilled labor to work it, so seizing them could only mean settling land (e.g. the Volkerwanderung or the colonization of America), capturing masses of slaves and integrating them into one’s social system (e.g. the Comanche or the Roman Republic), or conquering a productive agricultural society, leaving it mostly intact, and inserting one’s own people into the elite positions (e.g. the Normans or the Manchus). All of these approaches require far more effort and skill than simple plunder.

Since industrialization, the most important factors of production have been heavy machinery, skilled labor, and groundbreaking technologists. World War II shows that, when they disregard claims of legal ownership, modern regimes are no worse at seizing the factors of production than medieval regimes. The Soviets were notorious for shipping heavy machinery out of captured areas, and sending skilled technicians and engineers to work in slave labor camps. The Nazis transferred factories and shops from Slavs and Jews to ethnic Germans. (The best-known beneficiary of this policy was Oskar Schindler, who received a factory seized from Polish Jews and spent most of its profits on bribing the Nazi death machine to spare the Jewish slaves who worked his plundered machines.) Contrary to Angell’s fears, German financial markets did quite well when foreign capital was being seized. Moreover, Schindler and his peers produced vast quantities of useful goods, and that is the true test of economic value, not piles of gold or numbers in a stock exchange. As the Nazi government collapsed, American industrialists looted German patent files, setting research and development forward by years without concern for intellectual property. More importantly, the American military acquired Werner von Braun and other German rocket scientists, who would design the first ICBMs and the rockets that took us to the Moon. This transferred more wealth than all the plundered machinery put together.

Seizing the factors of production at scale is always a bloody affair. It requires mass graves, tearing parents away from children, kicking in doors at 3 AM, and shooting 13-year-old saboteurs in the back of the head. Most people hate doing this, which is a big part of why it’s so rare. Even the architects of the Treaty of Versailles, who are not known for their soft hearts, refused to contemplate something so extreme. But sometimes it happens anyway.

Musings On The Franklin Effect

The Franklin Effect is a concept in pop psychology which asserts that, if Alice does a favor for Bob, then Alice will be more inclined to do more things for Bob in the future. While I’ve observed a real effect like this, I think it’s different from the usual story in subtle but important ways.

The Franklin Effect takes its name from a passage in Benjamin Franklin’s autobiography:

I therefore did not like the opposition of this new member, who was a gentleman of fortune and education, with talents that were likely to give him, in time, great influence in the House, which, indeed, afterwards happened. I did not, however, aim at gaining his favour by paying any servile respect to him, but, after some time, took this other method. Having heard that he had in his library a certain very scarce and curious book, I wrote a note to him, expressing my desire of perusing that book, and requesting he would do me the favour of lending it to me for a few days. He sent it immediately, and I return’d it in about a week with another note, expressing strongly my sense of the favour. When we next met in the House, he spoke to me (which he had never done before), and with great civility; and he ever after manifested a readiness to serve me on all occasions, so that we became great friends, and our friendship continued to his death. This is another instance of the truth of an old maxim I had learned, which says, “He that has once done you a kindness will be more ready to do you another, than he whom you yourself have obliged.” And it shows how much more profitable it is prudently to remove, than to resent, return, and continue inimical proceedings.

The usual explanation for this effect is that it works by changing the giver’s self-concept. Once you do someone a favor, the story goes, you automatically think of yourself as the recipient’s friend, and you’ll be more likely to do friendly things for them going forward.

By now I’ve given and received quite a few favors, and my experience doesn’t quite match this explanation.

As a recipient of favors, I’ve found that it matters a lot what I do with what I’m given. When I make good use of the favor and demonstrate this to the giver, the effect works more or less as described, albeit more weakly than one would assume from a naive reading of Franklin’s text. When I do this *and also* make myself helpful to the giver, this is often the start a deep, ongoing relationship. On the other hand, when I don’t do much with the favor (or on one occasion when the favor was useful but I stupidly neglected to demonstrate this to the giver), the effect is small or negative.

As a giver of favors, I find that I feel very differently depending on whether I think it led anywhere. I do favors for people when I want to help them for whatever reason, and I watch to see which favors result in actual help vs. which seem to go nowhere. (Relatedly, I’ll often give an opportunity to someone I don’t know well as a way of evaluating what they can do.) If it helped, I’m inclined to do more for the person, because I feel confident my future efforts will also be helpful. If not, then I become skeptical of my ability to help the person. I’m wary of pouring too much effort into a project that’s unlikely to work, and I’ll usually cut my losses after two or three failures if there are no other considerations. From watching others, I think this is a very common pattern, even if I’m more explicit about it than most.

Here’s what I think is actually going on: Requesting a favor from a stranger or acquaintance has two important components. There’s a request for charity, and also an overture towards partnership. People often want to dispense limited charity on the basis of magnanimity, civic responsibility, ego, or some such. People also want to partner with good allies or useful coalition members. The Franklin Effect relies on the overture towards partnership. The charity component can help facilitate the early steps of the process, but is otherwise irrelevant as far as turning one-off favors into ongoing relationships.

When you request a favor, some people will consciously evaluate your suitability as a coalition partner, and many more will do so subconsciously. Everyone will notice, consciously or subconsciously, whether you subsequently act like a good coalition partner. This includes social things like showing due appreciation, and also material things like doing favors in return. The latter will work better for people who have real value to offer each other, like Ben Franklin and his rival-turned-friend in the Pennsylvania Assembly.

I sometimes see my friends try to use the self-concept model of the Franklin Effect to get support from influential patrons. They’ll try to get a favor or endorsement from a big name, not because the favor is useful in itself, but because it represents a step forward in the ongoing project of catching the patron’s eye. I rarely see this turn into anything lasting in the way my friend wants. Because they lack the fundamentals that would allow them to become a good friend or ally, my friend can only ask for charity, which by itself is not a foundation for an ongoing relationship.

All this is to say that the Franklin Effect is not a hack to beguile people into helping you. Rather, it is an audition that gives you a chance to demonstrate your worth.

Reputation And Organizational Drift

At the opening of the American Revolution, the state militias were a formidable force. They went toe-to-toe with the British army, then the most powerful in the world, and came off reasonably well. However, by the time of the American Civil War, the militias of those same states had become a joke. Their first serious battle was a litany of logistical and tactical blunders, where “Stonewall” Jackson earned his famous nickname because his men did not immediately run away.

This is unsurprising. The militias of 1776 were sharpened by frequent conflicts against the Native Americans, and had learned from both British officers and native allies. The militias of 1861 were far from the frontier and were led by local politicians and businessmen with no military experience to speak of. No wonder one was more competent than the other. A militia (or university, or retail chain, or…) often functions the way it does because of skilled people in key roles. If those people leave or lose motivation or get reassigned, then the organization will become very different. Whether it’s a restaurant losing its manager, or a militia losing its veteran commander, the dynamics are the same.

If new skilled people arise or gain power, this will also change the organization. After Paul Graham retired and Sam Altman took over Y Combinator, the company expanded from its previous role as a startup incubator and investor. It is now also a central industry hub, as well as an interface between the startup scene and adjacent sectors. This is mostly due to Altman’s skill at networking and making durable alliances.

Skill isn’t the only dimension on which organizations can change. They can also change their purpose. For example, in 1800 the United States military was built for frontier defense, but by 1900 it was built to project power externally. Also, in 1963 the counterculture movement was about reforming a corrupt society via moral and legal pressure, but by 1973 it was about seceding from a corrupt society via sex, drugs, and rock and roll. If an organization’s mission changes drastically, then it may lose the skills needed to carry out the previous mission as the old generation dies off.

All this may seem like a banal point, and in a way it is. Organizations change. Everyone knows this, at least in the abstract. Nevertheless I see a persistent error where many, many people make predictions based on stories of an organization’s previous form in a way that is utterly incompatible with the realities of its current form.

Among the most striking examples of this phenomenon is labor unions. Contemporary unions rest their claim to auctoritas on the victories of unions from the late 1800s and early 1900s. At the time, unions fought—literally fought, with truncheons and bombs—against factory owners who used private mercenaries and sometimes public police forces to violently suppress any independent power bases among the working class. The unions succeeded, establishing an organized power base and using this to negotiate for higher standards of living, then enshrining their victories (the 40-hour 5-day workweek, the concepts of minimum wage and overtime pay, etc) in law and custom.

Today’s unions present their activities as the continuation of this struggle. They claim that the mission of “get higher wages and better working conditions for our members” has remained constant, and that any differences in their tactics are a sensible response to changing circumstances. There’s a narrow sense in which it’s true that both groups would endorse that mission as a subset of their goals, but from the broader perspective of trying to predict how an organization will affect things we care about—which is the only reason it’s worthwhile to bother with this sort of analysis—this is as spectacularly unhelpful as drawing structural parallels between the engineers who designed the Minuteman missile on the one hand, and the actual Minutemen who Paul Revere rallied on the other, because there’s a line of institutional descent between them that maintained the mission “defend America”.

When looking at the structural factors that determine an organization’s capabilities and its effects on society, contemporary unions are nearly as different from their historical predecessors as the military-industrial complex is different from a citizen militia.  Historical unions fought the state; contemporary unions are a branch of the state. The main negotiating tool of historical unions was illegal or legally-gray strikes; the main negotiating tool of contemporary unions is the bureaucratic application of legal privileges. Historical unions were mostly made up of the industrial proletariat, and fought on their behalf; contemporary unions are mostly made up of government service workers, and fight on their behalf. Historical unions were ideologically committed to expanding their membership into new areas in order to carry forward the class struggle; contemporary unions are uninterested in class struggle because their leaders are no longer working class, and are uninterested in dramatic expansion because they lack the ideologue’s soaring ambition.

This is all fairly abstract, so let me say it more directly. If the John L. Lewises of the world were around today, they would be organizing workers to illegally seize warehouses from Walmart and Amazon. From their perspective, capital still controls the world, and labor is less organized than in the unions’ heydey, so similar action would be justified. Their self-styled heirs would never do anything remotely this extreme. Even if they wanted to, they don’t know how. This means that their role in society is utterly different. It may be that contemporary unions are a force for good, but if so then it’s good as conceived of by Teddy Roosevelt rather than by Emma Goldman. The only thing today’s unions have in common with their historical predecessors is a brand.

This is an unusually stark case, but similar situations are common. Organizational continuity does not come about because of some metaphysical property of the organization itself. It does not come merely from people’s duty to the stated mission, or from adherence to procedures and org charts, or from new members automatically assimilating to the culture. Rather, continuity comes from an organization’s current members using selection, training, and internal structure to shape the organization’s future membership. There is continuity only to the extent that these mechanisms produce it. You can evaluate this by comparing an organization’s past and present activities, or its past and present people and culture, or even by looking at the mechanisms of continuity themselves.

While many organizations live up to their old ideals, many others will mislead you by claiming to be more like their predecessors than they actually are. If you don’t want to be fooled, you need to be able to look beyond an organization’s brand—the restaurant down the street, the AFL-CIO, the Catholic Church, the company offering you a job, the New York Times, or whatever else—and see its people and institutions as they exist today.

No One Can Explain The Dominance Of Cavalry

The historical consensus holds that the invention of the stirrup was a major development in military history. By permitting the horseman to keep his seat, the simplified story goes, the stirrup changed the dominant strategy from the infantry-based armies of antiquity to the shock cavalry-based armies that came to dominate in the middle ages.

This story seems to make sense. The change in the composition of European armies is real and needs to be explained. (Infantry remained the numerical majority of most armies, but heavy cavalry became more important in determining the outcome of battles.) Horsemen without stirrups used different equipment in different ways than the stirrup-using knights we’re familiar with. The cavalry charge against massed infantry is almost unheard of in antiquity but becomes an extremely important tactic from the early middle ages until well after the ubiquity of firearms.

However, there is no historical consensus on when the stirrup became important in Europe. I’ve seen serious claims ranging from the late 300s to the late 700s. There’s sharp disagreement over very basic claims, like “Was the Battle of Adrianople a triumph of cavalry over infantry?” or “Did the Carolingian military use stirrups?” (I haven’t checked whether these questions were resolved by recent archeological work, but if the answers weren’t obvious 40 years ago, that’s still a notable fact.) The history of the stirrup before it reached Europe, e.g. in India or central Asia, is no clearer.

This is super weird. If the stirrup was such a huge deal, shouldn’t we be able to see its effects? If a historian in the year 3000 were trying to date the advent of the machine gun, and only had fragments of secondary sources and doubtful archeological scraps, it would still be possible because the machine gun so greatly transformed strategy, tactics, and the experience of individual soldiers. (The American Civil War is the only case I can think of where a smart scholar might get the wrong answer.) This is what we see for other massive shifts in historical weapons, such as chariots, castles, and artillery. If the stirrup were anywhere near this important, its effects should be similarly visible.

I’ve read all these historians arguing about the minutiae of manuscripts and archeological finds to set dates on when the stirrup was used where, but if their basic claim about the importance of the stirrup is true, then there should be much simpler avenues to answering the question.

At this point, I’m inclined to think the stirrup was not as overpowering as is commonly asserted. Important, yes, but important on the scale of chainmail or the rifled barrel, not on the level of the phalanx or the nuclear bomb. Not important enough to explain the transition from armies dominated by infantry to armies dominated by cavalry. If it were, its history would be more apparent.

If true, this raises two questions. The first, why so many historians have overstated its importance, is relatively easy to answer. For one thing, contemporary prejudices favor explaining large-scale trends as the natural consequence of technological development. More importantly, historians are like anyone else in that they are biased towards simple and compelling explanations for things. The story of the stirrup transforming combat has enough truth to it to lay the foundation for such a narrative. It fits very well from a purely local perspective. In contrast, broad sociological outside-view checks like the one I’m running here seem, if not rare, then at least uncommon.

The more difficult question is why Europe transitioned from infantry-based armies to cavalry-based armies, if not for stirrups. I’m not sure. It could be a combination of technological factors: larger horses, improved saddles, better armorsmithing, horseshoes, and the temporary loss of the composite bow, together with stirrups, producing a combined effect greater than the sum of its parts. It’s possible, but I don’t trust this type of explanation. Strategic considerations are usually Pareto-distributed in importance, and one major factor tends to overwhelm many medium-size factors.

It could be a matter of economic and social organization: the sharp division between landholding knights extracting wealth from their tenants on the one hand, and peasant farmers with little capital on the other, led to a combination of arms that was perhaps inefficient from a purely military standpoint but crucial with regard to internal coherence, thus leading Carolingian-style feudalism to succeed and spread in spite of some necessary overemphasis on heavy cavalry. This strikes me as plausible but far from certain. The institutional and cultural prominence of knighthood in Europe is consistent with this story, at the very least.

A more exotic version of the prior hypothesis is that Europe transitioned to cavalry not because its cavalry was strong, but because its infantry was weak. If feudalism made it institutionally and ideologically difficult to raise large masses of competent, well-equipped infantry, then perhaps this explains the shift.

I’m not confident in any of these explanations. The more I look into this, the more I think the dominance of cavalry in medieval Europe is a mystery that still needs to be explained.

Movements Without Strategists, And The Dissolution Of The British Empire

In The Anglo-American Establishment, Carroll Quigley presents a case study on the Milner Group, an association of British politicians and intellectuals that was more than a club and less than a political party. This case study illustrates a common phenomenon that limits the impact of competent, ambitious groups.

Quigley argues that the Milner Group played a decisive role in guiding the trajectory of the British Empire through the early and middle 20th century, especially the establishment of South Africa and the Empire’s later dissolution into the Commonwealth of Nations. However, his description presents an apparent contradiction. On the one hand, he paints the Milner Group as a driving force which shaped the path of British history for nearly a century, and enumerates many key events in which they played a major role. On the other hand, most of the individuals he describes seem unexceptional, and the events he chronicles (the consolidation of South Africa and the independence of South Africa and India) seem very similar to other events that were happening without the Milner Group’s influence (the consolidation of Australia and independence of Australia, Canada, and Ireland).

The Milner Group’s members are mostly people of solid but not remarkable competence. Most are politically adept, good at running projects, or both. They can do reasonably good work, but often need a lucky break or source of connections to attract the notice of an influential patron who dispenses appointments. They are held together by a combination of personal connections and ideological agreement, and ideological agreement is common enough that many people can be recruited this way. The visionary leaders, Alfred Milner and Lionel Curtis, advance a rather tepid vision that mixes federation and egalitarianism as the path to a flourishing civilization.

The group has some competent planners but no strategists worth the name. Quigley laments that their long-term plans suffered for lack of an economist; by this he seems to mean a person with a comprehensive theoretical understanding of how societies function and change. Without such a person, it’s impossible to take a strategic approach to the sort of global statesmanship and memetic engineering that the Milner Group engaged in.

From this and the apparent counterfactual inevitability of the Group’s accomplishments, I believe that the Milner Group was a moderately competent group whose objectives were downstream of broader memetic trends and power dynamics. They were reasonably good at accomplishing the goals they set, but had they not done so, someone else would have tried to accomplish similar goals at a similar time, and probably succeeded (although likely not so well or so quickly). This explains why they had such an easy time finding ideologically sympathetic recruits, why the rather unremarkable visions of Milner and Curtis were sufficient to inspire them, and why they had little trouble with defection despite the lack of formal oversight.

Thus, while it’s true that the Milner Group was involved in historically significant events, their counterfactual impact was modest. They likely determined the particular clauses in the Constitutions they wrote and the precise place that various borders were drawn, but it’s unlikely that they affected major trends.

Comparisons to contemporary groups are left as an exercise for the reader.

What Is Power?

Power is all around us. We swim through it like fish. It touches every part of us, and it is so vast that it can be difficult to see.

Power is the men in the glass building deciding where to invest. Power is the men in the marble building deciding where to bomb. Power is the man with stars on his shoulders and a red phone in his hand.

Power is the man in the lab coat who tells us that carbon emissions are too high. Power is the woman in the pearl necklace who tells us that graduation rates are too low. Power is the man with the flag on his lapel who tells us that the budget is just right.

Power is the woman at the newspaper who says someone should run a story about this hot new trend. Power is the man at the movie studio who says there will be more female leads this year. Power is the man with the book deal who says we can fix the Middle East.

Power is all of these things. But power is not just something that happens far away. Power is all around us. We swim through it like fish.

Power is your parents moving you to a new school where you don’t know anyone. Power is your brother screaming and screaming until your mother lets him have the top bunk. Power is your friends in the group house holding an auction to decide who gets the bigger room.

Power is game nights moving from Thursdays in San Francisco to Fridays in Berkeley. Power is the Dungeon Master refusing to let your boyfriend join the game. Power is knowing that you could run your own game.

Power is convincing your group leader to shift the project focus in a better direction. Power is the operations team reorganizing the furniture in the break room. Power is choosing what story the website will tell.

Power is all around us. We swim through it like fish. It touches every part of us, and it is so vast that it can be difficult to see.

Power is nothing but the ability to get things done. And everyone has things to do.