Shutting down the party

The study of history is constrained by the need to focus on a limited series of events.  The ability to interpret those events is further constrained by what else the historian knows about subjects relevant to those events.  Economic, political, sociological and other areas of knowledge can all be helpful.  Awareness of similar patterns of occurrence in different places or at different times brings further help in interpreting events.  Such an example is presented in an F.A. Hayek book,  The Fatal Conceit: 
   (full pdf, review)

Governments strong enough to protect individuals against the violence of their fellows make possible the evolution of an increasingly complex order of spontaneous and voluntary cooperation. Sooner or later, however, they tend to abuse that power and to suppress the freedom they had earlier secured in order to enforce their own presumedly greater wisdom and not to allow `social institutions to develop in a haphazard manner' (to take a characteristic expression that is found under the heading `social engineering' in the Fontana/Harper Dictionary of Modern Thought (1977)).
 
If the Roman decline did not permanently terminate the processes of evolution even in Europe, similar beginnings in Asia (and later independently in Meso-America) were stopped by powerful governments which (similar to but exceeding in power mediaeval feudal systems in Europe) also effectively suppressed private initiative. In the most remarkable of these, imperial China, great advances towards civilisation and towards sophisticated industrial technology took place during recurrent `times of trouble' when government control was temporarily weakened. But these rebellions or aberrances were regularly smothered by the might of a state preoccupied with the literal preservation of traditional order (J. Needham, 1954).

This is also well illustrated in Egypt, where we have quite good information about the role that private property played in the initial rise of this great civilisation. In his study of Egyptian institutions and private law, Jacques Pirenne describes the essentially individualistic character of the law at the end of the third dynasty, when property was `individual and inviolable, depending wholly on the proprietor' (Pirenne, 1934:I1, 338-9), but records the beginning of its decay already during the fifth dynasty. This led to the state socialism of the eighteenth dynasty described in another French work of the same date (Dairaines, 1934), which prevailed for the next two thousand years and largely explains the stagnant character of Egyptian civilisation during that period.

 Similarly, of the revival of European civilisation during the later Middle Ages it could be said that the expansion of capitalism - and European civilisation - owes its origins and raison d'etre to political anarchy (Baechler, 1975:77). It was not under the more powerful governments, but in the towns of the Italian Renaissance, of South Germany and of the Low Countries, and finally in lightly-governed England, i.e., under the rule of the bourgeoisie rather than of warriors, that modern industrialism grew. Protection of several property, not the direction of its use by government, laid the foundations for the growth of the dense network of exchange of services that shaped the extended order.

 Nothing is more misleading, then, than the conventional formulae of historians who represent the achievement of a powerful state as the culmination of cultural evolution: it as often marked its end. In this respect students of early history were overly impressed and greatly misled by monuments and documents left by the holders of political power, whereas the true builders of the extended order, who as often as not created the wealth that made the monuments possible, left less tangible and ostentatious testimonies to their achievement.

Another example of drawing upon several elements of knowledge in order to interpret history is provided in the Rodney Stark book,  How the West Won: The Neglected Story of the Triumph of Modernity:

Command economies began with the earliest empires and have lasted in many parts of the modern world – they still attract ardent advocates.  But command economies neglect the most basic economic fact of life: All wealth derives from production.  It must be grown, dug up, cut down, hunted, herded, fabricated, or otherwise created.  The amount of wealth produced within any society depends not only on the number involved in production but also on their motivation and the effectiveness of their productive technology.  When wealth is subject to devastating taxes and the constant threat of usurpation, the challenge is to keep one’s wealth, not to make it productive.  This principle applies not merely to the wealthy but with even greater force to those with very little – which accounts for the substantial underproduction of command economies.

The author goes on to give a specific example from China where a strong government brings a period of meaningful growth and development to a close: 

Late in the tenth century an iron industry began to develop in parts of northern China.  By 1018 the smelters were producing an estimated 35,000 tons a year, an incredible achievement for the time, and sixty years later they may have been producing more than 100,000 tons.  This was not a government operation.  Private individuals had seized the opportunity presented by a strong demand for iron and the supplies of easily mined ore and coal. 

…

Soon these new Chinese iron industrialists were reaping huge profits and reinvesting heavily in the expansion of their smelters and foundries.  The availability of large supplies of iron led to the introduction of iron agricultural tools, which in turn began to increase food production.  In short, China began to enter an “industrial revolution.”

But then it all stopped as suddenly as it had begun.  By the end of the eleventh century, only tiny amounts of iron were produced, and soon after that the smelters and foundries were abandoned ruins.  What had happened?

Eventually, Mandarins at the imperial court had noticed that some commoners were getting rich by manufacturing and were hiring peasant laborers at high wages.  They deemed such activities to be threats to Confucian values and social tranquility.  Commoners must know their place; only the elite should be wealthy.  So they declared a state monopoly on iron and seized everything.  And that was that.  As the nineteenth-century historian Winwood Reade summed up, the reason for China’s many centuries of economic and social stagnation is plain: “Property is insecure.  In this one phrase the whole history of Asia is contained.”

When government maintains law and order without smothering commerce and innovation, people can greatly improve their circumstances.  That balance has rarely been sustained.

deja vu - escaping poverty

Once almost everyone was poor, usually extremely poor.  Eventually there was a significant change.  Over the course of a recent few centuries many people around the world were able to improve their circumstances and live further and further above a subsistence level.  Although there are stories of how brutal this change was, by  revisiting history  we can achieve a more realistic perspective on these past events.  Contrary to the conventional narrative Mark Perry presents a post titled  In defense of sweatshops  offering support for their role in lifting people out of poverty.  One item on the post is a TED talk presented by Leslie Chang about alleged exploitation of Chinese factory workers.  Here are some excerpts from the  transcript:

Chinese workers are not forced into factories because of our insatiable desire for iPods. They choose to leave their homes in order to earn money, to learn new skills, and to see the world. In the ongoing debate about globalization, what's been missing is the voices of the workers themselves. --- Chen Ying: "When I went home for the new year, everyone said I had changed. They asked me, what did you do that you have changed so much? I told them that I studied and worked hard. If you tell them more, they won't understand anyway."… 

So I spent two years getting to know assembly line workers like these in the south China factory city called Dongguan. Certain subjects came up over and over: how much money they made, what kind of husband they hoped to marry, whether they should jump to another factory or stay where they were. Other subjects came up almost never, including living conditions that to me looked close to prison life: 10 or 15 workers in one room, 50 people sharing a single bathroom, days and nights ruled by the factory clock. Everyone they knew lived in similar circumstances, and it was still better than the dormitories and homes of rural China.  

The workers rarely spoke about the products they made, and they often had great difficulty explaining what exactly they did. When I asked Lu Qingmin, the young woman I got to know best, what exactly she did on the factory floor, she said something to me in Chinese that sounded like "qiu xi." Only much later did I realize that she had been saying "QC," or quality control. She couldn't even tell me what she did on the factory floor. All she could do was parrot a garbled abbreviation in a language she didn't even understand.  

Karl Marx saw this as the tragedy of capitalism, the alienation of the worker from the product of his labor. Unlike, say, a traditional maker of shoes or cabinets, the worker in an industrial factory has no control, no pleasure, and no true satisfaction or understanding in her own work. But like so many theories that Marx arrived at sitting in the reading room of the British Museum, he got this one wrong. Just because a person spends her time making a piece of something does not mean that she becomes that, a piece of something. What she does with the money she earns, what she learns in that place, and how it changes her, these are the things that matter. What a factory makes is never the point, and the workers could not care less who buys their products.  

Journalistic coverage of Chinese factories, on the other hand, plays up this relationship between the workers and the products they make. Many articles calculate: How long would it take for this worker to work in order to earn enough money to buy what he's making? For example, an entry-level-line assembly line worker in China in an iPhone plant would have to shell out two and a half months' wages for an iPhone.  

But how meaningful is this calculation, really? For example, I recently wrote an article in The New Yorker magazine, but I can't afford to buy an ad in it. But, who cares? I don't want an ad in The New Yorker, and most of these workers don't really want iPhones. Their calculations are different. How long should I stay in this factory? How much money can I save? How much will it take to buy an apartment or a car, to get married, or to put my child through school?

 I would contend that like the historical experience of English workers had some important similarities to that of Chinese workers.  It was a rough experience, but there was a sense that they were improving their circumstances.

Judging conditions

In light of the revisiting economic history post and the ensuing comments about standards and judgements, this post by Mark Perry at his Carpe Diem blog is quite apropos:

“Workers are paid poorly, only 15-25 cents per hour, and are expected to work 60 hours per week, often in unsafe and dangerous conditions. Sweat shops can be found in every major city across the country. There are no worker fringe benefits, no paid holidays, etc., and unions are nonexistent. Child labor is common, especially providing long hours of grueling manual labor on farms, and farms are so dependent on child labor that schools are not even in session during the peak growing and harvest months of the year. There are no environmental, safety or labor standards to speak of, and dirty black clouds of smoke are a common sight. City streets and sidewalks are often covered with rotting animal waste. People burn garbage everywhere without restriction, and the foul smells and thick smoke from burning garbage are a daily nuisance.”

Sounds like China today? Actually the description above is of the United States in 1900, when it could accurately be described as a “developing economy” by today’s standards.

Now, you should probably read the whole post to follow everything he is saying. He does us the great favor of summing up the key takeaway at the end:

Bottom Line: Advanced labor, health, safety, and environmental standards are luxuries that only advanced economies can afford. The U.S. couldn't afford these luxuries in 1900 and China can't afford some of them today. But just like the U.S. eventually created enough wealth to afford a clean environment, end child labor, regulate safety, and improve working conditions, so will China. Just give it time.

Then this comment makes another key point:

They seriously believe America is wealthy with comfortable working conditions because of labor laws, minimum wage laws, and other regulations.

As economies develop and workers get more productive, they will prefer to take some of their compensation in non monetary form: cleaner safer working conditions, limited work hours, a cleaner natural environment, etc. Employers will usually go along with this both for competitive reasons and because as workers get more productive it is worth doing things that enhance the health and happiness of employees. First comes enough of an increase in productivity, then comes the improvement in conditions. That's what it means for a society to become wealthier.

How workers become more productive and raise their standard of living further and further above a subsistence level is the subject of a future post. That's how workers compete with low wage workers : be much more productive or find a new area of comparative advantage.

ps Say I was in the car business and adopted this innovative way of organizing the work in my factory so my workers became much more productive. I could make more cars at a lower unit labor cost allowing me to undersell the competition and pay my workers more. The really fun part is that I could tell everyone how wonderful I was for paying such a generous wage. Really all I would be doing was following good business practices. Ford had a better idea.

Big Bad China

A friend wrote the following in an email list:

What happens to the US economy if we get into a skirmish with China, between a) they make a lot of the stuff for US companies, and b) they hold a significant part of a trillion dollars in US treasury bills?

I don't think much would happen to the economy. We might have a temporary shortage of poisoned toothpaste or maybe vacuum cleaners, but the total value of trade with China is a bit over $200 billion per year which is only about 2% of the U.S. gross domestic product. Furthermore, except for poisoned toothpaste, everything China makes is also made somewhere else so those other countries could probably ramp up fairly quickly to provide the required production capacity. I think the average person in the U.S. would be unaware of any problems even if trade with China stopped completely tomorrow.

Also, in a "skirmish", China would be unable to do anything with the U.S. Treasuries they hold. We would simply put a "hold" on those Treasury instruments till the "skirmish" ended. These aren't bearer bonds and you can't transfer or redeem them without the knowledge and permission of the U.S. government (or you can "transfer" them, but the buyer is taking the risk that the U.S. decides to never redeem them).

Many people seem awfully afraid of China. I'm not. I'm more afraid for the Chinese. I think they're a very corrupt and backwards country with some very large and potentially very violent hurdles to overcome in order to become part of the 1st world. I wish them luck and I'm not at all concerned about any potential future skirmishes between China and the United States.