Trust and Economic Development
by Jack Powelson
Why do some nations develop more economically, and some less so? Forty years ago I thought this was a pretty good question, which I decided to research. I worked on it 25 years. It became too long, so I cut out the section on the history of land tenure and land reform and put them in two other books. Centuries of Economic Endeavor, was finally published by the Unversity of Michigan Press in 1992, with almost 500 pages. Now I have decided to condense the whole book into an essay of only two pages, in which I omit the illustrations and country pages (where all that I describe below really happened). Instead, I define meanings, and after you read them, I believe the history and/or theory will become apparent.
Power. I define power as the ability to force others to one's will. This definition is not totally acceptable, because there are different kinds of power (e.g., military and political). But it will do for now.
Power diffusion is the degree to which power is spread among people. A country's power may be defined by population, income, ability to produce, military, or other. But if power is diffuse, economic development occurs more easily.
Why? Well, how big should a company be, in a given field, in order to display competitive power? Despite the uncertainties, Centuries argues that, for the most part, concentrated power such as that of the United States works against the economic development of the world.
One object of power diffusion might be to make the "bottom line" of businesses correspond with the ethics of the country. We will also try to find out whether the ethics of many countries must be similar, or is it better that they all be different?
Leverage. Suppose A and B are upper-ranking groups (e.g., nobles and king), who fight each other. Suppose, also, that C is a lower-ranking group that uses whatever power it has to tip the balance in favor of one upper contender, expecting a reward if the upper group wins. C is using its leverage. If the upper group that it chose loses, then it bides its time until the next opportunity.
Power diffusion process. If leverage is used over and over, for centuries (note name of book), to create ever-greater power for lower-level groups, the process may be known as economic development. Why has this process happened in some countries more than in others?
A segmented society is one in which the upper class acts as if it is the whole country, using its power (of money, etc.) to determine that the lower classes think and do as it wishes. Likewise, an unsegmented society is one in which the power diffusion process has run sufficiently for all classes to have similar power in important respects.
Vertical alliances are formed between upper- and lower-class groups as part of the diffusion process. Horizontal alliances are made among groups on the same business or social level (e.g., unions of workers to face management), at first horizontally and later vertically.
Trust among peoples occurs with centuries of interaction (mainly of trade). Early on, nations fight each other. As each comprehends that the others have goods or technologies wanted by themselves, they learn to deal with each other: trust builds up among them. Increasing trust leads to more and freer trade, and vice versa, in a powerful self-reinforcing cycle.
An institution is a way of interacting among groups, while an organization is a human-made segment of society. (In common parlance but never in my book these two words are often used interchangeably.) For example, the monetary system is an institution, while the International Monetary Fund is an organization. A free market in institutions means that institutions may be formed freely, which is a necessity for the power-diffusion process.
Duncan Foley recently published a book entitled Adam's Fallacy: A Guide to Economic Theology, declaring that Adam Smith's mistake was to exclude from economic theory the use of leverage, and vertical and horizontal alliances (my terms), and similar maneuvers of a political nature. In this view it was a mistake to conceive of economics as a tidy realm governed by individual self-interest, entirely separate from (and insulated from) the "morally more problematic issues of politics, social conflict, and values". To restate this in my terminology: power diffusion is critical to economic development. (For more on this topic, see "Economics: The Invisible Hand of the Market" by Peter Steinfels, in the NY Times, 11/25/06.)
Now that the definitions have been set forth, the theory of economic development in Centuries is ready to be integrated with other theories, in such a way that free trade takes its place along with entrepreneurship and good management. You can guess where this takes us, and you don't have to read the book.
Sincerely your friend,
P.S. Centuries of Economic Endeavor has been re-named A History of Wealth and Poverty; it is on the web. Just visit http://tqe.quaker.org/wealth-and-poverty .
Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer!
Editor's Note: This essay by Jack Powelson caused an extensive email debate among members of the Editorial Board and others who received an advance copy for comment. The comment section begins some excerpts from that debate.
Let us grant arguendo that power diffusion and the growth of trust work on behalf of increasing a society's "development," i.e, its overall wealth.
My question: does the process also work in reverse? Can erosion of trust, and the migration of wealth to the top of a society break down the "development" it has achieved?
Such at any rate is the overall thesis of many on the labor side of the fence that I listen to these days. They argue that just such a wealth migration has been occurring, and that our once-"wealthy" (as a group) middle class is being steadily hollowed out, and call for "drastic action" to reverse the trends.
From my layman's perch in the Carolina boondocks, these claims seem to be verified by experience: Over five years here I have watched factories leaving by the dozens, taking middle class wage jobs by the hundreds of thousands with them, to be replaced mainly by Wal-Mart and its ilk, with their minimum wages and crappy "benefits."
This process has been massively abetted by a politics and religion which for years have worked very skilfully to divide various segments of the population here into mutually suspicious, barely-interacting camps.
Some of these camps are very well-armed, and while they don't shoot at each other much at the moment, the rhetoric is there, and on some days I think it would not take much to make it happen. In the meantime, though, the horizontal and vertical alliances Jack speaks of as major engines of advancement seem largely to have disappeared, replaced mainly by distorted crazy house doppelganger alliances, in which many people here seem to connive at their own collective disinheritance.
Altogether, it sure looks to me like a "century of de-development" is upon us here unless you live in one of the scattered, gated communities inhabited by the winners of this process. But this only reinforces the conclusion that I am seeing Jack's process operating almost precisely in reverse.
To be sure, I lack the erudition and skill of some economists, who can explain in numbing detail how none of what I see is really happening. But I know Jack is of better, more honest stock.
So to him and others of like mind, the query stands: is what I have seen this process in reverse? And if so, what is to be done?
Chuck Fager, Quaker House, Fayetteville Ft. Bragg, NC.
Sitting in a dying industry newspapers and waiting for our union to reach a contract with our new management is a snapshot of what everyone's talking about. While I may be able to "put together my own job" elsewhere, I won't have health care, pension or any paid leave and I won't be paid what I am now. This has real world consequences on, for example, the Friends school where I sent my kids on my middle-class salary plus my husband's. In that school there were many two-newspaper families but the new crop of newspaper employees will not be able to afford a Friends School education because the new crop will be contract workers being paid much less.
Yes, there will be new jobs in on-line journalism that we can barely envision now. New cartoonists will animate their work and it will earn them a living being broadcast online and on TV.
But there are other consequences to this contraction. Where my old chain once had foreign bureaus, they are now gone. The New York times spends $50,000 a month on security costs alone to protect their people in Iraq. They don't get anything near what they need to support that presence from the online advertising they are generatiing on their website. There will be fewer professional journalists and I will defend my brethern here from the knee-jerk carping I hear from Quakers on this subject.
So, basically, both sides are right in this argument. I know this isn't fashionable in TQE circles, but I do think some form of universal health care must be worked out. That way as geezers like me and even my younger colleagues who are out of work because of the changes in the economy and technology, would have that security to allow them to go from one place to another. It would also relieve company owners being the health care providers.
I've got to get back to work, while I still have a job.
And then after universal health, universal education, universal food care, and universal housing care?
What is so special about health care that isn't equally special about education, food, and housing? Yes, I realize that we now have universal education. And at least once a decade everybody says "geez, but our schools suck. Let's reform them," and we get education reform. But nobody is ever willing to fix the real problem: that schools don't have to compete for parent's dollars; that schools aren't subject to the discipline of the market; that schools are political, not market entities.
I can wait a long time for universal health care, and even longer for the inevitable health care reform.
And yes, I realize that today's health care funding system sucks. Laundering money through the government and insurance companies (which are, except for high-deductible insurance, entirely a creation of the government) is insane. I agree with you that we have gone down the wrong road. Continuing down that road to full socialism is much worse than turning around.
Has anybody considered getting government out of the affair entirely? Yes, poor people need help; the system of self-funding by hospitals and doctors for indigent care worked fairly well. Why did we abandon it? Mostly because a lot of people were convinced that socialism could be made to work, so all the old systems of mutual aid were dismantled and replaced by government entitlements.
Here in Philly we have the most charter schools of any city in the country competing for our children. Overall, their scores aren't better than the public schools' which are rising. The city's public and public charters get approximately $5,000 less per child than the schools outside the city, which are popular and produce very high test scores (taking in children largely from very high income people who read to their children from an early age or have their au pairs read to them). Friends Schools pay even more per child and brag about their high test scores from families with really high incomes. It's a great system.
A dear free-market colleague of mine who argued your line in countless articles and columns in my newspaper died and his wife started a charter school in his name. It's great, but she says that her husband "used to say education wasn't about money or unions..... It's all about money and the unions."
Health care is different because while its costs are predictable across a population, they aren't for an individual (at least, not yet). An individual's health care costs can be catastrophic, which is not the case for other basic needs (education, food, housing).
The main reason why you and I and the other newspapers don't have what we used to have is that the government has had the privilege (by taxes and creating inflation) of spending our resources on a war in Iraq instead. Without that war, there would be no problem in sending kids to Friends' schools.
Your industry is dying because other technology now takes its place. Overall, the standard of living of poor people today is many, many times greater than it was in the Middle Ages. The data tell us it has grown faster in countries where the poor were allowed to do what they wished and were not bowed down by their government. I propose take we take every dollar now given to the government to take care of the poor, and give it to the poor directly instead. With the poor in charge of their future, they will get it right or not at all, With the government in charge, they never will eviscerate poverty. All over the world, the government has been in charge of the poor for centuries, but poverty has not ended. Instead, the government cannot agree with itself how or whether this or that should be done. A war in Iraq is better to spend money on than schools, isn't it?
There have, of course, been many instances of temporary reversion, always however turned around again. Progress has been slow, but occurring.
Why are your or my children more deserving than Zimbabwean children who cannot enter Friends schools because they haven't enough money to get there? Mainly, I think it is because of their government that they don't have the money.
I agree that there should be universal health care, but why does the law tell us what kind and how much? Why not set a minimum earning power and have the government pay, directly to the poor, the difference between that and what they actually earn? One reason why not is that "people cheat," but we might handle that by addressing the cheating, not by providing the health care that encourages the cheating.
A problem that perplexes me is a feeling that our great institutions, defined in the broadest sense and consistent with Jack's definition of established ways of getting things done, are somehow slipping.
This decline may come from internal forces such as problems in schools or an increased propensity to intervene militarily, or from external sources such as commercial competition from China. To combine the internal and the external, the holes created by those jobs that Chuck sees going East are less likely to be filled because of a breakdown in public schooling.
Following this hypothesis, the members of the workforce at the bottom end are less likely to be able to find work because their training is weak or irrelevant. Their motivation may be diminished because their relative capacity to respond constructively in searching for other work is stunted. Skill acquisition among the most vulnerable workers may not be keeping up with advances in technology and communications. Better schooling could be a basis for better workers, but it would take the span of a generation to turn this problem around.
A recent press report indicated that public sector workers' average pay and perks is now about twice that of private sector workers. This suggests that the government is no longer the residual employer. More importantly, it implies that the incentive structures of large bureaucracies, such as those in unionized public education where there is little parental choice (a captive audience), weigh down the overall amount of zest in society. No bureaucrat left behind while workers at the bottom end languish.
J.D. Von Pischke.
I believe Jack somewhat misread me. I know I'm in a dying industry and it's changing because young people get their news elsewhere and for free. I'm perfectly well aware that my immediate situation won't last forever and something new will replace us, war or no war. As I said, my own end of the biz is changing so people can capitalize on the web, i.e. animating.
When I say universal health care, I realize there are many ways to deliver it and have no problem with plans other than a one-size-fits-all that make sure chiropractor services are covered.
But what drives me crazy is that theoreticians can opine about other people's jobs blithely without truly feeling the brunt of what "creating your own job" means in the real world. Not much changes in academia (except the salaries at the top keep skyrocketing). My colleagues are fleeing to academia because they can teach whatever they want, get paid, and receive health insurance to study how other people in the real world ought to get theirs. Heck, our former publisher left the "profit" sector and went to academia where he makes more money.
My solution would be to have universal health care for everyone except elected officials and people studying the situation. They would have a better sense of what it's like for everyone else.
Signe (still in negotiations) Wilkinson.
I certainly agree that Adam Smith left politics out of his equation. It seems many economic thinkers tend to ignore the human side of their fields. Reality is ultimately messy, whether seen from the perspective of history, economics, or politics. Human behavior does not lend itself to neat little formulas like the ones I studied in Econ 101. And when the formulas do work often the ones adversely affected stage a revolt and throw the government out.
James O. Kimmel, Mason, Ohio.
Found on the Web
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Copyright © 2006 by John P. Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction with attribution. Students take note: copying any part of this essay into your written work without attribution is plagiarism.