Uncertainty

In the real world, beyond the abstract models that are taught and given to elucidate certain relationships between a few variables[3], all firms act with uncertain and dynamic knowledge of the conditions they face, which fluctuate successively over time. Meaning, there is no such thing as “the marginal cost curve”, or “the equilibrium price”, or “the price consumers are willing to pay”, [4] at least in a static and final sense. Instead, such constructs must be anticipated and guessed with varying degrees of success, and as such there is the element of risk; and with the “localised and unquantified” risk Hayek spoke of in his timeless essay we can say that there are risks a firm cannot anticipate or model ex-ante. [5]

Is it a sin, then, for a couple of firms to continuously anticipate the future correctly for quarters upon quarters on end, whilst other firms cannot? If there was a man who was so skilled at predicting sports scores that he continued to receive “windfall profits”, would we not applaud him for his great tact and intuition? Would we consider his opponents “cheated”, if they had average intuition and could only guess correctly a quarter of the time, and eventually could not continue to bid? [6]

It would seem, as Stigler said, [7] that the firm size of the successful firms persisting in an industry show the proper size of survival; this is called the survivorship principle. And beyond firm size, it would also prove that the firm strategy is attuned to existing conditions and reasonably adaptive especially if high differentials persist; it shows that there are not an appreciable degree of excess costs that quickly cut into their differential. [8] This, of course, does not need to be intentional acts of genius to be true; take the case of the Borél game mentioned by Armen Alchian.

Suppose two million Parisians are paired and set to toss coins in a game of matching; each pair plays until the winner of the first toss matches with the second; if the players assign the game to their heirs, assuming one toss per second for one eight-hour day, there will still be a dozen people playing after a thousand years! So it’s highly possible that the correct combination was found only using luck and chance. [9] But that is an even stronger argument against breaking up the successful firms, because the probability of perfectly arranging everything back in order what was spontaneously and happily (in the original sense of the word) formed, especially given dynamic conditions, is close to nil. [10]

Customer Benefit

If a firm wishes to stay a monopoly, or even an oligopoly, the level of effort it will take to remain so is certainly nontrivial. Unlike the hypothetical “perfectly decentralised” market, the monopoly or oligopoly will have more discretionary power over the prices they set, the quantities they produce, etc. Whilst this may make them more profits if done correctly, if done in a manner that will make consumers unwilling to pay, the risk of entry will be high and potentially arbitrage away previously made windfall profits. And it need not be small, newly-established firms who compete; well-established capitalists, if the potential of the high-profit industry outweighs the cost of capital and labour reshuffling, can potentially arbitrage away the firm’s differentials as well. [11]

This means that the conventional concern of “high capital costs” and “network effects” precluding an entrance to monopoly or oligopoly can be negated with a previously established capitalist with such tendencies. And it means that, as a result, the monopolist or oligopolists are not “safe” from entry and will thus still face real constraints in the way in which they produces. This means, somewhat paradoxically that they have some form of incentive to differentiate within the aggregate economy based either on price or on quality, compared to substitutes and potential competitors. (The effect is even more pronounced in oligopoly than monopoly, given the former’s tendency to create price wars to discern the “true” quoted price [12])

And on the production-side the firm in the concentrated market will attempt to fulfill such metrics by incorporating scale economies, innovative strategy, and general efficiency of the process of production. The most famous example of this occurring is Standard Oil. They had invested in the technological development of crude oil, and had exploited tank cars, pipelines, cheap barrels, railways, and storage capabilities with their scale economies; and by doing so they reduced the average costs per gallon from almost 3 cents in 1870 to 0.452

cents in 1885. [13]

They also managed to reduce the price of refined oil for customers as a result; from 9.33 cents in 1880 to 8.13 cents in 1885 to 7.38 cents in 1890 and to 5.91 cents in 1897. Between 1890 and 1897 their efficient production techniques meant an increase in quantity, as they increased its kerosene production 74 percent, lubricating oil production 82 percent, and wax production by 84 percent. They could not realistically depress the price for kerosene, because even though the market was highly concentrated, substitutes like Baku Oil, and newly established competitors like Sunoco and Gulf could potentially outcompete them. [14]

Of course, Standard Oil is hardly a sufficient empirical case to justify such a sweeping proposition, and much more work will have to be done before one can make a general conclusion. But I do think that this is the right track.

Competition for the Field

This is the field I have the most amount of intuition on, but the least amount of formalisation. [15] But it draws on Demsetz’s idea that a high degree of concentration in a market, even to the extent of natural monopoly, does not mean that companies cannot still compete for space. Essentially, a conglomerate in the industry will have to finance a group of companies with either intercompany loans, as a formal liability, or capital contributions, or capital reallocation as Berkshire has done for quite some time. In doing so they have a multiplicity of firms to choose from; some that may differentiate from subsidiaries in the very same conglomerate; so for instance, Coca-Cola had both Gold Peak and Honest Tea, both of which produced tea, but one was more “high-end” (Honest). [16]

Now, the total market space for tea is limited, and the two companies cannot both have infinite shelf space; so the two companies must “compete” with each other in some sense in order to decide who receives capital holdings from the parent firm, or the conglomerate. It is also possible that a new merger; or a new innovation in R&D; may create a tea brand that is superior to the other two, or more health-conscious or anything of the sort. [17] In this case the new brand will crowd out the other bands; leading to “negative cannibalisation”. This is another form of inter-conglomerate cannibalisation; but I must stop here, for I do not have the proper tools to analyse or discuss it.

Bibliography

1- The Control of Trusts. by J. B. Clark, 1901.

2- Imperialism, the Highest Stage of Capitalism, by V.I. Lenin, 1916.

3- I refer to of course, the “perfectly competitive” model.

4- Cf. Prisbildningsproblemet och föränderligheten by G. Myrdal, 1927.

5- *The Use of Knowledge in Society*, By Fritz Hayek, 1945.

6- Of course, greed and jealousy may have it so that the individual is banned anyhow. But clearly that is not a rational response.

7- Cf. The Economies of Scale, G.J. Stigler, 1958.

8- Op. Cit, Hayek, p. 523.

9- Alchian, A. A. (1950). Uncertainty, Evolution, and Economic Theory. Journal of Political Economy, 58(3), 211–221. http://www.jstor.org/stable/1827159.

10- Cf. Demsetz, H. (1973). Industry Structure, Market Rivalry, and Public Policy. The Journal of Law & Economics, 16(1), p. 2. http://www.jstor.org/stable/724822

11- This point is also made somewhere in Murray Rothbard’s Man, Economy and State, if I am remembering correctly.

12- An example of such a price war seems to be the 1992 US Airline incident.

13- Antitrust and Monopoly, D. Armentano, p. 60 & 66.

14- idem., p.67.

15- Demsetz, H. (1968). Why Regulate Utilities? The Journal of Law & Economics, 11(1), 55–65. http://www.jstor.org/stable/724970

16- https://investors.coca-colacompany.com/news-events/press-releases/detail/491/honest-tea-joins-the-coca-cola-family

17- https://www.simon-kucher.com/en/insights/when-new-products-cannibalize-sales-mitigate-risks-and-grow

G.D.P. Gross. Domestic. Product. Hark! I hear the ghastly cries of pained souls. Ne’er before, my liege, hath three words caused mankind so much undue confusion, except for perhaps Nietzsche’s “God is Dead!”.

Gross. Domestic. Product. Now just what does that mean? Gross. Think of what that means in accounting. There is net profit and there is gross profit. Net means after deductions, and gross means before deductions. But what deductions? Not everything. The costs of intermediate goods are “deducted” from G.D.P, after all (more on this later). There is the word product, so we should intuit that it has something to do with production. And indeed it does.

Gross in this context simply means that the annual (or quarterly) depreciation of fixed capital is not deducted from the total quantity. ¹ What is depreciation? A reduction in the book value (the net monetary value) of a good throughout its useful life, or the period a good can be employed for before it becomes obsolete. ²

Say a plant was bought at $50,000, 1 year later its monetary value is now $47,000, that counts as depreciation. Fixed capital is defined as assets that can be used repeatedly or continuously in production processes, most commonly more than one year. So when we make bread, flour is circulating capital because once we use it, we can’t “re-use” the bread used (can’t turn bread into flour), but the oven is fixed capital because we can use it to make bread over and over again.³

Domestic is easier. It simply means in this context, “within a nation’s borders.” For the U.S., this means “the 48 contiguous states plus Alaska and Hawaii.” The G.D.P. of overseas colonies and territories, such as the Northern Mariana Islands and Guam, is calculated separately and not included in the United States G.D.P, except as exports and imports like any other country. To repeat, all economic activity (that GDP measures) for a nation takes place within the nation’s legal borders.⁴

Product is also a simple term. It simply means the total monetary value of all final goods and services within a designated time (e.g. a year or a quarter). There are some goods not included in this category, and we will soon see what said “special exceptions” are.

So we can say that G.D.P. is the total monetary value of all final goods and services within a nation’s borders in a given period of time before deducting for the consumption of fixed capital. You may be wondering; but what about the value-added or income approach? The value-added approach sums the value-added, or less confusingly, the value produced in every stage of production across all industries, and the income approach sums up the earnings of both businesses and households created through production.

Superficially it seems like they are unequal, but in fact (in theory) they are. If the sales price of one good is $30, shouldn’t the value produced by the firm equal… $30? And won’t the earnings of selling that good be $30 (redistributed to multiple parties)?⁵ They will not equal each other in real life, but in theory they are describing the same thing; the gross monetary value created through production and services in a given period of time.

This does not contradict the previous definition. In fact it is little more than two restatements.

The expenditure approach

This is the equation you learn in school. (You should learn the other two as well, but it is the one you remember). It adds up all the spending done on final produced goods and services done within a national economy in a designated period of time before the deduction of fixed capital.

Y = C+ G+ I + (X-M).

Y is just GDP. It is said that Kalecki in 1937 decided on this convention for whatever reason. ⁶

C is “Consumption”. But what does it mean to consume? To purchase. I can’t consume a good without purchasing it, unless I’m a no-good shoplifter. But purchases from who? Well, the government is “G” (of course, government expenditures are also G), firms are “I”, and international trade is included in (X-M) (Kind of… I will elaborate later). So who else purchases? Well, citizens. You and I. Private individuals and families. Unless you’re a really devout Buddhist. So “C” covers consumer final goods and services; anything from a small cookie to a giant car, if purchased for private consumption and is a final good or service, counts in “C”. ⁷ These goods are formally split into durable goods (goods with a lifespan of at least three years) and nondurable goods (goods with a lifespan less than three years). Such a distinction applies at the commodity level, not the individual level; clothes are nondurable regardless how long one coat lasts.⁸ And services are just intangible activities that have monetary value and are purchased, but are not produced goods. Of course, there are some caveats to this general rule.

Buying a new house is counted in “I”, not in “C”, although gross rent paid by a tenant, imputed rent (the rent homeowners would pay if they rented), housing utilities are counted in “C”.⁹ Buying a used good does not count in “C” because it is merely transferring ownership, but “C” was already counted for the good in the year it was produced. However, the retail or brokerage service used in purchasing the used good is a current service and so does count towards C.¹⁰ Net purchases of used goods from businesses are counted in “C”, although they are deducted in full in “I”, so they have no ultimate impact. “C” also counts in additional to private consumption nonprofit spending serving households (NPISH), namely their gross operating expenses. (Nonprofits serving businesses are reported elsewhere). This is because there is no market price for their goods. Capital outlays of nonprofits are counted in “I” however.¹¹ As for services, housework services (e.g. mowing a lawn) and services that are not reported in tax filings are excluded.

Interestingly, Medicare and Medicaid and other government services offered at a reduced charge to consumers are reported in “C”, not in “G”, under the logic that consumers are the people who ultimately consume them. More on this very soon.

G is “government”. Government can be viewed as a consumer and as an investor of goods; it “consumes” services like education and national defence that make its way to the public, and it “invests” in fixed assets, such as bridges and roads. More formally, “Government” is government consumption expenditures + gross investment.¹² To first look at the former, government consumption expenditures include the gross output of general government (the non-market output of the government sector, e.g. education and law enforcement), the own-account investment, and the “sales to other sectors”. The second and the third are subtracted from the first¹³. How come? Because own-account investment are goods government produces for its own future use, namely structures, software, and R&D. But those goods are already counted in gross investment so to count them twice would be double-counting. Sales to other sectors are, as said before, goods the government offers services at a reduced cost. If these services are offered to consumers they are counted in consumption (as I have mentioned), and if they are offered to businesses they are counted in investment. So we have to subtract them too.

Gross output in general government are measured in input costs, not in market prices, or specifically the costs of labour, material, supplies and fixed capital. This is because, for certain pure public goods like national defence, there may be no market price.¹⁴ For fixed capital it is assumed that the net return for general government fixed assets is zero. Now to speak of the latter, gross investment consists of structures, equipment and intellectual property products, or goods developed by the government.¹⁵ What is a “structure”? Well, little more than long-lasting infrastructure; highways, bridges and schools. What is “equipment”? Government purchases of machinery and hardware. What is an “Intellectual property product”? Software and R&D. It doesn’t matter for R&D whether it is protected, or if it is open-source; it still counts as government investment because it is seen as a service government adds to the public.

Things excluded from “G” are transfer payments, e.g. Social Security and similar monetary transfers, because that is little more than a change in ownership.

I is “investment”. It consists of business fixed investment, residence investment, and inventory investment. Business fixed investments, just like government expenditure, includes investment structure, both the construction of nonresidential and residential buildings, so buildings for living (we call them “houses”), and buildings for business, industry and such. It also includes equipment considered integral to the maintenance of the structure (e.g. a plumbing system), mobile structures, the shoring and creation of mines, the digging of petroleum, and nonbuilding private construction. So, for example, a bridge is not a building, but if a private firm invests in it, it is considered business fixed investment nonetheless. This excludes the maintenance and repair of buildings, as well as demolition costs not used to create new structures. The other categories are investment in equipment, and investments in R&D. Investment in equipment includes fixed investment (equipment with service lives with more than a year), equipment purchased by landlords for the use of tenants, e.g. furniture, and excludes equipment needed to maintain structures (because that was already counted in business fixed investments) and parts used to repair and maintain equipment.¹⁶

Investment in R&D is not very different from government investment, except it is done by private businesses. Expenditure on both copies and original software are counted in this category, provided they are used in production and have a service life of more than one year. The expenditures to discover or develop new products (which is what R&D fundamentally is), and of improvements to existing products and the process of production are also counted. Obviously, fixed capital is also used in R&D and so the rate of return of capital on fixed assets is counted as well. Not all R&D is heavy machinery and cures for cancer, however; expenditures for the original copies of movies, long television programmes, books, music, are also counted. However, expenditures for newspapers, radio, sports and reality television series are not.¹⁷ (Good! Reality television is drivel.)

Residence investment includes the exemption to consumption we mentioned before; housing! Both the new construction of single-family and multi-family housing units are counted, as are improvements (e.g. the remodeling of bathrooms, the addition of swimming pools, and replacements that extend the useful life) that go beyond routine maintenance (e. washing windows). Certain expenditures, such as brokers’ commissions, and ownership transfer costs such as title insurance and payments for stamp taxes are also counted under this category.¹⁸ Inventory investment, on the other hand, can be better phrased as change of inventory value, as it counts the monetary value of change in the physical volume of private inventories in a specific period. This is extremely volatile and can thus signify short-run changes better than, say, fixed investment. Changes in inventory investment includes finished good inventory (the value of produced goods to be sold), work-in-process inventory (the value of goods in the process of production), and materials/supplies inventory that is acquired for use as inputs; essentially input goods. Most of the information surrounding inventory investment comes from business spreadsheets.

Finally there is (X-M). Now this is misleading. It seems to be “exports minus imports”. So if we make M really small, this value will be larger, and GDP will be larger. So then we need to reduce imports, and thus protectionism is the right strategy.¹⁹ Am I right? No. Remember… Gross… Domestic… Product. When I buy a computer in the consumer market one could obviously observe the transaction and see where the computer came from. But when there are billions of computers being bought it is far less possible. When government spends, it will not only spend on goods made in the United States, or whatever country of origin it was in. And so on and so forth. But doesn’t this contradict the point of GDP, to measure the value-added of production within a nation’s borders? Yes, it does. You can’t count things that weren’t produced in the country. So you have to prevent spurious counting by subtracting the net value of imports. So they have no effect on the final value of GDP, as it should be.²⁰

Net exports, somewhat dissimilar to the other categories, includes the sale of used and intermediate goods to foreigners; the latter done to accurately track where something was produced. All new goods for export are obviously also counted; services exports are not counted (with the exception of electrical energy), sales of dwellings are not counted because it is a transfer in ownership, and sales of illegal goods do not count because they are hard to track.²¹

So here we get a good picture of the expenditures approach. Goods that are generally not counted are the goods sold on the black market; at least, most of the time. Sometimes prostitution and narcotics will be included in an adjusted version.²² Intermediate goods are generally excluded, with the exception of net exports (or alternatively, they are factored away to prevent double counting). Transfers of ownership, such as buying stocks and bonds are excluded; as they are really nothing but intangible property titles with a market price. Transfer payments like Social Security and unemployment insurance are excluded for the same reason. Net imports appear to be counted, but in reality they are actually excluded. Other piecemeal exclusions of general categories have already been discussed.

So we can really formulate the equation as such (this is still rough):

GDP = (Imported Consumer goods + Durable consumer goods + nondurable consumer goods + Services + gross operating expenses of nonprofits serving houses) + (Imported government spending + ((gross output of nonmarket government output, i.e. general government - own account investment - sales to other sectors) + (government structures + government equipment + government R&D)) + (Imported investment + business fixed investment + residence investment + changes of inventory investment) + (net exports - ((net imports = (imported consumer goods+ imported government spending+imported investment)).

But this doesn’t look half as appealing as (Y = C+G+I+NX).

The value-added approach.

I am unsure if this is learned in school. It doesn’t really matter in any case. It is actually trivially easy, and we do not need an equation to explain it. In fact, an abstract example should do plenty.

Assume an agrarian economy with the industries: Coconut, Pineapple, wood, fish, amber, and coal. (All prices are in dollars). Assume coconut has firm 1 and firm 2; pineapple firm 3 and firm 4; wood firm 5 and firm 6 (my creativity is off the charts, without a doubt), fish is fishery 1 and fishery 2; amber is refinery 1 and refinery 2; and coal is mine 1 and mine 2.

So now, we get (all figures are of course, arbitrary):

Firm Industry Gross Output Intermediate Consumption GVA

Firm 1 Coconut $600 $230 $370

Firm 2 Coconut $300 $90 $210

Firm 3 Pineapple $770 $440 $330

Firm 4 Pineapple $500 $200 $300

Firm 5 Wood $2000 $1100 $900

Firm 6 Wood $1200 $700 $500

Fishery 1 Fish $200 $80 $120

Fishery 2 Fish $190 $100 $90

Refinery 1 Amber $700 $50 $650

Refinery 2 Amber $1000 $100 $900

Mine 1 Coal $500 $440 $60

Mine 2 Coal $400 $310 $90

Hopefully the pattern is painfully obvious. Gross output - intermediate consumption = Gross value added. Now to obtain the gross value added for all companies, we add the gross value added for each firm together, or $4430. Assuming no net taxes, that is our GDP. Assuming that refinery 1 gets a product tax of $20 and mine 2 gets a subsidy of $7, the net taxes is $13. So then we must add net taxes with gross value added, and get $4443. That would be our GDP using the value-added approach.

Now let’s aggregate for each industry, and thus do value-added calculations by industry rather by firm. This is simple: we add the gross output and intermediate consumption for each firm together. Share of GVA means the % to total GVA each industry contributes, and VA/GO measures Value added to Gross output. A high VA/GO ratio means the industry uses more labour skill than purchasing raw material; a low VA/GO ratio vice versa..²³

Industry Gross Output Intermediate Consumption GVA Share of GVA VA/GO

Coconut $900 $320 $580 12.8% 0.64

Pineapple $1270 $640 $630 13.9% 0.496

Wood $3200 $1800 $1400 30.97% 0.4375

Fish $390 $180 $210 4.64% 0.538

Amber $1700 $150 $1550 34.3% 0.9111

Coal $900 $750 $150 3.39% 0.167

We get the exact same numbers for GVA, but now we can see which industry is contributing heaviest (it is amber), and which industry is contributing the least (coal). In addition, the VA/GO ratio for amber is extremely high, meaning that it is better at using existing labour and internal capital to create value instead of having to buy raw materials.

So the value-added approach is actually very simple. This is referred to officially by the BEA as “GDP-by-industry”. Obviously it is hundreds of thousands of times more complex, but the principles remain.

The income approach.²⁴

This is perhaps the most interesting form of GDP, at least in my opinion, and the least known. Formally it is called “GDI”, or gross domestic income, although in theory it will be exactly identical to GDP because under the household-firm model, the total earnings of selling a good will equal the total monetary value of said good, before the latter has any deductions for fixed capital. The income approach sums up this value and looks roughly at how the income is, on aggregate, redistributed.

The formal equation is:

GDI (or GDP) = W + P + I + R + T - S + CC.

That is a lot of variables. Fortunately, they are not all too difficult to understand.

“W” is wages. What is a wage? Well, something I want. But it is also the effort employees obtain for their labour; more formally, renumeration in-cash and in-kind; “employees” include corporate officers, so C.E.O’s and C.F.O’s. Commissions and bonuses also count; although of course they can be hard to measure sometimes because they can be paid under the table. Contributions to 401(k) plans, gains from nonqualified stock options (company stocks that don’t meet the IRS criteria for tax advantage), and receipts-in kind (a written transaction of goods without a market price), also qualify. Miscellaneous contributions to worker’s income also count, except for bribery, unfortunately, because bribery is illegal and “under-the-table”.

“P” is profit; corporate profits and proprietor’s income. Corporate profits are the accounting profit of corporate entities; I think you know what corporations are. Proprietors’ income refers to the income of unincorporated businesses, which include both the accounting and the in-kind profit of sole proprietorships, partnerships, and tax-exempt cooperatives; dividends and monetary interest are not considered part of proprietor’s income because they are considered received persons. Proprietors are divided between farm and non-farm proprietors in the United States.

Unlike the expenditures calculation, the income approach does take into account income interest; or “I”. Interest income is the property income received by the owners of loans and securities; it is their return on investment in some sorts. “R” is rental income; it is the net income of individuals who rent real property (owned land with immovable property attached to it), the imputed net rent income of people who own residences (to repeat from earlier, this is calculated off the rough market price of rent), and the royalties received from the copyright and ownership to natural resources.

“T” is taxes on production and imports and it is income for the government. It includes taxes on goods that are disposed of by their producers (customs taxes, excise taxes, etc.), and taxes on production, particularly taxes on factor goods (say, land taxes, and vehicle licenses). Corporate income taxes and personal property taxes are excluded. “S” is subsidies; when the government pays private businesses (e.g. farmers, semiconductor businesses) to support their current operations, or other enterprises (any local authority). This does not include transfers in capital (transfers in kind); those are capital transfers.

CC is the consumption of fixed capital, or capital that has a useful life of more than one year. It measures the decline in monetary value of a good caused by physical deterioration and obsolescence, although things such as catastrophic accidents do not count, since they do not “depreciate’ goods in the normal sense. One distinction from accounting depreciation is that it is valued at current cost (the prices at the time valuation is made) and not historical cost (the valuation of prices at the time of initial acquisition).

In theory, again, this number should be identical to that of the expenditure approach. But different sources are used with this approach and the expenditures one, and there is the presence of time-lag. So there is a discrepancy between the two values; a statistical discrepancy. According to FRED the statistical discrepancy between GDP and GDI in 2025 is roughly 0.7%. It last successfully reached 0.0% in 2022.²⁵

“GDP” In the Socialistic Nations (The MPS)

The socialist countries did not measure G.D.P. Not badly, not approximately; they did not measure it at all, and for most of their existence they had no intention of doing so. The Soviet Union began publishing something recognisable as G.D.P. only in 1988, three years before it ceased to exist, which is rather like installing a fire alarm while the roof is already gone.²⁶

What they measured instead was the Material Product System, or M.P.S. It originated in the Soviet Union in the late 1920s, at almost exactly the same moment that Kuznets, Stone and Meade were assembling the Western accounts, and it was formally standardised across the C.M.E.A. (Comecon) countries in 1969. Sixteen countries used it for some length of time: the U.S.S.R. and the Eastern Bloc until about 1990, China from 1952 to 1992, Cuba, and several other Asian states.

The whole system rests on one singular premise: only labour which produces material goods creates value. Everything else redistributes value. Health care, education, government administration, defence, banking, insurance, housing services, personal services, passenger transport, social organisations; all of this is “non-productive labour”. A man who assembles a tractor produces. A man who teaches the man who assembles the tractor (education) does not. So there is no such thing as “services” in the MPS.

This is usually described as the Marxian distinction between productive and unproductive labour, but the M.P.S. definition of unproductive labour actually sits closer to Adam Smith’s than to Marx’s. Marx never built a system of social accounts for a socialist economy; after all that was not his goal. His categories were categories of the capitalist mode of political economy. The accounting apparatus was constructed after the fact by Soviet statisticians who needed a doctrinally respectable framework and reverse-engineered one.

The system was divided into two meaningful aggregates. The first is Gross Social Product, or the gross output of the national economy. It sums the gross output of every material-producing enterprise. It does not subtract intermediate consumption. So if flour is milled, sold to a bakery, baked into bread, and sold to a shop, the value of the flour is triple-counted. This means that Gross Social Product rises when an industry disintegrates vertically and falls when it integrates, independently of whether anything more is being produced. Since plan fulfilment was often assessed in terms of gross output, enterprises had an interest in the more roundabout arrangement because of double/triple/whatever counting.

The second is Net Material Product, called natsional’nyy dokhod in Russian, which translates as “national income”, rather unfortunately. N.M.P. takes the gross output of the material sphere and subtracts material inputs and the depreciation of fixed capital. The material production sectors are industry, agriculture, forestry, construction, freight transport, wholesale and retail trade, the supply of material inputs, road maintenance, and communications insofar as they serve material production. It is not called net for nothing; unlike G.D.P, depreciations of fixed capital are subtracted, and unlike G.D.P., again, there is no services sector to speak of.

Whether this system was better or worse than G.D.P, depends on your preferences.

A note on the differences between American GDP and the SNA²⁷

Everything described so far in this essay is American practice. The United States compiles the National Income and Product Accounts, the N.I.P.A.s, at the Bureau of Economic Analysis. Almost everybody else compiles to the System of National Accounts, published jointly by five organisations: the U.N. Statistics Division, the I.M.F., the O.E.C.D., the World Bank, and Eurostat. Europe implements it through its own regulation, the E.S.A. 2010.

The current operating standard is the 2008 S.N.A. Its successor, the 2025 S.N.A., was endorsed by the U.N. Statistical Commission at its 56th session in March 2025, developed in parallel with the seventh edition of the I.M.F.’s balance of payments manual so that the two share text where they overlap; implementation is expected around 2030.

The S.N.A. has five domestic institutional sectors: non-financial corporations, financial corporations, general government, non-profit institutions serving households, and households. Every unit sits in exactly one of them, for every account, all the way through the sequence.

The N.I.P.A.s use what the B.E.A. itself calls a mixed sectoring scheme. For measuring production the sectors are business, households and institutions, and general government. For measuring income, outlays and saving they are personal, government, and corporate. The same entity is therefore classified one way for value added and another way for income. A sole proprietorship is in “business” when its output is being counted and in “personal” when its income is being counted.

In the N.I.P.A.s, a corporation is an entity legally constituted as one. In the S.N.A., a corporation is anything that behaves like one: charges economically significant prices, keeps accounts separate from its owners, enjoys limited liability, acts autonomously. So co-operatives, limited liability partnerships, and government-owned market producers like the Postal Service are corporations in the S.N.A. and are not in the N.I.P.A.s.

The N.I.P.A.s treat all government social benefits identically, whether the government hands over cash or hands over a service. The value is recorded as a government expenditure, as a household receipt, and as personal consumption expenditure. So health care financed by Medicare shows up inside American “C”.

The S.N.A. treats these as social transfers in kind and keeps them out of household final consumption expenditure. They are government final consumption expenditure. They are then added back in a second, separately labelled measure called actual final consumption, with a matching pair of income measures, disposable income and adjusted disposable income.

And most importantly, the S.N.A. says that any activity meeting its definition of production should be counted whether or not it is legal, since a mutually agreed transaction in narcotics uses labour and capital to produce an output exactly as a transaction in tobacco does. Under E.S.A. 2010 the European member states were obliged to include drugs and prostitution from 2014, which produced a one-off bump in several national G.D.P. figures and a great deal of newspaper comedy.

The B.E.A. excludes them, and its stated reason is the absence of reliable source data rather than any ideological reason.

I do not have more time to get into the intricacies, but I hope this provides a good starting point.

A quick note on nominal vs. real G.D.P.

Nominal GDP refers to the GDP measured in current market prices. Real GDP adjusts the output for inflation by indexing prices to a fixed base year. The latter allows us to compare the result of G.D.P. in the “long-period”.

Bibliography:

1- https://www.bea.gov/help/glossary/net-domestic-product-ndp

2- https://www.bea.gov/help/glossary/depreciation

3- https://www23.statcan.gc.ca/imdb/p3VD.pl?Function=getVD&TVD=394919&CVD=394922&CPV=1.2.1&CST=01012017&CLV=3&MLV=4

4- Note: non-sovereign departments, such as French Guiana, are not an exception to the rule when they are counted with French GDP because they are essentially akin to states, rather than autonomous territories.

5- This of course does require the presumption of the household-firm model.

6- I believe Kalecki’s equation was Y = GDP = Π + O + W (or GDP = Profits + overhead + wages, which is similar to the income approach used today).

7- _{“Personal consumption expenditures, which measures the value of the goods and services purchased by, or on the behalf of, persons—that is, households, nonprofit institutions that primarily serve households, private noninsured welfare funds, and private trust funds.”} NIPA Handbook, ch. 2, p.8, Dec. 2021._. [Note: I felt as if household was sufficient to describe the transacters in “C”. It seems as if it is slightly vague, and I may consider expanding in future revisions.]

8- U.S. Department of Commerce. Bureau of Economic Analysis. Fixed Assets and Consumer Durable Goods in the United States, 1925–99. Washington, DC: U.S. Government Printing Office, September, 2003.

9- Op. cit. NIPA Handbook, ch. 2, p.5.

10- David S. Moss, A concise guide to Microeconomics, p. 188.

11- https://www.bea.gov/help/faq/1009

12- Op. cit. NIPA Handbook, ch.9, p.2.

13- idem., ch.9, p.5.

14- idem, ch.9, p.4.

15- idem., ch.9, p.5.

16- idem, see ch. 6. ff.

17- A somewhat arbitrary distinction in my view, but one that spawns from durable and nondurable capital being distinct.

18- Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts: Changes in Definitions and Presentations,” Survey 93 (March 2013): 13–39.

19- https://www.bloomberg.com/news/articles/2025-04-30/us-economy-contracts-for-first-time-since-2022-on-imports-surge?sref=R8NfLgwS (an example of this fallacious reasoning)

20- https://www.econlib.org/imports-arithmetic-doesnt-explain-gdp-drop/

21- Op. cit. NIPA Handbook, ch. 6, ff.

22- https://www.bea.gov/research/papers/2019/including-illegal-activity-us-national-economic-accounts

23- https://www.cso.ie/en/interactivezone/statisticsexplained/nationalaccountsexplained/grossvalueadded/

24- Primary source: GLOSSARY: NATIONAL INCOME AND PRODUCT ACCOUNTS (Updated: November 2019), BEA.

25- https://fred.stlouisfed.org/series/SB0000081A027NBEA

26- A great discussion and summary can be found here: https://www.jstor.org/stable/40868619

27- Refer to: https://unstats.un.org/unsd/nationalaccount/sna2008.asp

Why capitalists?

In capitalism, there are markets and more markets. This not even the most hardened communist can question. And in a market, you have people who buy stuff, and people who sell stuff.¹ Another truism.

Everyone, save the ascetic, wants to buy stuff, because if you don’t have stuff, well, you’re doomed. But not everyone wants to be a seller. Why?

Because, most goods are not simply finding a good and placing it in the open market. How easy life would be if that was the case! Say I want a sandwich. I have ham, cheese, lettuce, and French bread. Just a simple sandwich. Now, if I want to use them to make a sandwich, I can’t consume them right now. I have to wait to consume them, until my assembling is done.² But not everyone wants to wait in the future. Some people want to consume these goods now. Why? Well, ask them.

So the people who will want to sell stuff are the people who want to not consume now, and instead consume later. The later they want to consume, and the more they sink the capital they have now into the future, the more capitalist they are. And remember risk. In our little example, the right amount of ham, cheese, lettuce and French bread were a given. But in the real world, the “right” amount is always changing, and we’ll have to guess what it is.³ Guess incorrectly and your entire initial outlays could disappear. The chances are low, but it just might.

And who would be crazy enough to invest in things that might yield profit 1 year, 3 years, 10 years from now… or could make a loss? That is simply the role of the capitalist. To bear the risk. Capitalists are crazy people. But crazy need not be bad.

Why a firm?

So a capitalist wants to invest in stuff for the future, in spite of risk that can swallow up his profits. But why doesn’t he just make contracts on the open market? A 1-year partnership with Joe, a 5-year partnership with Bob…

Well, Coase said “transaction costs”. Williamson said “opportunism”.⁴ I suggest “mutual interdependence”.⁵

What does that mean? Well, suppose I’m making a bar of chocolate. So, I have picking, fermentation, drying, roasting, grinding, conching, tempering and distribution. I can have the best machine in the world regarding tempering, but if earlier, in picking, there was a terrible crop failure that killed all my cacao, the use for it would be nil. Same for roasting. If fermentation goes wrong, it doesn’t matter how efficient roasting machines are. ⁶

And likewise, if chocolate is out of fashion and marijuana in, won’t that affect the price I value for chocolate packaging? And won’t it impact the value I have for each preceding stage? So each stage is dependent on each other in a circular way. Now, consider I rely on spot contracts with roasting. And say the roasting machine goes out of business. Won’t that disrupt literally everything else?

Now of course, I could find another seller, but the new sellers with his new stipulations, and new quality control standards and such means that I have to go to the production process and revise everything. New prices, new quantities, new orders. And think of the profits lost! So because I don’t want my intermediary to go out of business and leave me in the dark, I’ll control them myself.⁷

Of course, they won’t perfectly meet my standards. Slavery is illegal. So I can give them proper rewards for meeting my goals, and I have the discretion to roughly set targets for what they can and cannot do without the fear of them going out of business.⁸

Limits to the Firm

So the firm is really nothing but a governor of innumerable contracts, paranoid that one contractor can go astray and disrupt their plans. So why don’t firms consolidate everything? Why don’t they become a monopoly?

This question is very hard. But I think we have to look at the short and long run. In the short run, it is possible that the costs of governance, at some point become so inefficient that it becomes worth it to form a forwards contract, which can hedge for uncertainty similarly to a firm. ⁹ Also, alternatively, if the firm completely foregoes the open market, they will also fail to adjust their production structure to existing market prices, meaning they will have to “ride the tide”, or buy input goods in the open market at quoted prices. Or, the average costs of some firm functions could be so high that maybe taking the uncertainty of contracting is worth it.¹⁰

In the long-run Knight makes his dashing return. (Ha ha).¹¹ The more the firm increases in age and size the more it will tend to specialise to niches that have bought it success.^* That means they will commit more towards a particular interconnected production program. The problem is they may commit too much, and the costs of switching or creating an entirely new production process may be too high. ¹²

This might be alright if markets stayed static. Do markets stay static in the real world, however? Well, I’m sure Motorola, or Blockbuster would love to say “yes”. Unfortunately, the answer is a resounding “no”. Schumpeterian creative destruction means that the firm can see its imposing differentials go “kaput”, in just a few years in some cases.

Citations/Footnotes

1 - Of course, there are also intermediaries, and there is the case of monopoly, oligopoly, monopsony, etc. But my assumption need not assume perfect competition; a capitalist who seeks to maximise profits and take risk in an oligopolistic market is still a capitalist who seeks to maximise profits and take risk.

2- Cf. Man, Economy and State, M.N. Rothbard, p.8-10.

3- Cf. The Role of Expectations in Economics as a Social Science, L. Lachmann, p.12-23.

4- The Nature of the Firm, R. Coase p. 386-405, Opportunism and Its Critics, O. Williamson, p. 154-171. Do note that Williamson defines opportunism as, broadly, “self-interest with guile”.

5- Perhaps “mutual causality” is a better term; Cf. THE SECOND CYBERNETICS: Deviation-Amplifying Mutual Causal Processes, M. Maruyama, p. 164-179. However, the process need not be instantaneous.

6- Complementarity and Substitution in the Theory of Capital, L. Lachmann, p.197-213.

7- It should be noted that “control” does not mean fiat. Control can imply, say, the setting of optimal production targets. It would be wrong to think of the firm as a dictator, and moreso of a centralised, converging entity all contracts aim to model themselves through; that is to say, they are more indicative than explicitly interventionist. Cf. Production, Information Costs, and Economic Organization, A. Alchian and H. Demsetz, p.777-795.

8- ibid., see the discussion on page 778.

9- Of course, one risk of this is that fluctuating market prices can make it so that at maturity one party may default and refuse to honour their part.

10- Cf. The Division of Labor Is Limited by the Extent of the Market., G. Stigler, 85–93.

11- Risk, Uncertainty and Profit, F. Knight.

12- This can adequately be equated to asset specificity.

* I thank for his helpful comment on this, as before I took a broad perspective of Kirznerian risk as an explanation.

Anyone and their mother knows what antitrust law is. And, of course, they are familiar with the old story justifying it. Perhaps not quite as familiar as the account I am about to give, but they should recognise some themes written here. Pres. Theodore Roosevelt got sick and tired of industrial combinations (or “trusts”), most famously Standard Oil who had obtained a terrifying (to some) 90% of the market share in the 1870s[1], sorted them into “good” and “bad” trusts[2], and used the preexisting Sherman Act in 1904 to punish Northern Securities Corp.[3] by having the Court enforce a violation of the Act and consequently ordering them to dissolve. (I say preexisting because the act had existed a decade and about a half before Northern Securities; it was used unsuccessfully in United States v. E.C. Knight Co., and successfully in Addyston Pipe and Steel Co v. United States,[4]). In 1905 Roosevelt struck down the meat trusts in Swift and Company v. United States[5], as the Supreme Court decided that their “stream of commerce” was interstate in character because the process from farm to retail store crossed state lines, and thus were subject to regulation under the Commerce Clause. And then there were the Pure Food & Drug Act of 1906, the Meat Inspection Act, and most famously the Standard Oil Company of New Jersey v. United States case of 1906[6] which, simply put, argued through some refixing of terminology that Standard Oil was an unreasonable combination, and was thus in violation of the Sherman Act, and broke it into 34 independent companies. And thus, trusts and corporate consolidation was stopped.

This narrative may be crudely simplified, and it may overlook the arbitrary nature of certain rulings in these cases. But that is no concern of mine, at least in this article, for my purpose in this article is not to contest the validity of anti-trust acts, but rather to show that if one is to support antitrust laws in their general role of reducing corporate consolidation, specifically the Sherman Acts and her derivatives, they must support them in reducing labour consolidation, and that the Government, far from being the omnipotent Leviathan so often assumed to be value-neutral and public-centered in the introductory textbooks about market regulations, has deliberately propped up said monopolies, in the detriment of workers.

I will not attempt to make a moral argument, nor will I attempt to concoct my private definition of “monopoly”. The semantics around such a term are quite tortured, so I will merely use the definition used in the Sherman Act and do what some would label “immanente Kritik”.

Labour Law and Economics

The Sherman Act, at least on paper, says that its purpose is to, and I quote verbatim, “protect trade and commerce against unlawful restraints and trade”, such that “Every contract, combination in the form of trust or otherwise (so coordinated action with multiple actors) or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.” [15 U.S.C. 1].Further, it says that this applies not just with interstate commerce or commerce between states, territories and foreign nations but also with anti-competitive contracts formulated in “any Territory of the United States or of the District of Columbia.” [15 U.S.C. 3]. [7]

I will lay out the quote in full, such that there can be no confusion:

“Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce in any Territory of the United States or of the District of Columbia, or in restraint of trade or commerce between any such Territory and another, or between any such Territory or Territories and any State or States or the District of Columbia, or with foreign nations, or between the District of Columbia and any State or States or foreign nations, is declared illegal.”

15 U.S.C. 3, Sherman Act.

Notice precisely the usage of the word “every” for the former quote, such that there are no exemptions made for anticompetitive contracts that potentially incur market efficiency, nor exceptions made for markets that might operate with less competitors as a whole, nor exceptions made for markets that might be considered by the government to be a “natural monopoly”. It is clear that forming trusts or guilds to collaborate and create barriers of entry against competition, regardless of the structure of the market or the consequences of monopolising is a textbook violation against the Sherman Act.

Given that unions are a form of “trust”, in that they “conspire” to increase the price of Labour above the prevailing rate within the individuals unionised, attempt to limit outside competition (nonunionised workers) by branding them “scabs”, and hinder trade both interstate and intrastate with their strike (as is often the point) I do not see how in any rigorous application of the word they do not establish an anticompetitive contract or combination. And this is not merely my intuition, but something the courts recognised as well.

Such a consistent definition was initially recognised as correct and prosecutable by the Courts through the form of injunction, as can be seen with Loewe v. Lawlor (a.k.a. the “Danbury Hatters” case wherein hatmaker D.E. Loewe refused to recognised the hatter's union's efforts to unionise; the unionists boycotted both Loewe and his sponsors) with the reasoning :

["A combination of labor organizations and the members thereof, to compel a manufacturer whose goods are almost entirely sold in other States to unionize his shops and, on his refusal so to do to, boycott his goods and prevent their sale in States other than his own until such time as the resulting damage forces him to comply with their demands is, under the conditions of this case, a combination in restraint of interstate trade or commerce within the meaning of the Anti-Trust Act of July 2, 1890"] [8]

But by no means was this case isolated; it was so similarly for the case of U.S. v. Workingmen’s Amalgamated Council of New Orleans, et al, wherein the Workingmen's Amalgamated Council (a collection of unions, not just one) organised workers for a general strike. Thousands of workers did so which damaged the New Orleans economy; once again the Courts ruled in favour of the New Orleans Board of Trade in that "an injunction issue, enjoining the defendants, (was filed), as prayed for in the bill, from combining by violence or intimidation or in any other manner to interrupt the trade or commerce among the States of the United States or between the United States and foreign nations and from combining by violence and intimidation to interrupt or hinder those who are at work in conducting or carrying on the interstate and foreign commerce or who are engaged in moving the goods and merchandise". [9]

A common theme between these judgements, as alluded to beforehand, is that boycotting or trying to forcefully prevent the sale of goods is a textbook violation of the Sherman Act. This is, a consistent application of the terminology embedded within the Act. But of course, the American Federation of Labor did not take such an act lightly and as such they lobbied to the Taft administration. [10] Soon, the Clayton Act was passed which (amongst an expansion in prohibited anticompetitive behavior) prevented judges from ordering injunction or restraining orders from the basis of antitrust law and really, anything unless procedural requirements are met, and even then the injunction cannot prohibit worker(s) from “from terminating any relation of employment or from ceasing to perform any work or labor, or from recommending, advising, or persuading others by peaceful means so to do.” (Sec 20, Clayton Act). [11]

This is because “the labor of a human being is not a commodity or article of commerce.” (Sec 6, Clayton Act). This is an arbitrary line to draw, as the status of a commodity or article of commerce is non-normative and instead descriptive. As an example, slaves served the role of commodities in the antebellum economy in that they were sought after and commanded a market price for their production. Whether this is right or not comes *ex post* to it being true.

But regardless. The fact of the matter was that the American government had made special exceptions for what was seemingly a universal and non exceptional act (as reasoned beforehand) and exempt the labour sector in particular because of the industry’s involvement and justified this exemption with arbitrary and vague language. The last point is especially important, not just in their rationale but also in their prescription, as the Act also says in Section 3 that unions should not have injunctions for their performing of “legitimate objects”… which was basically what was lawful, which, circularly, was in turn what the courts decided.

But consistency was offered her brief respite. The Clayton Act was frequently ignored in court rulings such as Bedford Cut Stone Co. v. Journeymen Stone Cutters' Assn.; United Mine Workers of America v. Coronado Coal Co. wherein exceptions were made for unions being unincorporated, or in the particular case of United, causing treble damages in general[12]. But this changed with the 1930s and the web of pro-union administrators like Lloyd Garrison within the administration. For example, the State created the Loyal Legion of Loggers and Lumbermen and mandated lumbermen to join; and also amended the Railway Labor Act in 1934 to essentially mandate collective bargaining. [13] But none of these solidified the role of unions more than the Norris-LaGuardia, Wagner and National Industry Recovery Act (NIRA).

NIRA was a bundle of cartel agreements sanctioned by the government and was specifically designed to push prices up, as during that time the Great Depression was happening and consumer prices were falling. [14] The act professed the importance of "the right [of employees] to bargain collectively through representatives of their own choosing without interference, coercion or restraint on the part of the employer”, indicating even more concessions granted to labourers. But, beyond NIRA, it would be Norris-LaGuardia that not only codified the right for unions to exist, but would actually codify its monopolistic tendencies.

The act declared nonunion oaths (yellow dog contracts) unenforceable in Court (sec. 3), relieved labor organizations from liability for wrongful acts under antitrust law (sec 4,5) and nullified the equity powers of federal courts in labor disputes. Yellow dog contracts were essentially nonunion pledges within a company; their wages with unionised wages in cases like Hitchman Coal & Coke Co. v. Mitchell were roughly the same (see Albert F. Hinrichs, The United Mineworkers of America and the NonUnion Coal Fields) and oftentimes it was preexisting workers who preferred their presence, for strikes were disruptive and cut into wages; [15] but regardless the government by banning them merely furthered and substantiated the cartel unions had in the labour market, in addition to making exemptions for strikes, picketing, and all forms of boycott.

So not only were union activities broadly sanctified and allowed, but they were even implicitly encouraged, in a sense, by the artificial barrier-of-entry created by government. The Wagner Act, passed alongside it, more broadly encouraged collective bargaining and protected by law workers negotiating terms of employment, and also created the National Labor Relations Board to legally enforce this, limited consumer resistance by specifying anti union behavior as “ unfair labor practises" by employers”, fixed pay scales for union and nonunion workers, and enforced monopolistic bargaining rights. [16]

Here, the monopoly unions had hitherto was now represented in a legal organisation. This obviously gave them more power than before, which led to unions using coercive and “unfair” tactics to get people to join, pay union dues, and strike in a way detrimental to health and safety. (See Hunt V. Crumboch where unions would not admit the employees of a carrier company, nor accept employment from the carrier, even when that would have bankrupted the business). [17] This led to the Taft-Hartley Amendment of 1947 which prohibited unions from using coercive tactics and could break strikes in the name of health and safety, and the Landrum-Griffin amendment, which set internal rules on how unions ought to have been run. [18]

Despite these “checks” existing as a result of unions being negotiators in bad faith as a result of unchecked power they do not really challenge the monopoly created by Government or the services demarcated in Wagner or Norris La-Guardia. And as a result, unions retain their power to coerce, to crowd out opposing competition with the power of the state, etc. They are a monopolistic entity, but a monopolistic entity given full power to reign, for the reason of none other than special interests. If one is to be consistent they must reason that they cannot prevail.

Bibliography

[1] - The Problem of Bigness: From Standard

Oil to Google, N. Lamoreaux, p. 3.

[2] - Roosevelt elaborates on his perspective here: “_{Our aim is not to do away with corporations; on the contrary, these big aggregations are an inevitable development of modern industrialism, and the effort to destroy them would be futile unless accomplished in ways that would work the utmost mischief to the entire body politic. We can do nothing of good in the way of regulating and supervising these corporations until we fix clearly in our minds that we are not attacking the corporations, but endeavoring to do away with any evil in them. We are not hostile to them; we are merely determined that they shall be so handled as to subserve the public good.”} December 2, 1902: Second Annual Message Of Teddy Roosevelt.

[3]- Northern Securities Co. v. United States, 193 U.S. 197 (1904) (https://supreme.justia.com/cases/federal/us/193/197/)

[4]- Cases cited: Addyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1899), United States v. E. C. Knight Co., 156 U.S. 1 (1895)

[5]- Swift & Co. v. United States, 196 U.S. 375 (1905)

[6]- Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911) (The Government brought forth the lawsuit in 1906)

[7]- 15 U.S.C. §§ 1, 15 U.S.C. §§ 3

[8]- Syllabus of Loewe v. Lawlor, 208 U.S. 274 (1908)

[9]- Final judgement of THE UNITED STATES vs Workingmen’s AMALGAMATED COUNCIL OF NEW ORLEANS, STATE OF LOUISIANA, ET AL.

[10]- The Shaping of the American Labor Movement, William J. Forbath, p. 1124.

[11]- Clayton Antitrust Act of 1914, Sec. 20, Sec.6.

[12]- Bedford Cut Stone Co. v. Journeymen Stone Cutters' Assn. (1927), United Mine Workers of America v. Coronado Coal Co. (1922/1925)

[13]- Discussed in 45 USC Ch. 8: Railway Labor.

[14]- https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm

[15]- Fishback, Price V., Soft Coal, Hard Choices: The Economic Welfare of Bituminous Coal Miners, 1890-1930

[16]- An Economic Analysis of the Norris-LaGuardia Act, the Wagner Act, and the Labor Representation Industry, by Morgan Reynolds, p. 227-267.

[17]- Hunt v. Crumboch, 325 U.S. 821 (1945)

[18] Op. cit. Reynolds, p. 239.

People often ask me: how do I get started in the Economic sciences? The answer is, of course, very simple. Read. But read what? This is not as simple. Some people think to understand Economics you must understand maths. And to be clear, they would be partially correct. Most if not all of economic thought in the last century involves econometrics, and (accurate) modelling is an indispensable tool. But one must remember that mathematics is ancillary to Economic thought. That is to say, it is of secondary importance. Mathematics is a tool which we use to formalise assumptions and make predictions, but if one does not have a clue on how to use them a priori, then there is little benefit in its use. Of primary importance is thinking like an economist, that is to say, to think of what is an issue, what are potential explanations pertaining to it, and which explanation is the most tractable and intuitive. I do not think this can be easily learnt, and oftentimes it comes with plenty of reiterations, but if I had to recommend some books and papers to help you get started on this, it would be the following.

(N.B. I am of course assuming the reader has little or no preexisting knowledge in the discipline.)

General Papers

The Use of Knowledge in Society - F.A. Hayek*. (If you have not read one text pertaining to Economics in your life, let it be this one. By the time you finish, you will appreciate the role of the price system in unifying the incommensurable, dynamic forms of knowledge to coordinate, spontaneously and dynamically, our very complex economic system.)

Competition as a Discovery Process - F.A. Hayek. (This paper takes the assumptions given in The Use of Knowledge in Society and applies it to the competitive process, showing how market competition does not rely on assumptions of perfect information, costless transactions, etc. but instead thrives and coordinates in Knightian uncertainty).

Economics and Knowledge - F.A. Hayek. (Economic equilibrium is often derided as “imperfect” and “unrealistic”. And some formulations of it are. However, Hayek treats it in a satisfying manner and spells out the importance of creating tractable assumptions. A very important paper.)

Uncertainty, Evolution and Economic Theory - A. A. Alchian. (Of course the real world doesn’t operate through perfectly competitive markets, static equilibrium, and perfect information. And obviously firms have much bigger trouble maximising their profits than one would expect from reading an Economics textbook. The issue is, how do we square such an assumption with the tools we have?)

Toward a Theory of Property Rights - H. Demsetz. (What benefit do property norms bring to us? How might they form? What different types of property rights exist? These are all very heavy questions, but they are all things Demsetz tries to address.)

The Nature of the Firm - R.H. Coase. (Neoclassicals, such as Alfred Marshall, tended to view the firm as a “black box” that swallowed inputs and gave outputs. But they never questioned why the firm as an institution existed. They never gave a reasonable treatment of the role of the entrepreneur, and so Coase’s job is to bridge the firm from a position of economic mythology to something we are more accustomed to seeing.)

The Problem of Social Cost - R. H. Coase. (Contra the assumption of many, Coase’s job here is not to create an ideal situation of bargaining with zero transaction costs—no, his role is to comprehensively make a case for and sketch out the case for well-defined property rights when transaction costs are high and bargaining is costly. A vital paper.)

The Theory of Economic Regulation - G.J. Stigler. (Regulations are framed as a necessity and an unquestionable boon to consumers. But, what if at times they actually serve not-so beneficial purposes? What if their goal is to price out entrants and allow existing actors to survive? The layman should read this because it will make him analyse regulatory decisions with much more skepticism.)

Marginal Analysis and Empirical Research - F. Machlup. (Thinking “at the margin” is criticised for being unrealistic and reductionist. Fritz Machlup explains, however, how people can act “marginally” without having good notions of what their marginal cost, marginal profit etc. are, or how they are derived. A very good paper.)

Books

The Wealth of Nations - A. Smith. (Yes, this book is hundreds of years old. Yes, the writing is quite difficult to understand. Yes, there’s little formalism. But read Smith’s pin-factory example and tell me that it doesn’t rival the efforts of industrial organizations undertaken by Economists today. Read Smith’s formulation of the various types of “stock”, or “labour”, and tell me he wasn’t being exceptionally nuanced. Smith may have had very few mathematical tools, but he was well ahead of his time, and he thought of many, many scenarios.)

Principles of Political Economy - J.S. Mill. (Mill is not only a good teacher, but also, in my opinion, just as comprehensive as Smith. It discusses production, distribution, “Say’s Law”, land, wages, various forms of government policies, rent, trade, and credit, inter aila. It is absolutely a look into the inner mind of an illustrious economist.

Principles of Economics - C. Menger. (This is the book that drew Hayek and Bohm-Bawerk to Economics. It is short (~300 pages), covers various concepts, and is written very didactically. There is little question that it is an extremely good book.)

Risk, Uncertainty and Profit - F. Knight. (In this book Knight demarcates firmly “risk” (knowable variance ex-ante) and “uncertainty” (unknowable variance ex-ante) and sketches a theory of profit and thus a function of the entrepreneur. One of the most influential, and interesting, reads in modern economics.)

The Theory of Price - G.J. Stigler. (Ed.5.) (There are five editions to the book; I recommend you get the fifth. The book goes into all the conventional aspects of price theory, e.g. supply and demand, cost curves, oligopolies and mergers, but what differentiates it is Prof. Stigler’s fine manner of writing, his witty humour and his comprehensive treatment of issues.)

Price Theory and Applications - S. Landsburg. (This book manages to explain intermediate price theory and more contemporary issues such as the pricing decisions of the firm with a reasonable amount of maths.)

The Economics of Imperfect Competition - J. Robinson. (This book is interesting because it is the progenitor of several modern economic concepts, e.g. monopsony and monopolistic competition. However, the style of the book leaves something to be desired.)

Universal Economics - A. Alchian & W. Allen*. (A textbook in the conventional sense, Alchian and Allen write not only about supply/demand & classical micro/macroeconomics, but also dedicate sections to uncertainty, team production, shirking, search costs, valuation, and property rights. On top of that they rigorously explain, step-by-step, all concepts, with minimal usage of mathematics. This book is truly one-of-a-kind.)

Human Action - L.V. Mises. (Rarely in a book is every single chapter, every single page essential to the contribution of broader understanding. Human Action is one of those books. For twenty pages, Mises writes in a rambling, incoherent manner with long run-on sentences and strange verbiage–but then on the twenty-first, everything seems to magically click, every concept referentially justifying the past.)

Man, Economy and State, M.N. Rothbard. (One of the most comprehensive textbooks in Economics, Austrian or non-Austrian, I would say. This text was written to be a textbook of “Human Action” before Rothbard expanded on the list of concepts. Rothbard gives multiple concepts just as much attention as Stigler or Alchian does.)

More Specialised Topics.

Macroeconomics

An Introduction to National Income and Income Analysis, R. Ruggles.

Profits, Interest and Investment, F.A. Hayek.

Capital and Industrial Fluctuations*, F.A. Hayek.

National Income Behavior (an Introduction To Algebraic Analysis), T.C. Schelling.

International Trade and the National Income Multiplier, F. Machlup.

Forced or Induced Saving, F. Machlup.

Theory of International Trade, G. Haberler.

Competition

Perfect Competition, Historically Contemplated, G.J. Stigler.

A Note on the History of Perfect Competition, P.J. McNulty.

Economic Theory and the Meaning of Competition, P.J. McNulty.

Competition and Entrepreneurship, I. Kirzner.

Perfect Competition and the Transformation of Economics, F. MacHovec.

The Market as an Economic Process, L. Lachmann.

Capital and Its Structure*, L. Lachmann.

Industrial Organisation

Strategy and Structure, A.D. Chandler.

The Organization of Industry, G.J. Stigler.*

Industry Structure, Market Rivalry, and Public Policy, H. Demsetz.

Industrial organization : a treatise, J. Bain.

Theory of the Firm.

The Modern Corporation and Private Property, A. Berle and G. Means.

Strategizing, Economizing, and Economic Organization, O. Williamson.

Agency Problems and the Theory of the Firm, E. Fama.

Production, Information Costs, and Economic Organization, A. Alchian and H.Demsetz.*

The Theory of the Firm Revisited, H. Demsetz.

* = (if you only have time to read one book/paper in this set, read this one).

(N.B. a more comprehensive list will possibly come in the future, encompassing more comprehensive topics. Comments, suggestions and revisions are welcome.)

コース「企業の本質」に関するノート

コースは論文の冒頭で明確に述べている。経済学者はこれまで自らの前提を明示し、その妥当性を検証することを怠ってきた、と。これは望ましいことではない。なぜなら、それは基礎的前提をめぐる不必要な論争を招き、また最初から適切な前提を選ぶことを妨げるからだ。「企業」という語の日常的な定義と経済学的な定義はまったく異なっており、経済学者が産業ではなく企業を通じて経済を研究する傾向を強めている以上、経済学において「企業」が何を意味するのか、そしてそれが日常的な意味とどう違うのか(そもそも違うのか)を定義する必要がある。ただし、単なる定義であればよいというわけではない。

ジョーン・ロビンソンが述べているように、前提は扱いやすく(操作可能で)、かつ現実に根ざしている(現実的である)必要がある。前提が扱いやすいだけで現実的でない場合(完全競争)もあれば、逆に現実的だが扱いにくい場合(たとえば流体力学の前提)もある。コースは、企業の定義は現実の企業の機能に対応するという意味で現実的でありながら、アルフレッド・マーシャルの限界分析と代替効果というツールを用いることで扱いやすくもなり得ると論じる。ここから本格的な分析が始まる。

企業対市場

企業を適切に定義するには、それが機能する経済システムそのものを見る必要がある。市場は中央計画によって統制されていない。上から俯瞰し、構造化し、命令する計画者は存在しない。生産は消費と出会い、供給は需要と出会い、価格は調整される――これらすべてが中央の計画機関なしに行われる。このシステムは自動的で、自発的で、応答的で、無調整的――マルクスとエンゲルスが有名に述べたように、無政府的でさえある。

市場そのものは単一の制度ではない。ちょうど人体がそれ自体一つの臓器ではなく臓器の集合体であるのと同じである。価格機構だけが全体を調整し統制している。個々の計画(機会費用の判断など)はシステム内に存在するが、それは価格シグナルによって調整される。資源配分も価格によって調整される。それはそうならざるを得ない。しかしこれは企業の内部では起こらない。

経済理論では、要素Aの価格が用途Yに対して用途Xで上昇すれば、より多くのAがYに配分される。しかしこれは企業内部では起こらないかもしれず、特に労働については起こりにくい。労働者AがY部門からX部門へ異動するよう命じられれば、彼はただ命令されたからそうするのであって、価格機構によってそうするのではない。したがって明らかに、経済的計画(中央計画ではないことに注意)と組織化には果たすべき役割がある。

コースは、これがまったく無視されてきたわけではないと論じる。マーシャルは組織を生産要素の一つとして扱い(これは「企業家精神」と呼べるかもしれない)、ロバートソンは――私はこの一節がとても好きなのだが――企業を、無意識的な存在であるバターミルクの液体の中の意識的な塊であるバターの小片にたとえている。しかしどちらも、なぜそうなのかを本当に説明してはおらず、ただそうであると述べているにすぎない。

コースが指摘するように、これはそれ自体では十分に説得的ではない。市場における調整は価格機構を通じて行われ、一連の交換取引を方向づける。しかし企業内部では、交換取引はすべて企業家によって調整され、彼が直接生産を指揮する。しかし価格シグナルが生産を調整できるのであれば、なぜこのような特異な上意下達型の組織がそもそも存在するのか。

もちろん、価格機構がどの程度置き換えられるかは様々である。コースは、食料品店が商品X・Yの配置を意識的に計画するか、あるいは価格入札を通じて決めるかは、垂直統合の程度が業種によって異なることを指摘する。これは単純な補足にすぎず、企業に共通する特徴が内部価格機構の不在であるという主要な論点と矛盾しない。この不在は外部価格と関係しているが、その関係は適切に検討されねばならない。モーリス・ドッブが書いているように、資本家は外部の経済圏に対して外部的な関係を持ち、内部的には独自の分業を計画しているとはいえ、彼自身は「より大きな有機体の中の一細胞」に過ぎない。

コースの全体的な目標は、なぜある生産は価格シグナルによって調整され、ある生産は企業家によって調整されるのか、そしてなぜそれが見た目ほど矛盾していないのかを説明することである。

なぜ企業は存在するのか

コースはまず、企業がそれ自体のために存在するという考え――一部の人々は監督の下で働くことを単純に好み、そのために低い報酬を受け入れる――を提示する。しかしこれは正しいはずがない。なぜなら人々は一般に「自分自身の主人であること」を好むからだ。奴隷はなぜ自らを解放したのか。

次に彼は、他人を支配することを好み、価格機構を使うよりも彼らを指揮するために対価を支払う人がいるという考えを検討する。しかしこれは、指揮することで報酬を得るのではなく、指揮するために対価を支払うということを意味し、かなり奇妙な取り決めになる(コースは、店主が自分の従業員よりも低い報酬しか得ていない場合にこれが実際に起こると指摘するが、これを例外的なものであり原則ではないと扱っている)。

彼はまた、人々が企業によって作られた商品を、企業によって作られていない商品よりも単に好むという可能性も検討する。しかし企業はこの選好が全く関与しない分野でも存在するので、これも理由にはなり得ない。

では理由は何か。コースは論じる。それは価格機構を使うことのコストである、と。

価格機構を使うことのコスト

第一のコストは、関連する価格が実際に何であるかを発見することである。専門家によってこのコストを削減できるが、完全になくすことはできない。つまり彼らはその情報を明らかにするために報酬を受けているだけなのだ。

第二のコストは、個々の交換取引ごとに契約を交渉し締結することである。たとえば私が家を建てたいとしよう。私は設計のために建築家と契約し、コンクリート会社にコンクリートの供給を契約し、労働者と個別に建築の契約を結び、道具会社に道具の供給を契約する、といった具合だ。これは煩雑で費用がかかる。

企業内部ではこれをする必要がない。誰もがあなたのために働く。個々の業務ごとに契約を開始・終了する必要はない。契約が完全になくなるわけではないが、大幅に削減され、一種類の契約――各生産要素が一定期間、企業家の指揮に従うことに対して報酬を受ける契約――に集約される。これが賃金労働である。

これを超えてさらなるコストがある。単一の長期契約は多数の小さな契約よりも契約コストが低く、また人々は時間選好が高い傾向にあるため、保証された長期的な見返りを単純に好むかもしれない。

購買者、すなわち生産手段の所有者も全知ではない。供給者が長期にわたって正確に何をすべきかを事前に指定することは彼にとって難しい。供給者はどちらでも気にしないかもしれないが、購買者は本当にわからないのだ。そこで所有者は労働者や供給者を一般的なサービス(たとえば造園)のために雇い、具体的な内容は後になって決める(何単位分の芝を刈るか)。事前に合意されるのは、労働者に要求できることの限界であり、詳細は事後に決まる。

別の例として、「プログラミング」の仕事のために雇われるが、実際に何をプログラミングするのかは、その仕事に就き、オリエンテーションなどを経た後になって初めて明らかになる、というものがある。

資源がこのように方向づけられるとき、企業が生まれる、とコースは言う。

企業はいつ現れ、どのように成長するのか

企業は短期契約が不十分な場合に現れる。この取り決めの形態は、商品よりも労働にとってはるかに重要である。なぜなら商品は詳細をあまり気にせず単純に購入できるからだ。

単純に言えば、市場にはコスト、すなわち取引コストがかかる。企業家が生産を内部で指揮するとき、これらのコストの一部――すべてではない――が節約される。企業家は、これらの取引コストを差し引いた上で、生産要素を公開市場よりも低い実効価格で調達できると想定している。もしそれができなければ、彼はいつでも公開市場に頼ることができる。

(コースはまた、支払い方法――固定賃金か利潤の分配か――が企業を定義するというフランク・ナイトの主張を退けている。そうではない。なぜなら企業家は自分の利潤のすべて、一部、あるいは全く分配しないこともでき、それが取り決めが企業に該当するかどうかに影響しないからだ。

また、交換取引と企業内取引が政府によって異なる扱いを受けることも注目に値する。たとえば売上税は交換取引に課税されるのであって、企業内部で行われる仕事には課税されない。もし企業がまだ存在していなかったなら、この差異的な取り扱いが企業の形成を説明したかもしれないが、企業はこの種の課税に先行して存在していたため、それが企業の原因になったというよりも、既存の企業の規模を拡大させる要因である可能性が高い。割当や価格統制も同様に個人配給の一形態として機能するが、コースはこれらも通常企業がすでに存在した後に登場すると指摘しており、根本的な原因ではないことを示唆している。)

つまり、企業とは資源の方向づけが企業家(あるいは「企業家」という語が気に入らなければ「資本家」)によって調整されるときに存在するものである。これにより、企業が「大きくなる」あるいは「小さくなる」という明確で客観的な意味が与えられる。企業家がより多くの取引を自ら調整すれば企業は成長し、少なくなれば縮小する。では実際に何が企業を成長させたり縮小させたりするのか。

フランク・ナイトはこれを本質的に「歴史的偶然」に帰しているようで、したがって体系的には答えられない問題だとしている。コースはこれに同意しない。彼はまた、もし取引コストが原理的には企業内にすべてを取り込むことで完全に排除できるのであれば、なぜ単一の企業がすべての生産を扱わないのか、言い換えればなぜ完全な中央計画が存在しないのかを問う。

その答えは組織化への収穫逓減である。

I. 内部コストの上昇。企業内でもう一つ取引を組織する追加コストは無料ではなく、ある時点でそれは公開市場や他の企業でその同じ取引を組織するコストに達する。

II. 誤配分。取引が追加されるにつれ、企業家が資源を誤って配分する可能性が高まる。完璧な配分は不可能だからだ。この誤配分によって生じる無駄は、それを公開市場(あるいは他の企業家)に処理させるための取引コストと比較検討されねばならない。

III. 供給価格の上昇。生産要素の供給価格が、小規模な企業よりも大規模な企業にとって単純に高くなる可能性がある(コースはこの詳細についてE・A・G・ロビンソンの『競争産業の構造』を挙げている)。

これらを合わせたものが組織化への収穫逓減を構成する。

したがって企業は、もう一つの取引を内部で組織するコストが、公開市場あるいは他の企業内でその同じ取引を組織するコストと等しくなるまで拡大する。もしそれより手前で止まるなら、それは他の企業と市場取引を行っていることを意味し、その他の企業のコストも同様に制約されている。これは実際にどのように展開するか。

Aが B から製品を得たいとしよう。両者ともに関連コストのしきい値以下でその取引を組織でき、Bは自分の側で複数の生産要素を組織しているとする。もしAが市場を通したくないなら、彼は一つの取引だけでなくBの生産全体を買い取らねばならない。さもなければ結局市場取引が発生してしまう。しかし企業が拡大するにつれて非効率になる傾向があるため、AがBの行っていた作業を内部で行うコストは、Bの元のコストより高くなる可能性がある。Aは、その吸収コストがBの元のコストに加えて節約される一回分の公開市場取引コストを超えない場合にのみ、Bの業務を吸収する。市場取引が依然としてより安価な選択肢であるならば、生産は分割された状態にとどまり、各企業の内部取引コストは市場での代替案と整合的な水準に保たれる。

これまでのすべては交換取引がほぼ均質であることを前提としてきたが、実際にはそれらは大きく異なり、交換と内部取引の両方のコストもまた異なる。企業内の一部の取引は、実際に市場での同等の取引よりも高くつくかもしれない。市場取引は依然として価格機構を経由するかもしれないが、それだけでは複数の企業が存在する必要性を説明しない。供給価格と経営への収穫逓減の方がより決定的な要因である。

したがって、他の条件が同じであれば、組織化コストが低くゆっくりとしか上昇しない場合、企業家の誤りが少ない場合、生産要素の供給価格が低い場合に、企業は拡大する傾向がある。しかし組織化コストと誤りの発生率は、取引が異質になるにつれ、また価格が不安定になるにつれ上昇する傾向がある。種類と場所の両方で異なる取引は効率を低下させる傾向がある。空間的距離を縮める電話のような技術革新や、生産要素を集中させる技術は、いずれも企業規模を押し上げる。より優れた経営もまた同様である。

つまり、企業とは取引が市場ではなく企業家によって組織され遂行される場のことである。これはまた「結合」――以前は課題をめぐって競争していた企業家たちが今や一人の企業家の下でそれを組織すること――と、「統合」――以前は市場を通じて処理されていた課題が企業に吸収されること――にも意味のある解釈を与える。どちらも企業が成長する方法である。

これでコースの議論の(i)と(ii)の部分がカバーされた。(iii)の部分では、この定式化を企業の必要性についての競合する説明から擁護する。

アッシャー、ドッブ、ナイトへの反論

アッシャーとドッブは、分業があまりに複雑になるため、様々な糸をまとめる中心的な組織化の力が必要になるので企業が存在すると論じる。コースの応答は、この組織化の力はすでに価格機構であり、市場は自ら分業がどのような形をとるべきかを規制しているというものだ。彼らの議論は、なぜ企業家が価格機構の代わりに自分自身の計画を代入する必要があるのかを実際には説明していない。

ナイトはむしろ、企業は不確実性のために存在すると論じる。完璧な世界では、すべての個人が誤りなく行動し、原材料や資源を顧客に誤りなく分配する――つまり取引コストがなく、企業も必要ない。労働者は監督や組織なしに完璧に仕事をこなすからだ。

しかし社会はエデンの園ではない。人々は意見に基づいて行動する。人々は最善の選択や最善の行動方法について無知でありうる。これにより何をすべきか、どうすべきかという問いが本当に重要になる。そして単純に言えば、人々は常にそれを正しく理解できるわけではない。

ナイトの議論はおおよそ次のように進む。

生産者は消費者が実際に何を望んでいるかについて不完全な近似しか持たない。彼らは事前に需要を知るのではなく予測しなければならず、この予測の役割が企業家階級を生み出す。何をどのようにが単なる機械的な実行以上に重要になると、内部組織は付随的なものではなく必要なものになる。ゆえに企業家の下での集権化が必要条件になる。

自信があり冒険的な人々(時間選好の低い人々)は、確実な収入を保証することによって、疑い深い人々(労働者)を事実上保険する。その保証がなければ、労働者は他人の指揮下で働くことを受け入れないだろう。ナイトの見解では、これが企業と賃金制度が存在する理由である。

コースはこれに反対する傾向がある。第一に、市場についてより優れた知識を持つことは、企業家になることを必要としない。その知識は同様に助言サービスとして売ることができる。第二に、将来の引き渡しについて生産者と契約すること――たとえば商人が先物を買うこと――は、生産を自ら指揮することなく保証された報酬を確保することが完全に可能であることを示している。ナイトはまた、人を指揮せずに雇うことは不可能だと主張するが、契約に基づく(指揮を受けない)労働がこれを反証する。そしてナイトの、実際の責任がないときでも報酬を受け取る有給の経営者についての説明は、誰が彼らに報酬を支払うのか、なぜ価格機構がこれを扱えないのかを実際には説明していない。ナイトは価格機構が不要である理由を示せていない。

企業規模とコスト曲線

論文の最後の部分ではコスト曲線に転じる。完全競争市場では、企業規模はコスト曲線が上向きに傾斜するところで制限される。不完全競争市場では、MR=MCとなる点で制限される。

しかし企業は複数の製品を生産するかもしれず、その事実だけで企業の規模が制限されるべき明白な理由は現実にはない。ロビンソンは企業が単一の製品のみを生産すると仮定することで話を単純化しているが、コースはこの仮定が実際には何ら有益なものをもたらさないと論じる。

古典的な議論では、あらゆるものが原理的にはその市場清算価格で生産できるため、他の何かを生産する必要はないと主張される。しかし新しい製品の市場清算価格が、既存の製品の市場清算価格を下回ることがある。

このように想像してみよう。消費の中心地点Cがあり、企業家は地点Xで交換取引を開始する。A、B、Cはそれぞれ異なる産業を表す。企業家がBに拡大するにつれ、ある時点で彼の組織化コストは、より近い製品のコストと一致するようになり、彼はAとCにも拡大する。これは単なる例示にすぎないが、完全競争下でさえコスト曲線が企業拡大の上限を必要としないことを示しており、不完全競争下ではなおさらである。したがってロビンソンの問題の扱いは成り立たない。

この定義は扱いやすく実用的か

コースは冒頭で提起した問いに戻る。彼の企業の定義は扱いやすく実用的か。

扱いやすいという点では、そうである。雇用主・被雇用者関係の本質は、被雇用者が個人的なサービスを提供する義務を負い、雇用主がその仕事を指揮する権利を持つことである――そうでなければそれは単なる契約であって雇用ではない。雇用主は、被雇用者がいつ働き、いつ働かないかを言える必要がある。指揮こそが、法的な雇用主・被雇用者関係の本質であり、それは経済的にも同様である。バットが指摘するように、賃金労働者と使用人を区別するのは、賃金労働者が仕事そのものの遂行方法についてある程度の裁量を保持しているという点である。

実用的だという点でも、そうである。なぜなら企業規模は結局のところ限界分析の問題だからだ。企業内部の組織化コストは、代替案――すなわち他の企業や公開市場――のコストと等しくなる方向に向かう傾向がある。実業家は自然にこの種の均衡を追求する。

しかしこれは静的な状態でのみ成り立つものであり、それを超えて考慮すべきことはさらに多い。コースはそこで筆を置き、これ以上進めば別の論文が必要になると述べている。

A. アルチアンとH. デムセッツ「生産、情報コスト、経済組織」に関するノート

なぜ企業は存在するのか。それはどのような目的を果たすのか。どのように調整するのか。これらがアルチアンとデムセッツが検討する問いである。

市場資本主義と協力の論拠

A&Dはまず市場資本主義の基本的な定義から始める。生産手段に対する非政府的な統制である。企業や家計などが財を所有し、それらをどのように配分するかを決定する。このプロセスの中で、彼らは他の経済主体との協力と専門化を必然的に追求する(アダム・スミスの有名なピンの例を考えてほしい)。これは協力的専門化を促進する制度への需要を高める。

彼らはさらに、協力的専門化からの利得が制度(企業)の内部で発生する方が高いのか、それとも市場(無調整な場)を通じてなのか、そしてその制度の構造が実際にどのようなものかを問う価値があると述べる。

企業は独裁ではない

従来の知恵は、企業とは単に無調整な市場よりも優れた中央計画者であり、すべての投入物を所有し、権威主義的な方法で人々がどこで働くかを命じる――小規模なソビエトの官庁のようなもの――だと想定している。A&Dはこれを、かなり強く否定する。「これは妄想である!」

A&Dにとって企業のメカニズムは、実際には無調整な市場のそれと非常によく似ている。労働者を解雇し訴訟することは、もはやある食料品店から買わなくなることで彼を「解雇」し、粗悪な商品の受け取りを拒否することで彼を「訴える」ことに相当する。労働者に一定の賃金でタスクAやBではなくCを割り当てることによって管理することは、食料品店主を水ではなく茶を供給するよう互いに合意可能な価格で誘導することによって管理することに相当する。

管理、割当、タスクの指揮は権威主義的に聞こえるが、この枠組みはかなり誤解を招くものである。本質的には、それらは一時的な契約の再構築にすぎない。少数の例外を除き、労働者は永続的に企業に契約で縛られているわけではない。したがって企業の統制者は、実際には官僚や王というよりも、無数の分散した自発的契約を調整する「チームリーダー」に近い。

メータリング問題

A&Dは次に、企業がこのチームを管理する上で直面する中心的な課題――「メータリング」問題に転じる。ここでいうメータリングとは、測定し統制することを意味する。両方ともここでは当てはまる。企業は投入産出の生産性を測定し、それに結びついた報酬を統制しなければならない。もし報酬が生産性と相関していなければ、誰にとってもより努力する誘因はないだろう。もし報酬が生産性と負の相関にあれば、まともな人間なら誰もその企業のために働かないだろう。生産性の過小評価も非現実的な生産性目標も、いずれも企業を害する。

したがって、生産性を測定し、それに結びついた報酬を設定することが不可欠である。企業は一部、労働者の生産性に比例した報酬を促進するために存在する。A&Dは、市場がこのメータリング問題を自ら解決できる場合があると指摘する。もし農夫が市場価格において自分の産出を大幅に増やせば、彼の収入もそれに比例して増加する。彼の限界生産物は自動的に測定され、それに応じて報酬が伴う。したがって市場は、産出の変化が個々に観察可能な人にとっては、メータリングをうまく処理する。

ここでA&Dはまた、組織上の問題を無視し、生産性が自動的に報われると単純に仮定してきた経済学の正統派を批判する。もし報酬が組織内で不十分にメータリングされていれば、根底にある産出が高く持続可能なままであっても、企業の生産性は低下するだろう。言い換えれば、メータリング問題は些細なものではない。

チーム生産

これはすでに触れたチーム生産へとつながる。A&Dはこの考えを形式化するために交差偏微分といくらかの数学を使うが、そこまでの必要はないと思う。直感的にいこう。

彼らの例をとろう。二人の人間が重い荷物をトラックに積み込んでいる。これはチーム生産に該当する。なぜなら彼らの行動は技術的に分離不可能だからだ。産出だけからでは、誰がサボり誰が一生懸命働いているかを見分けることは不可能である。

私がサボってゆっくり働き、しかし相棒が四倍努力してそれを補ったとしよう。産出が5箱から50箱に増えたことを見るだけではこれを観察できない。なぜなら私たちは単一の同一の共同生産された財を生産しているのであって、別々の箱を持ち上げて合計しているのではないからだ――私たちは同じ箱を一緒に持ち上げているのだ。私たちはまた同じ財の別々の単位を独立に生産しているのでもない(たとえば別々の果樹園で単独でリンゴを摘む二人のリンゴ農家)。つまり最終的な産出は私たちの組み合わされた努力に共同で依存する。これがまさに、生の産出数値だけから生産性と報酬を測定することを不可能にしているものである。

誰かがこの二人の労働者を直接監視して誰がサボっているかを見なければならない。限界産出をどちらか一方に帰属させることはできなくても、行動は依然として観察できる――どちらかがたくさんコーヒー休憩を取っているか。とてもゆっくり持ち上げているか。などなど。

A&Dは、もし監視が無料であれば、誰もサボらないだろうと指摘する。なぜなら産出の減少を自分ではなく相棒のせいにすることが不可能になるからだ。これは明らかだろう……もし私が鷹のように見張られていて、それでもサボりに出かけるなら、その結果生じた低下を相棒のせいにすることは馬鹿げているだろう。しかし常時の監視は無料ではない。誰が一日中報酬なしで人々が荷箱を持ち上げるのを見張りたいだろうか。

したがって監視にはコストがかかり、監視が難しければ難しいほど、メータリング問題のためにサボる誘因は強くなる。チームで働くことが価値を持つのは、チームワークからの純生産性の利得が監視とメータリングのコストを上回る場合だけである。

サボりと非金銭的便益

これから、人々が非金銭的な便益に価値を置くということも導かれる。余暇はその明白な例だ。ほとんどの人は8時間よりも4時間働きたいと思うだろう。この選好はチームの中でより重要になる。もし私が自分の作物を育てて売る個人農家で、私がサボれば、私はそのサボりのコストを産出の減少という形で直接自分自身で負う。

しかしもし私がチームで働いていて、私たちの限界産出がわずかしか低下しなければ、メータリング問題のためにその低下を私個人に遡って追跡することは企業にとって難しい。したがって私個人の報酬の損失は、私の余暇追求がチーム全体に課す総コストよりも小さくなり得る。これは監視が無料でない限り――つまり常に――ある程度のサボりが、低い賃金と引き換えに暗黙のうちに容認されることを意味する。

A&Dは大学を一種の「合法化された」サボりの例として挙げている。人々は生産性とは無関係のことに紙や郵便(今日ではコンピュータ)を使い、管理者はほとんどの場合その犯人を特定できるだろうが、そうすることは煩雑でコストに見合わないだろう。したがって教員には暗黙のうちにある程度の非金銭的特権、つまり余裕が与えられており、これが金銭的(貨幣的)賃金を下げ、「余暇」を引き上げる交換となっている。

理想的には、サボりの検出ははるかに効果的になり、サボり自体はゼロに近づくだろう。しかしこれは実際にはほとんど、あるいは全く達成されない。

市場は単独でチームを監視できるか

A&Dは、上司なしに市場組織だけでチームを監視できるかどうかを検討する。潜在的なチームメンバー間の競争が報酬の分配方法を決定し、上司ではなく投入物の所有者が過度にサボる者を交代させることができる。この分散型の仕組みでは、経営者や命令権者がいない(労働者協同組合のようなもの)状態で、外部者は、同じ仕事をより小さな取り分でやると申し出ることによってメンバーを規律づけることができる。組織は、原理的には誰も指揮しなくても進化しうる。しかしA&Dは、これは二つの理由から完全にはうまくいかないと論じる。

チーム生産におけるサボりの検出コストは、その性質上高い。

フリーライダー問題がある。新しい投入物の所有者がチームに加わるためにより小さな取り分を受け入れなければならないとしよう。彼のサボる誘因は依然として高い。なぜなら産出の低下による彼自身の取り分の減少は、総チーム産出の減少よりも彼にとってはるかに影響が小さいからだ。

古典的企業と「ボス」の台頭

ここでA&Dは異なる企業構造の類型を導入する。

第一は、コースらが説明したような古典的企業である。上述のように、サボりを減らす一つの方法は、チームメンバーを直接監視する誰かを任命することである。しかし誰がその監視者を監視するのか。市場競争だけではこれを解決できない。先に述べた理由による。より良い解決策は、この人物に残余――つまり所定の基準額を超える総収益――を与えることであり、これによりサボりが彼自身に直接コストを負わせるようになるため、彼自身がサボる可能性は低くなる。これは専門化された役割である。

しかしこの監視者は、単にサボりを見張ること以上に、実際にどのように監視するのか。彼は産出実績を測定し、報酬を決定し、限界生産性を観察し、人々のタスクを指揮し、成績不振者の契約を終了させなければならない。これが事実上「ボス」である。A&Dはこれを、監視者は投入物の行動を観察し指揮することによって自身の残余を稼ぐ、とまとめている。そしてサボりを実際に規律づけるためには、彼は個々の契約を終了・改定する単独の権限を必要とする。

企業の企業家の役割は、以下の五つに帰着する。

I. 上記の理由による残余「余剰」の請求。

II. 投入物の行動の観察。

III. 投入物との契約における単独の当事者であること。

IV. チームの構成員を変更すること――雇用と解雇。
V. これらの権利を売却または移転できること。

しかし重要なのは、企業家が暴君ではないということだ。雇用主が被雇用者に特定のタスクを完了するよう「命じる」のと同様に、被雇用者も雇用主に報酬を支払い、自分に有利な条件を交渉するよう「命じる」。この関係は相互的である。

企業の様々な形態

A&Dはこの構造のいくつかのバリエーションを説明していく。

利益分配企業:残余の一部が労働者に再分配される。A&Dによれば、これは労働者が効果的に互いを監視する場合に可能だが、実際には難しい。なぜなら全員が残余に対する請求権を持つと、チーム生産のコストが上昇し、サボり問題が悪化するからだ。

社会主義企業(彼らはユーゴスラビア、あるいは「ユーゴスラビア」を引用する):企業は労働者評議会によって組織され、それが経営者を統制し、残余は労働者間で分配される。ここでの経営者は、残余のうち小さな取り分しか受け取らないため、サボる誘因が増す。一つの抑制策は、評議会が経営者の成績不振の場合、国家に契約終了を勧告できることである。

株式会社:利益は多数の株主間で分配される。サボりに対する一つの抑制策は将来の資本(負債、株式)へのアクセスの約束であり、有限責任がさらに株主を損失から保護するメカニズムを加える。もう一つは、株主が集団で自ら意思決定を行うのではなく(それは物流上の悪夢だろう)、代わりに少数の役員会を任命して行わせつつ、それらの決定を改定する権利を保持することである。経営者もまた自由裁量を与えられているわけではなく、株式購入、資本市場、委任状争奪戦などを通じて依然として説明責任を負う。

非営利団体:A&Dはこれを手短に扱い、非常に明白な点を指摘する。経営の改善が株式ベースの資本利得に転換されないため、ここでの経営者は自身のサボりを減らしたり業績を改善したりする誘因が少ない。

パートナーシップ:一定の関係はパートナーシップの取り決めを通じて処理される。これらは小規模で自己監視的な傾向があり、互いのサボりの傾向をすでに知っている人々の間で構築される。

従業員組合:従業員は互いの業績と報酬を監視する。賃金のようなものは監視しやすいが、健康保険や年金のような非金銭的便益は監視しにくく、そのため最終的には専門の監視者がその目的のために雇われる。

チームスピリットと忠誠心:A&Dは、これが単にサボりを減らすために存在するのではなく、企業内の信頼が高くサボりの可能性が低い場合、労働者が生産と余暇を実際にどのような割合で交換したがっているかの真の水準をより正確に推定できるようになるために存在すると論じる。したがってチームスピリットと忠誠心は、従業員からより多くの仕事を絞り出すためのツールでも、単なる甘言でもなく、むしろ労働者の業績をより正確に評価するためのツールである。

投入物の所有と減価償却

最後に、A&Dは企業所有者が直接保有する傾向のある特定の投入物について論じる。中心となる従業員/所有者は、自分自身が損失を出している期間においても投入物の所有者に公正に支払わなければならない。彼はこれを前払いによって、あるいは機械や土地といった資源をそのような損失に対して担保に入れることによって行うことができる。彼はまた、使用に起因する減価償却に対しても補償を受けるべきである。なぜなら、これらの資産の使用方法に注意を払う監視者や所有者がいなければ、減価償却はそうでない場合よりも高くなってしまうからだ。

ウィリアムソン「統治契約としての企業理論」に関するノート

前段でコース的な「企業の本質」について論じたが、それは確かに非常に優れた論文であり、おそらく史上最高の論文の一つである。しかしコースの論文は長く堅固な伝統の始まりにすぎなかった。しばしば見過ごされがちなもう一人の経済学者、オリバー・ウィリアムソンは、企業について異なるやり方で論じており、ここでそれを議論する。

なぜ組織はほとんど論じられないのか

組織は経済学においてほとんど論じられない。ウィリアムソンの見解では、これは「組織は経済取引にとって重要である」と言う方が、なぜそうなのかを実際に説明するよりもはるかに容易だからである。彼の目標は、組織理論の結論を契約の観点から適用し、それを企業理論に結びつけることである。

これは「契約の観点」とは実際には何かという問いを提起する。ウィリアムソンは、経済学があまりにしばしば選択の経済学――消費者行動理論、利潤と効用の最大化――を通じて研究されてきたと論じる。このレンズは間違ってはいないが、必ずしも最も有益なものでもなく、契約のレンズは比較的無視されてきた。

契約のレンズは、行為者が自らの交換のニーズに合った制度を整合させ作り出そうとする努力、すなわち私的秩序化を研究することによって、制度がどのように生まれるかを具体的に見る。これは契約上の危険を回避する文献――特にメカニズムデザインとエージェンシー理論――を再び視野に入れることになる。これらはしばらくの間、新古典派経済学からかなり切り離されていた。

ウィリアムソンはこれを単純な樹形図で示す。選択の科学は稀少性と資源配分に関わり、契約の科学は私的秩序化に関わり、それが今度は統治理論の根源となる――どのように契約関係が実際に実施されるか。ウィリアムソンが研究したいのは統治である。

組織理論からの五つの教訓

ウィリアムソンは、ハーバート・サイモンによって発展させられた組織理論からいくつかの教訓を契約の経済学のために引き出す。

I. 限定合理性。サイモンの枠組みは、行為者が限られた認知と情報を持つと仮定し、効用を最大化するのではなく「サティスファイス(満足化)」する、つまり十分に良い代替案で妥協すると仮定する。契約に適用すると、これはすべての契約が必然的に不完全であることを意味する――誤り、隙間、抜け落ちを含みうる。行為者は予見されないことに適応しなければならず、潜在的な契約上の破綻(協力の失敗、再交渉)にさらされ続ける。私的秩序化はこれに応じて、こうした行き詰まりを緩和できる統治構造を形成しようとする……企業を非常に彷彿とさせるものである。

II. 行動的規則性に注意する。労働者を統制することには意図された結果(たとえば労働時間の増加)があるが、労働者は生きた思考する行為者であってホモ・エコノミクスではないため、意図されない結果(たとえば生産性の低下)もある。両方を考慮に入れるメカニズムは、意図された結果のみを考慮に入れるメカニズムより優れている。

III. 組織の異なる形態は構造的に異なる。市場、企業、官僚制は単なる用語の違いではない。根本的に、それらは根本的に異なる離散的な方法で組織されており、それぞれ独自の強み、弱み、特徴を持つ。

IV. ミクロ分析が重要である。活動は個々の取引のレベルまで還元されるべきである(ミーゼスを彷彿とさせる)。そこでは対立、相互性、秩序が同時に存在する。

V. 協調的適応が必要である。これは当事者が市場の変化を通じて互いに適応するという考えである。ハイエクとチェスター・バーナードの両方がこの一種の見解を支持していた。ハイエクは経済主体が相対価格の変化を通じて自発的かつ自律的に適応すると考え、バーナードは適応には深く意識的で目的を持った調整が必要だと考えた。ウィリアムソンは、両方のメカニズムが現実の経済システムにおいて共存すると論じる。(私はこの点については自分の考えを控えておく。)

契約の三つの規則性

契約のレンズがなぜ重要なのかを確立した上で、ウィリアムソンはそれを通じて発見できる三つの規則性を特定する。すなわち根本的転換、複製と選択的介入を組み合わせることの不可能性、そして(複数の)契約法である。

根本的転換とは、資格のある供給者の大きなプールが、契約の実行と更新のプロセスを通じて、実際に取引される少数の供給者へと変換される様子を説明するものだ。これは、少なくとも顔の見えない売買者が市場価格で出会うという意味での、一般に定義される「市場」取引ではない。むしろこの契約は長期的なものであり、当事者は双方向に依存するようになる。買い手は容易に供給者を切り替えられず、供給者も生産性の低下なしには買い手を切り替えられない。この依存関係は、対立を最小化し相互利益を最大化する価値創造的な統治構造の必要性を生み出す。したがって早期終了に対する罰則、情報開示のメカニズム、専門化された紛争解決などの必要性が生まれる。

複製と選択的介入を組み合わせることの不可能性は、ウィリアムソンにとって企業規模の制約要因である。もし大企業が小企業の集合体(すなわち市場メカニズム)がうまくやっていることをすべて複製できるなら、それは常に市場を上回るだろう。もしそれがまた、対立が生じるあらゆる場所で階層的秩序を課すことによって選択的に介入できるなら、対立をよりよく緩和できるだろう。もし両方を同時にできるなら、限りなく成長するだろう。しかしそうはならない。ウィリアムソンの説明(私見ではやや不満足なものだが)は、市場から階層への移行が統合された企業内部のインセンティブを弱め、一部の取引は単に管理的統制にうまく反応しないというものである。

(複数の)契約法。単一の契約法ではなく、多数の法が存在する。企業がどのように契約を形成するかを規律する普遍的な単一の法は存在しない。企業は、間接費や会計処理をめぐる内部紛争を解決する際、事実上自らの控訴裁判所となり、自らの領域内で一種の命令権を得る。これは、企業の統治構造としての地位が、単に前提とされるのではなく再確認される必要がある理由の一部である。

統治構造としての企業

これらすべてが、ウィリアムソンが企業を統治構造として――つまり単独の組織様式としてではなく、他のものと比較検討されるべきものとして――分析しなければならないと主張する理由である。財産権理論やエージェンシー理論の企業観とは異なり、彼の統治理論は企業の基盤を三つのもの――インセンティブの強度、管理統制、契約法――に置く。ウィリアムソンが統治の実際を示すために使う例は、中間財についての「作るか買うか」の意思決定である。企業はある投入物を自ら作るべきか、それとも買うべきか。これもまた統治上の選択である。

歴史的に、作るか買うかの意思決定は双方独占のレンズを通じて分析されてきた。一人の買い手(独買)が一人の売り手(独占)に対面し、価格は交渉によって決まる。標準的な主張は、両者間の利益の分配は不確定になり得るというものであり、これが対立を解決し「適切な要素比率」を回復するための垂直統合を求める根拠となってきた。

ウィリアムソンはこれに反論する。第一に、独占力は大規模な経済のあらゆる場所に存在するわけではないので、それが起こる場合ですら垂直統合が常に必要とは限らない。第二に、もし統合された企業が非統合の企業が行うすべてを複製できるなら、なぜ企業はすべてを統合しないのか。

ここでウィリアムソンは自身の説明を定式化する。統治は、彼が「コモンズ・トリプル」(ジョン・コモンズにちなむ)と呼ぶもの、すなわち対立、相互性、秩序――統治は対立を緩和し、秩序を導入し、自発的交換からの相互利益を実現する――のために価値がある。それを定義するのは、より低いインセンティブの強度、より大きな管理統制、そして内部的な紛争解決である。

彼はこれを、取引コストを資産特殊性の関数として描いたグラフで説明する。技術的に見えるが、見た目ほど恐ろしいものではない。資産特殊性がゼロの場合、市場の取引コストM(k)は階層のH(k)よりも低い。資産特殊性が上がるにつれて協調的適応がより必要になり、ある時点でM(k)がH(k)を上回る――ただしこのグラフには、階層が市場組織のいくつかの特徴を保持するハイブリッドな取り決めを表すX(k)曲線も含まれている。なお、M(k)の傾きはH(k)の傾きよりも急であることに注意されたい。市場の単位あたり取引コストの上昇は階層のそれよりも速く、全体的な話と整合的である。

作るか買うかの意思決定、さらなる展開

ウィリアムソンは作るか買うかの枠組みをさらに発展させる。企業はある投入物を作るか買うかを選択でき、その投入物は一般的な供給者からも、選ばれた目的のために生産する専門化された供給者からも来る可能性があるとしよう。彼はこれを意思決定樹として示す。

企業は資産特殊性kがゼロのとき、一般的な(市場の)供給者を選ぶ――つまり特殊な資産(念のため、他の場所に再配置されると価値を失う資産)が関与しておらず、当事者が事実上顔の見えない関係にあることを意味する。k>0のときは専門化された供給者に転じる。二つ目の変数sは、セーフガード――情報開示要件のような、取引を「監視」するメカニズム――を表す。

ノードA:資産特殊性なし。統治は市場価格を通じて完全に処理できる。

ノードB:k>0、s=0。専門化は存在するがセーフガードが存在しない――悪い組み合わせである。

ノードCとD:k>0、s>0。これは信頼できる契約(企業間の双方向合意、ノードC)によって、あるいは資産特殊性が高すぎてそれでは対応できない場合には内部組織(ノードD)――企業が階層構造をとり、原材料、部品、流通プロセスを直接所有する――によって解決できる。

もちろん、完全な内部化は常に可能とは限らない。企業は労働者や顧客を所有することはできない。それは奴隷制に相当し、非効率(その他の理由も含めて)だからだ。

実用的な応用、できる限り手短にまとめると(?)

すでに多くを述べたので、残りの実用的な応用は手短にまとめる。

流通への前方統合は、製造業者と卸売業者の関係である。これらの取引のほとんどは一般的で市場ベースであり、かなりノードAに当てはまるが、完全にはそうではない。多くの場合、顧客・地域制限、サービス要件などが依然として伴うからである。ウィリアムソンは、これはシステム全体(企業)の利害と、その部分(フランチャイズ加盟店、小売業者)の利害が対立するときに生じると論じる。彼はシュウィン自転車会社(私はもちろんトレック製に乗っている)が転売禁止規定を課した例を挙げている。フランチャイズ加盟店がディスカウンターに販売し、それが適切なサポートなしに箱詰めのまま自転車を販売していたため、ブランドイメージを損なっていたからだ。したがって製造業者・小売業者の関係はしばしばノードAでもノードDでもなく、ノードCである。

労働:企業は明らかに自らの労働を所有できない(それは奴隷制に相当する)ので、ここではノードDは適用されず、比較はノードA、B、Cの間で行われる。ノードAでは、労働は生産的価値を失うことなく他の場所に再配置できるので、不当な離職を防ぐことや、情報開示、検証手続き、紛争解決メカニズムに投資する特別な必要はない。k>0かつs=0(ノードB)では、離職すると本当に非効率を引き起こす専門的スキルを持つ労働者がおり、雇用主と労働者の間の紛争を解決する統治構造の必要性が生まれる。労働組合はその一例である。理想的には、これは雇用主と労働者の間の相互信頼が積極的に育まれるノードC、すなわち集団的な組織構造に落ち着く。

アルチアン「企業の経営理論における最近の進歩の基礎」に関するノート

経営者は純粋な利潤最大化にそぐわないように見える方法で行動することが観察される。彼らは資産規模の成長を求めたり、利潤最大化の点をはるかに超えて機械を購入したりする。なぜか。アルチアンが説明する。

より具体的には、経営者は純粋に利潤を目標とするのではなく、総資産と売上の成長を重視することが観察される。彼らはまた、純粋な富の最大化の下ではその反応が自動的であるはずなのに、需要の低下に応じてコストを削減し効率を上げることに遅い。そして彼らは、利潤最大化に明らかに全く役立たない、より高価なコンピュータを購入するといったことをする。

ボーモルは、売上最大化は単に経営者の仕事の客観的な特徴であると論じ、ペンローズは資産成長についても同じことを言う。しかしどちらも経営者行動の全範囲を説明しておらず、これらの目標を単に富の制約に従うものとして扱うことは、企業が金銭的利潤を売上のために犠牲にすることは決してないということを含意する――これは我々が実際に観察するものではない。したがってこれらはそれ自体では弱い防衛である。

見かけ上の経営の非合理性についてのより優れた理論は、ウィリアムソンの『裁量的行動の経済学』、マリスの『経営者資本主義の経済理論』、ベッカーの『差別の経済学』に見出すことができる。ここでは網羅的な詳細なしに、それぞれを通観しよう。

ベッカー:非金銭的効用

ベッカーは、非金銭的効用は所得を得るすべての人の全体的な効用関数に含める必要があると論じる。所有者、経営者、被雇用者は、一定の非金銭的便益――たとえば居心地の良さや、人種や宗教に関する選好――を提供されれば、いくらかの金銭を犠牲にする。これは彼を、差別されている労働者がより高い全体的利潤を生み出したであろう場合でさえ、差別のようなことをするように導きうる。金銭的所得と、労働条件のような無形の便益は、したがって両者間にトレードオフ率のある財である。

所有者や経営者が道徳的または個人的な考慮のために利潤を犠牲にするという考えはアダム・スミスにまで遡るが、利潤最大化を企業の唯一の目標として扱うことに favor して無視されてきた。ベッカーとケッセルはこれを特に公共事業に適用し、規制された利潤上限ですでに営業している企業は、代わりに非金銭的要因――差別もその一つ――を最大化する方向に転じる強い誘因を持つと論じた。

マドックスとマリス:経営者の非利他主義

マドックスは、経営者の給与は企業規模に応じて拡大するため、経営者は大企業において所有者の利潤を減らすある種の誘因を持つと論じる――つまり経営者は所有者の利益ではなく自分自身の利益のために行動する理由を持つ。マリスはこれに対し、株主はこれを規制できると反論するが、そのような行動を検出し規制するコストはかなりのものになりうる。アルチアンはここで、マリスが利潤率(追加投資に対する限界的な収益として表される)と絶対的な利潤を混同していると指摘する。

ウィリアムソンの経営者効用の三つの経路

アルチアンが紹介するウィリアムソンは、経営者行動についての最良の一般理論を与える。彼は、経営者が企業の資源を用いて自身の効用を高める方法が三つあると論じる。

彼は単純に所有者の利潤を増やし、それに対してより高い自身の見返りで報われることができる。

彼は企業の資源を指揮――たとえば資産規模を拡大――して、たとえ利潤の減少を犠牲にしてでも自身の給与を上げることができる。

彼は非金銭的な財を直接消費する(人種差別、豪華な宴会、より多くの休暇、より魅力的なスタッフなど)ことによって自身の効用を最大化でき、これは全体的な企業利潤を犠牲にしてでも行われる。

これが意味すること

ここから、企業支出は非金銭的な角度から分析でき、金銭的なものと並んで経営者の効用曲線に組み込むことができる。それを超えては、税制や制度変化がこのような形で経営者がサボる能力にどのように影響するか、また所有者がこのような利潤最大化行動からの逸脱を検出し規制する際に直面する取引コストを考慮に入れる必要があるだろう。

アルチアン「不確実性、進化、そして経済理論」に関するノート

鋭いアルメン・アルチアン(その業績はすでに二、三度要約されており、それが彼がどれほど優れているかを物語っている)は、UCLAの若手教授だった頃、レスターとマクラップ(そしてスティグラーのような人物が後者を助けた)の間で交わされた辛辣で終わりのないように見える限界主義論争を読み、なぜその論争がこれほど長く、これほど激しく続いたのか困惑していた。彼の見解では、解決策は単純で直感的なものであり、企業行動に大きな意味を持つものだった。

アルチアンは、不完全な情報とナイト的不確実性が最初から組み込まれた分析的枠組みを提案する。この枠組みは利潤最大化や予測可能な個人行動を仮定しないが、驚くべきことに、それでも経済学者が有用な提言を行うことを妨げない。

素朴な利潤最大化の問題

アルチアンの時代の新古典派経済学者は、合理的な行為者は完全に最適な解を求め、最も適切な行動が最適な結果をもたらすという単純化されたモデルを教えていた。(ウィリアムソンも後に上述のような似たようなことを扱うことになる。)この「限界による行動」は、ある期間にわたって(変動を受けるため)「最適」が何を意味するかについての不確実性のために実際には起こらないと認められているが、それでも人々はこれらの原則に従って行動していると(特にマクラップのような人物によって)、たとえ無自覚であってもなお主張される。

この方法論はG・ティントナーによって攻撃された。真の、すなわち「ナイト的」な不確実性の下では、個人は複雑な多変数の問題を、最適であるかどうかにかかわらず、原理的にすら解くことができない。それぞれの行動はむしろ分布、すなわち単一の確定的な結果ではなく潜在的な結果の確率的な広がりを伴う。これらの分布は重なり合い、したがって選択は最終的にはどの分布を好むかという決定になり、「最大化する分布」を探すことではなくなる。

これについて正確に言えば、「最大価格」を求めることは無意味ではない。実際に一つの最大価格が存在するからだ。しかし「最大化する分布」を求めることは無意味である。なぜなら最大利潤の基準は、結果の分布そのものが単一の最良の答えを生み出すような形で重なり合い通約可能であることを要求するが、それらはそうならないからだ。

アルチアンの代替案

アルチアンは代わりに二つのことを提案する。第一に、市場の力を理解するために、個々の意思決定単位をモデル化しようとするのではなく、社会全体としての最適化計算を研究すること。第二に、ビジネスにおける成功は最大の利潤ではなく、実現された正の利潤によって示されるということ。正の利潤を実現する人々が生存者であり、したがって「成功した」者たちであり、そうでない人々はそうではない。彼らは単に成功していないのだ。

これを達成する人々が賢いか、愚かか、魅力的かなどは問題ではない。まったく愚かな人々の集団でさえ、成功例を生み出すだろう。なぜなら真の不確実性の世界では、論理的で慎重であることよりも、冒険的で幸運であることの方が報われるからだ。

したがって成功は優越性を伴うが、その優越性は本当の洞察力よりも偶然の問題である可能性がある。それはまた適応の問題でもありうる。すなわち、個人の合理性、動機、先見性は、意識的に理由づけされたかどうかにかかわらず、環境に適した行動を採用する能力に対して二次的である。実際の例を挙げると、植物が建物の側面に沿って成長するのは、それを意図しているからではなく、そうすることによって利用可能な日光に適応しているからである。

寿命の長さ≠先見性

アルチアンはまた、企業の存続の長さは、それ自体では真の先見性を証明しないと論じる。彼はボレルの例を挙げる。二百万人のパリ市民が硬貨を投げて一致させる遊びを、一秒に一回、一日八時間、千年間続けたとしても、純粋に偶然によって、なお十数人の参加者がゲームに残っているだろう。したがって百年続いた企業でさえ、幸運ではなく本当の先見性によるものと自動的に評価することはできない。

幸いなことに、偶然と不確実性を想定することは、経済学者の仕事が無用であることを意味しない。生存に必要なことと代替案についての帰納的知識をもって、彼は特定の企業にとって他よりもより存続可能な行動を述べることができる。

Coase begins the paper very clearly: economists have failed to state and rationalise their assumptions. This is not very good, because it leads to needless controversy about the set of foundations, and because it stops us from choosing the right set of assumptions in the first place. The colloquial definition of “firm” and the economic definition are very different, and as economists have increasingly gravitated to studying economics through the firm, not the industry, we have to define what “firm” means in economics, and how it differs from the colloquial meaning, if it differs at all. But not any mere definition will do.

As Joan Robinson says, an assumption has to be tractable (manageable, utilisable) and grounded in the real world (realistic). Sometimes an assumption will only be manageable but not realistic (perfect competition), and other times realistic but not very manageable (say, assumptions in fluid dynamics). Coase argues that a definition of the firm can be both realistic, corresponding to the functions of a real-world firm —and utilisable, by drawing on Alfred Marshall’s tools of marginal analysis and the effect of substitution. Here the real analysis begins.

The Firm Vs. The Market.

To even properly define a firm, we have to look at the economic system it operates within. The market is not centrally planned. There is no planner from above surveying, structuring, and ordering it. Production meets consumption, supply meets demand, prices adjust, all without a central planning board. The system is automatic, spontaneous, responsive, uncoordinated; even anarchic, as Marx and Engels famously said.

The market itself is not a singular institution, in the same way the human body is not itself an organ but a collection of organs. Only the price mechanism coordinates and controls the whole. Individual planning within the system — judgements of opportunity cost, and so on exists, but it is coordinated by price signals. Resource allocation is coordinated by prices too. It has to be be. But this doesn’t happen inside firms.

In economic theory, if the price of factor A rises in use X relative to use Y, more of A gets allocated to Y. This might not happen inside a firm, and it especially might not happen for labour. If worker A is ordered to move from department Y to department X, he does so simply because he is ordered to, not because of the price mechanism. So clearly, economic planning (not central planning; remember this) and organisation has a role to play.

Coase argues this hasn’t exactly been ignored. Marshall treats organisation as another factor of production (one might call it “entrepreneurship”), and Robertson — I really, really like this line; compares the firm, a planned entity, to a little lump of butter in a pail of liquid buttermilk, an unconscious entity. But neither really explains why this is the case; they just state that it is.

As Coase points out, this doesn’t make much sense on its own. Coordination in the market happens through the price mechanism, directing a sequence of exchange transactions. Inside the firm, though, exchange transactions are wholly coordinated by the entrepreneur, who directs production directly. But if price signals can coordinate production, why does this peculiar form of top-own organisation exist at all?

Of course, the degree to which the price mechanism gets superseded varies. Coase points out that grocery stores either consciously plan where to put product X or Y, or let it be settled through price-bidding — the level of vertical integration is sector-dependent. That is a simple clarification, and it doesn’t contradict the main point that the common feature of firms is the lack of an interior price mechanism. This absence is related to exterior prices, but that relationship has to be examined properly. As Maurice Dobb writes, the capitalist has exterior relations to the broader economic sphere, and although he plans the distinctive division of labour internally, he is only the “cell in a larger organism.”

Coase’s overall goal, then, is to explain why some production is coordinated by price signals and some by the entrepreneur, and why this isn’t as contradictory as it looks.

Why does the firm exist?

Coase first floats the idea that firms exist for their own sake; that some people would simply rather work under supervision, and accept less pay for it. But this can’t be right, since people generally like “being their own master.” Why did the slaves free themselves?

He then considers that some people like controlling others, and would pay to direct them rather than use the price mechanism. But this would mean paying to direct people rather than being paid to direct them, which is a fairly odd arrangement. (Coase notes it does occur in the case of shopkeepers paid less than their own assistants, but treats it as an edge case and not the rule.)

He also considers that people might simply prefer goods made by firms over goods not made by firms. But firms exist even in fields where this preference plays no role, so that can’t be the reason either.

So what is the reason? Coase argues: the costs of using the price mechanism.

The costs of using the price mechanism

The first cost is discovering what the relevant prices actually are. Specialists can reduce this cost, but they can’t eliminate it, that is to say, they are still paid to uncover that information.

The second cost is negotiating and concluding a contract for every single exchange transaction. Say I want to build a house: I contract an architect to design it, a concrete company to supply concrete, workers individually to build it, a tool company to supply tools, and so on. This is cumbersome, and costly.

Inside a firm, you don’t have to do this. Everyone works for you. There is no need not individually starting and stopping contracts for every task. Contracts aren’t eliminated altogether, but they’re greatly reduced to one kind of contract, where each factor of production is compensated for following the entrepreneur’s direction over a period of time. This is wage labour.

There are further costs beyond this. A single long-term contract has lower contracting costs than many small ones, and because people tend to have a high time preference, they may simply prefer guaranteed long-term returns.

The purchaser, that is, the owner of the means of production, also isn’t omniscient. It’s hard for him to specify in advance exactly what a supplier ought to do over the long run. The supplier may not particularly care either way, but the purchaser genuinely doesn’t know. So the owner hires the labourer or provider for a general service (landscaping, say), and only fills in the specifics later (trim x units of grass). What’s agreed upfront are the limits of what the worker can be asked to do; the details come ex post.

As another example: you might be hired for a “programming” job, but exactly what you’ll be programming isn’t spelled out until after you’ve taken the job, and undergone onboarding and so on.

When resources are directed this way, a firm is created, says Coase.

When does a firm appear, and how does it grow?

A firm appears where short-term contracts are unsatisfactory. This mode of arrangement matters much more for labour than for commodities, since commodities can simply be purchased without the specific details mattering much.

Put simply: the market has costs; that is, transaction costs. When entrepreneurs direct production internally, some of these costs are saved, though not all of them. The entrepreneur presupposes he can get factor goods at a lower effective price than the open market, once those transaction costs are stripped out. If he can’t, he can always fall back on the open market.

(Coase also dismisses Frank Knight’s claim that the mode of payment — fixed wages versus a share of profit — is what defines a firm. It isn’t, because an entrepreneur can distribute all, some, or none of his profits to workers, and it makes no difference to whether the arrangement counts as a firm.

It is also worth noting that exchange-transactions and internal firm transactions are treated differently by government; sales tax, for instance, taxes the exchange transaction, not the work done inside a firm. If firms didn’t already exist, this differential treatment might explain why they’d form, but since firms predate this kind of taxation, it more likely just increases the size of existing firms rather than causing them. Quotas and price controls work similarly as a form of individual rationing, but again, Coase notes they typically arrive after firms already exist, suggesting they aren’t the underlying cause either.)

So: a firm exists whenever the direction of resources is coordinated by an entrepreneur (or “capitalist,” if “entrepreneur” annoys you). This gives a clear, objective sense of a firm getting “larger” or “smaller”; as the entrepreneur coordinates more transactions himself, the firm grows; fewer, and it shrinks. But then: what actually makes a firm grow or shrink?

Frank Knight seems to argue this is essentially down to “historical accident,” and therefore unanswerable in any systematic way. Coase disagrees. He also asks: if transaction costs can in principle be eliminated entirely by bringing everything inside a firm, why doesn’t one single firm just handle all production? In other words, why isn’t there full central planning?

The answer is Diminishing returns to organisation.

I. Rising internal costs. The additional cost of organising one more transaction inside the firm is not free, and at some point it rises to meet the cost of organising that same transaction on the open market, or inside another firm.

II. Misallocation. As more transactions get added, the entrepreneur is increasingly likely to misallocate resources, since perfect allocation is impossible. The waste this creates has to be weighed against the transaction costs it would take to have the open market (or another entrepreneur) handle it instead.

III. Rising supply prices. It is possible that the supply price of a factor of production is simply higher for a large firm than a small one. (Coase points to E. A. G. Robinson’s The Structure of Competitive Industry for the details of why.)

Together, these make up the diminishing returns to organisation.

So a firm expands until the cost of organising one more transaction internally equals the cost of that same transaction on the open market or inside another firm. If it stops short of that point, it means it’s making a market transaction with another firm instead; and that other firm’s costs are also bounded the same way. How does this play out in practice?

Suppose A wants a product from B. Both could organise the transaction below the relevant cost threshold, with B organising several factors of production on his end. If A doesn’t want to go through the market, he’d have to buy out the totality of B’s production, not just the one transaction; otherwise a market transaction will happen anyway. But as a firm expands, it tends to become less efficient, so A’s internal cost of doing the work B used to do might end up higher than B’s own cost. A will only absorb B’s operation if doing so costs no more than B’s original cost plus the saved cost of one open-market transaction. If a market transaction remains the cheaper option, production stays divided so that each firm’s internal transaction costs stay in line with the market alternative.

All of this has assumed exchange transactions are roughly homogeneous, but in reality they vary a great deal, and so do the costs of both exchange and internal transactions. Some transactions inside a firm might genuinely cost more than the market equivalent. Market transactions may still route through the price mechanism, but that alone doesn’t require there to be more than one firm; supply prices and diminishing returns to management remain the more decisive factors.

So, ceteris paribus, a firm will tend to enlarge when organisation costs are low and rise slowly, when the entrepreneur makes fewer mistakes, and when the supply price of factors of production is lower. But organisation costs and the rate of mistakes will tend to rise as transactions become more dissimilar and prices become more volatile; transactions differing in both kind and location tend to reduce efficiency. Innovations like the telephone, which shrink spatial distance, and technologies that centralise factors of production, both push firm size up. So does better management.

So: a firm is where transactions are organised and carried out by an entrepreneur rather than the market. This also gives a meaningful sense of “combination” — entrepreneurs who used to compete over a task now having it organised under one entrepreneur — and “integration,” where a task formerly handled through the market gets absorbed into a firm. Both are ways firms grow.

That covers parts (i) and (ii) of Coase’s argument. Part (iii) defends this formulation against rival explanations of why firms are necessary.

Against Usher, Dobb, and Knight

Usher and Dobb argue the firm exists because the division of labour becomes so complex that it needs a central organising force to hold the varying strands together. Coase’s response is that this organising force is already the price mechanism; the market regulates what forms the division of labour should take on its own. Their argument doesn’t actually explain why the entrepreneur would need to substitute his own planning for the price mechanism.

Knight instead argues the firm exists because of uncertainty. In a perfect world, every individual acts flawlessly, distributing raw materials and resources to customers with no error, that is to say, no transaction costs, no need for firms, since workers do their jobs perfectly without supervision or organisation.

But society isn’t the Garden of Eden. People act on opinion. People can be ignorant of the best choice or the best way to act, which makes the questions of what to do and how to do it genuinely important; and simply put, people won’t always get them right.

Knight’s argument then runs roughly like this:

1. Producers only have an imperfect approximation of what consumers actually want. They have to forecast demand rather than know it in advance, and this forecasting role is what creates the entrepreneurial class. Once what and how matter more than simply executing mechanically, internal organisation stops being incidental and becomes necessary; ergo centralisation under an entrepreneur becomes a requirement.

2. The confident and venturesome (those with low time preference) effectively insure the doubtful (workers) by guaranteeing them a fixed income. Without that guarantee, workers wouldn’t accept working under someone else’s direction. This, on Knight’s view, is why the firm and the wage system exist.

Coase is inclined to disagree. First, having better knowledge of the market doesn’t require becoming an entrepreneur; that knowledge could just as easily be sold as advisory services. Second, contracting with producers for future delivery—a merchant buying futures, for instance—shows it’s entirely possible to secure a guaranteed reward without personally directing production. Knight also claims it’s impossible to hire someone without directing their work, which contractual (non-directed) labour disproves. And Knight’s account of paid managers; paid even when they have no active responsibilities, never actually explains who pays them or why the price mechanism couldn’t handle this instead. Knight simply hasn’t shown why the price mechanism is unnecessary.

Firm size and the cost curve

The last part of the paper turns to the cost curve. In a perfectly competitive market, firm size is limited wherever the cost curve slopes upward; in an imperfectly competitive market, it’s limited at the point where MR = MC.

But a firm might produce more than one product, and there’s no obvious reason in real life why that fact alone should cap the size of firms. Robinson simplifies things by assuming a firm produces only one product, but Coase argues this assumption doesn’t actually get us anywhere useful.

The classical argument holds that since everything can in principle be produced at its market-clearing price, there’s no need to produce anything else. But the market-clearing price of a new product can sometimes undercut the market-clearing price of an existing one.

Picture it this way: there’s a consuming centre at point C, and the entrepreneur starts his exchange-transactions at point X. A, B, and C represent distinct industries. As the entrepreneur expands into B, at some point his organisation costs rise to match the cost of a nearer product, so he expands into A and C as well. This is just an illustration, but it shows that cost curves don’t need to cap firm expansion even under perfect competition, and the same holds, even more so, under imperfect competition. So Robinson’s treatment of the problem doesn’t hold up.

Is the definition tractable and practical?

Coase returns to the question he opened with: is his definition of the firm tractable and practical?

Tractable, yes. The essence of the employer/employee relationship is that the employee is under a duty to provide personal service, and the employer has the right to direct that work — otherwise it’s a mere contract, not employment. The employer must be able to say when the employee works and when he doesn’t. Direction is the essence of the legal employer/employee relationship, just as it is economically. As Batt notes, what distinguishes a wage labourer from a servant is that the wage labourer retains some degree of control over how the work itself gets carried out.

Practical, too, because firm size is ultimately a matter of marginal analysis: organisation costs inside the firm will tend toward equality with the costs of the alternative, that is to say, another firm, or the open market. Businessmen naturally seek this kind of equilibrium.

But this only holds in the static state, and there’s more to consider beyond it. Coase leaves it there, noting that going further would open up another paper.

Notes on A. Alchian and H. Demsetz: “Production, Information Costs and Economic Organisation”.

Why do firms exist? What purpose do they serve? How do they coordinate? These are the questions Alchian and Demsetz consider.

Market capitalism and the case for cooperation

A&D start with a basic definition of market capitalism: non-governmental control over the means of production. Corporations, households, etc. own the goods and decide how they’re allocated. Within this process they’ll inevitably seek cooperation and specialisation with other economic actors (take Adam Smith’s famous pin example), which in turn increases the demand for institutions that can facilitate this cooperative specialisation.

It’s worth asking, they go on, whether the gains from cooperative specialisation are higher when they take place inside an institution (the firm) or through the market (an uncoordinated setting), and what the structure of that institution actually looks like.

The firm isn’t a dictatorship

Conventional wisdom supposes the firm is simply a better central planner than the uncoordinated market; that it owns all its inputs and dictates where people work in an authoritarian manner, something like a Soviet bureau but smaller. A&D reject this; quite emphatically in fact. “This is delusion!”

The mechanisms of the firm to A&D are actually very similar to those of the unplanned market. Firing and suing a worker is comparable to “firing” a grocer by no longer buying from him, and “suing” him by refusing to accept shoddy goods. Managing a worker by assigning him task A or B instead of C, at a given wage, is comparable to managing a grocer by steering him toward supplying tea instead of water, at a mutually agreeable price.

Management, assignment, and directing tasks sound authoritarian, but this framing is quite deceptive. Intrinsically, all it amounts to is the restructuring of a temporary contract. With few exceptions, workers aren’t contractually bound to a firm permanently. So the controller of the firm is really more a “team leader,” coordinating a nexus of disparate, voluntary contracts, rather than a bureaucrat or a king.

The metering problem

A&D then turn to a central issue the firm faces in managing this team: the “metering” problem. To meter, in the relevant sense, means to measure and to control. Both apply here; the firm must measure input-output productivity and control the rewards tied to it. If rewards weren’t correlated with productivity, no one would have any incentive to work harder. If rewards were negatively correlated with productivity, no one in their right mind would work for the firm at all. Both under productivity and unrealistic productivity targets damage the firm.

So it’s essential to both measure productivity and set the rewards attached to it; the firm exists, in part, to facilitate rewards proportional to a worker’s productivity. A&D point out that the market can sometimes solve this metering problem on its own: if a farmer increases his output substantially at the going market price, his revenue rises proportionately too. His marginal product is metered automatically, and rewards follow accordingly. So the market handles metering reasonably well for anyone whose output changes are individually observable.

It’s here that A&D also criticise economic orthodoxy for ignoring organisational issues and simply assuming productivity is automatically rewarded on its own; if rewards are metered poorly inside the organisation, the firm’s productivity will decline even if underlying output stays high and sustainable. The metering problem, in other words, is not trivial.

Team production

This brings us to team production, mentioned earlier. A&D use cross-partial derivatives and some math to formalise the idea, but I don’t think there’s any need for that. Let’s just be intuitive.

Take their example: two people lifting heavy cargo onto trucks. This counts as team production because their actions aren’t technologically separable. It’s impossible to tell from output alone who’s shirking and who’s working hard.

Suppose I slack off and work slowly, but my teammate quadruples his effort to compensate. We cannot observe this just by seeing that total output rose from 5 boxes to 50, because we’re producing a single, identical, jointly-produced good, not lifting different boxes and summing the totals; we’re lifting the same boxes together. We’re also not each producing separate units of the same good independently (say, two apple farmers picking apples alone in different orchards), meaning the final output depends jointly on our combined efforts. This is exactly what makes metering productivity and rewards from raw output numbers alone impossible.

Someone has to directly monitor the two workers to see who’s shirking and who isn’t. Even though marginal output can’t be attributed to either one individually, behaviour can still be observed; is one of them taking a lot of coffee breaks? Lifting v e r y s l o w l y? And so on.

A&D note that if monitoring were costless, no one would shirk, because it would be impossible to pin a decline in output on your teammate instead of yourself. Obviously so… if I’m being watched like a hawk and I wander off to slack, blaming the resulting drop on my teammate would be absurd. But constant monitoring isn’t free. Who wants to watch people lift crates all day for no extra compensation?

So monitoring is costly, and the harder it is to monitor, the stronger the incentive to shirk, because of the metering problem. Working in a team is only worthwhile when the net productivity gains from teamwork outweigh the costs of monitoring and metering.

Shirking and non-monetary benefits

From this we can also deduce that people value non-pecuniary benefits: leisure being the obvious one. I would guess most people would rather work 4 hours than 8. This preference matters more inside a team. If I’m an individual farmer growing and selling my own crops and I shirk, I bear the full cost of that shirking directly, in reduced output.

But if I’m working in a team and our marginal output declines only slightly, the metering problem makes it hard for the firm to trace that decline back to me specifically. So my personal loss in reward can end up smaller than the total cost my pursuit of leisure imposes on the team as a whole. This means that whenever monitoring isn’t free, which is to say, always… some level of shirking gets tacitly tolerated in exchange for lower pay.

A&D use the example of a university as a kind of “legalised” shirking: people use paper, mail, and (nowadays) computers for things that have nothing to do with productivity, and administrators could probably identify the culprits in most cases, but doing so would be cumbersome and not worth the cost. So faculty are implicitly granted some degree of nonpecuniary privilege, that is to say, slack; which lowers pecuniary (monetary) wages while raising “leisure” in trade.

Ideally, detection of shirking would be far more effective, and shirking itself would fall to zero. But this is rarely, if ever, achieved in practice.

Can the market monitor a team on its own?

A&D consider whether market organisation alone could monitor a team, without any boss. Competition among potential team members would determine how rewards get distributed, and input owners instead of bosses could replace members who shirk excessively. In this decentralised setup, with no manager or fiat authority (something like a workers’ cooperative), outsiders could discipline members by offering to do the same work for a smaller share of the rewards. Organisation, in principle, could evolve without anyone directing it. But A&D argue this can’t fully work, for two reasons:

1. The cost of detecting shirking in team production is high ipso facto.

2. There is a free-rider problem: suppose a new input owner has to accept a smaller share of rewards to join the team. His incentive to shirk remains high anyway, because the reduction in his own share from a drop in output affects him far less than the aggregate reduction in total team output.

The classical firm and the rise of the “boss”

This is where A&D introduce different types of firm structure.

The first is the classical firm, as described by people like Coase. As noted above, one way to reduce shirking is to appoint someone to monitor team members directly. But who monitors the monitor? Market competition alone can’t solve this, for the reasons just given. A better solution is to give this person the residual, that is, total earnings above some prescribed baseline, which makes him less likely to shirk himself, since shirking now costs him directly. This is a specialised role.

But how does the monitor actually monitor, beyond simply watching for shirking? He has to measure output performance, decide on rewards, observe marginal productivity, direct people’s tasks, and terminate the contracts of anyone underperforming. This is, in effect, the “boss.” A&D sum it up as: the monitor earns his residual by observing and directing the actions of the inputs. And to actually discipline shirking, he needs sole authority to terminate and revise individual contracts.

The role of the firm’s entrepreneur, then, comes down to five things:

I. Claiming the residual “surplus,” for the reasons above.

II. Observing input behaviour.

III. Being the unilateral party to input contracts.

IV. Altering team membership — hiring and firing.
V. Being able to sell or transfer these rights.

But, crucially, the entrepreneur isn’t a tyrant. Just as the employer “orders” the employee to complete certain tasks, the employee “orders” the employer to pay him and to negotiate conditions favourable to him. The relationship is reciprocal.

Different forms of the firm

A&D go on to describe several variants of this structure.

The profit-sharing firm: part of the residual is redistributed to workers. This is possible, A&D say, if workers effectively monitor each other, but difficult in practice, since the costs of team production rise once everyone has a claim on the residual, and the shirking problem worsens as a result.

The socialist firm (they cite Yugoslavia, or “Jugoslavia”): firms are organised through workers’ committees, which control the managers, with the residual shared among workers. The manager here has an added incentive to shirk, since he receives only a small share of the residual. One check on this: the committee can recommend to the state that his contract be terminated if he performs poorly.

The corporation: profit is shared among many shareholders. One check against shirking is the promise of future access to capital (debt, equity), with limited liability adding a mechanism that protects shareholders from loss. Another is that shareholders don’t collectively make decisions themselves (which would be a logistical nightmare), but instead appoint a small board of executives to do so, while retaining the right to revise those decisions. Managers, again, aren’t given free rein; they remain accountable through stock purchases, capital markets, proxy fights, and so on.

The nonprofit: A&D keep this brief, pointing out the very obvious: since improved management doesn’t translate into stock-based capital gains, managers here have less incentive to reduce their own shirking or improve performance.

The partnership: certain relations are handled through partnership arrangements. These tend to be small and self-monitoring, built between people who already know each other’s tendencies toward shirking.

The employees’ union: employees monitor each other’s performance and compensation. Some things, like wages, are easy to monitor; others, like nonpecuniary benefits (healthcare, insurance, pensions), are harder, so a specialist monitor ultimately gets hired for that purpose.

Team spirit and loyalty: A&D argue this exists not simply to reduce shirking outright, but because when trust within the company is high and the potential for shirking is low, the true rate at which a worker would trade production for leisure can be estimated more accurately. Team spirit and loyalty, then, isn’t a tool for squeezing more work out of employees, or mere pandering, rather, it is a tool for evaluating worker performance more precisely.

Input ownership and depreciation

Finally, A&D discuss certain inputs that firm owners tend to hold onto directly. The central employee/owner must pay input owners fairly, even in periods when he personally loses money: he can do this by paying in advance, or by committing resources such as machinery and land against such losses. He should also be compensated for use-induced depreciation, since without a monitor or owner attending to how these assets are used, depreciation would run higher than it otherwise would.

Notes on Williamson’s “The Theory of the Firm as Governance Contract”.

I talked about the Coasian “Nature of the Firm” in an earlier part, and to be sure, it’s a very good paper; perhaps one of the best of all time. But Coase’s paper was only the beginning of a long and firm-standing tradition. Oliver Williamson, another oft-overlooked economist, argues for the firm in an altered manner, which I’ll discuss here.

Why organisation is scarcely discussed

Organisation is scarcely talked about in economics. In Williamson’s view, this is because it’s much easier to say “organisation matters for economic transactions” than to actually explain why. His goal, then, is to apply the conclusions of organisation theory from the perspective of contract, and tie that back into the theory of the firm.

This raises the question of what the “perspective of contract” actually is. Williamson argues economics has too often been studied through the economics of choice; the theory of consumer behaviour, of profit and utility maximisation. That lens isn’t wrong, but it isn’t necessarily the most instructive one either, and the lens of contract has been comparatively ignored.

The lens of contract looks specifically at how institutions come into being, by studying the efforts of actors to align incentives and craft institutions suited to their own needs of exchange, that is to say , private ordering. This brings back into the picture the literature on avoiding contractual hazard, particularly mechanism design and agency theory, both of which had been largely cut out of neoclassical economics for some time.

Williamson sets this out with a simple tree: the science of choice is concerned with scarcity and resource allocation; the science of contract is concerned with private ordering, which is in turn the root of governance theory — how contractual relations actually get implemented. It’s governance that Williamson wants to study.

The Tree in question.

Five lessons from organisation theory

Williamson draws several lessons from organisation theory, as developed by Herbert Simon, for the economics of contract.

I. Bounded rationality. Simon’s framework assumes actors have limited cognition and information, and rather than maximising utility, they “satisfice”; that is to settle for a good-enough alternative. Applied to contract, this means all contracts are necessarily incomplete: they can contain errors, gaps, or omissions. Actors have to adapt to the unforeseen, and remain exposed to potential contractual breakdowns (failed cooperation, renegotiation). Private ordering, in response, works to form a governance structure that can mitigate these impasses… something very reminiscent of a firm.

II. Notice behavioural regularities. Controlling a worker has an intended consequence (say, more hours worked), but since workers are living, thinking actors and not homo oeconomicus, it also has unintended consequences (say, lower productivity). Mechanisms that account for both are superior to mechanisms that only account for the intended one.

III. Different forms of organisation differ structurally. A market, a firm, and a bureaucracy is not a mere form of terminology; fundamentally, they are organised in fundamentally different, discrete ways, each with its own strengths, weaknesses, and characteristics.

IV. Microanalytics matters. Activity should be reduced down to the level of the individual transaction (reminiscent of Mises), where conflict, mutuality, and order are all simultaneously present.

V. Cooperative adaptation is necessary. This is the idea that parties adjust to each other through changes in the market. Both Hayek and Chester Barnard endorsed a version of this: Hayek held that economic actors adjust spontaneously and autonomously through changes in relative prices, while Barnard held that adaptation requires deep, conscious, and purposeful coordination. Williamson argues both mechanisms coexist in any real economic system. (I’ll withhold my own thoughts on this one.)

Three regularities of contract

Having established why the lens of contract matters, Williamson identifies three regularities discoverable through it: the fundamental transformation, the impossibility of combining replication with selective intervention, and contract law(s).

The fundamental transformation describes how a large pool of qualified suppliers gets transformed, through the process of executing and renewing a contract, into a small number of suppliers actually dealt with. This isn’t what one would commonly define as a “market" transaction”, at least in the sense of faceless buyers and sellers meeting at a market price. Rather this contract is long-term; the parties become bilaterally dependent, since the buyer can’t easily switch suppliers, and the supplier likewise can’t switch buyers without a loss in productivity. This dependency creates the need for value-creating governance structures that minimise conflict and maximise mutual gain; hence the necessity for penalties for premature termination, mechanisms for information disclosure, specialised dispute resolution, and so on.

The impossibility of combining replication with selective intervention is, for Williamson, the limiting factor on firm size. If a large firm could replicate everything a collection of small firms (i.e., the market mechanism) does well, it would always outperform the market. If it could also selectively intervene by imposing hierarchical order wherever conflict arose, it would mitigate conflict better too. If it could do both at once, it would grow without limit. But it doesn’t. Williamson’s explanation (somewhat unsatisfying, in my view) is that moving from market to hierarchy weakens incentives inside the integrated firm, and some transactions simply don’t respond well to administrative control.

Contract law(s), not contract law; there isn’t one universal law governing how firms form contracts, but many. A firm effectively becomes its own court of appeal when settling internal disputes over things like overhead and accounting, giving it a kind of fiat power within its own domain. This is part of why the firm’s status as a governance structure needs to be reiterated rather than assumed.

The firm as a governance structure

All of this is why Williamson insists the firm has to be analysed as a governance structure, that is, not as a stand-alone mode of organisation, but one to be compared against others. Unlike property-rights or agency theories of the firm, his governance theory rests the firm’s foundations on three things: incentive intensity, administrative control, and contract law. The example Williamson uses to illustrate governance in action is the “make or buy” decision for intermediate products: should the firm make an input itself, or buy it? This, too, is a governance choice.

Historically, the make-or-buy decision was analysed through the lens of bilateral monopoly; one buyer (monopsony) facing one seller (monopoly), with prices settled through bargaining. The standard claim was that the division of profits between the two could be indeterminate, which created a case for vertical integration to resolve the conflict and restore “proper factor proportions.”

Williamson pushes back on this. First, monopoly power isn’t present everywhere in a large economy, so vertical integration can’t always be necessary even where it does occur. Second, if an integrated firm can replicate everything an unintegrated one does, why don’t firms just integrate everything?

This is where Williamson formalises his own account: governance is valuable because of what he calls the “commons triple” (named after John Commons), namely conflict, mutuality, and order; governance mitigates conflict, introduces order, and realises mutual gains from voluntary exchange. What defines it is lower incentive intensity, greater administrative control, and internal dispute resolution.

He illustrates this with a graph of transaction costs as a function of asset specificity; technical-looking, but not as scary as it would seem. At zero asset specificity, market transaction costs, M(k), are lower than hierarchy’s, H(k). As asset specificity rises, cooperative adaptation becomes more necessary, and at some point M(k) exceeds H(k) — though the graph also includes an X(k) curve, representing hybrid arrangements where hierarchies retain some features of market organisation. Please note that the slope of M(k) is steeper than that of H(k): the transaction cost per unit rises faster for the market than for the hierarchy, consistent with the overall story.

The make-or-buy decision, further elaborated

Williamson develops the make-or-buy framework further. Suppose a firm can either make or buy an input, and the input can come from either a general supplier or a specialised one producing for select purposes. He lays this out as a decision tree.

The firm goes with the general (market) supplier when k, asset specificity, equals zero — meaning no specific assets (to be clear, assets that would lose value if redeployed elsewhere) are involved, and the parties are essentially faceless. When k > 0, it turns to the specialised supplier. A second variable, s, stands for safeguards — mechanisms that “police” a transaction, such as requirements for information disclosure.

• Node A: no asset specificity. Governance can be handled perfectly through market prices.

• Node B: k > 0, s = 0: Specialisation exists but no safeguards are in place — a bad combination.

• Nodes C and D: k > 0, s > 0: This can be resolved either through credible contracting (bilateral interfirm agreements (node C) ) or, when asset specificity is too high for that to hold, through internal organisation (node D), where the firm takes on the hierarchical structure and owns its raw materials, components, and distribution process directly.

Of course, full internalisation isn’t always possible; firms can’t own their workers or customers, since that would amount to slavery, which is inefficient (among other things).

Practical applications, summarised as quickly as possible (?)

I’ve said a lot already, so I’ll summarise the remaining practical applications briefly.

Forward integration into distribution is the relationship between manufacturers and wholesalers. Most of these transactions are generic and market-based, fitting node A reasonably well, but not entirely, since they often still carry customer and territorial restrictions, service requirements, and the like. Williamson argues this arises when the interests of the system as a whole (the firm) conflict with those of its parts (franchisees, retailers). He cites the Schwinn bicycle company (I, of course, ride a Trek) imposing non-resale restrictions, since franchisees were selling to discounters who then sold the bikes boxed, without proper support: undermining the brand’s image. So the manufacturer-retailer relationship often isn’t node A, or node D for that matter, but node C.

Labour: a firm obviously can’t own its labour (that would be slavery), so node D doesn’t apply here, and the comparison is between nodes A, B, and C instead. In node A, labour can be redeployed elsewhere without losing productive value, so there’s no particular need to guard against undue quits, or to invest in information disclosure, verification procedures, or dispute-settlement mechanisms. Where k > 0 and s = 0 (node B), workers with specialised skills who quit cause real inefficiency, creating a need for governance structures to settle disputes between employers and workers; unions being one example. Ideally, this settles into node C, a collective organisational structure where mutual confidence between employer and worker is actively fostered.

Notes on Alchian, “The Basis of Some Recent Advances in the Theory of Management of the Firm".

Managers are observed to act in ways that seem unbecoming of pure profit maximisation. They seek to grow asset size, or buy machinery well beyond the profit-maximising point. Why? Armen Alchian explains.

More specifically, managers are observed to emphasise growth in total assets and sales rather than purely targeting profit. They’re also slow to cut costs and raise efficiency in response to falling demand, even though under pure wealth maximisation that response would be automatic. And they do things like buy more expensive computers that don’t obviously serve profit maximisation at all.

Baumol argues that sales maximisation is simply an objective feature of managerial work, and Penrose says the same of asset growth. But neither explains the full range of managerial behaviour, and treating these objectives as merely subject to a wealth constraint implies the firm would never trade off pecuniary profit for sales — which isn’t what we actually observe. So these are weak defences on their own.

Better theories of what looks like managerial irrationality can be found in Williamson’s The Economics of Discretionary Behaviour, Marris’s The Economic Theory of Managerial Capitalism, and Becker’s Economics of Discrimination. Time to go through each one without exhaustive detail.

Becker: nonpecuniary utility

Becker argues that nonpecuniary utility has to be included in the overall utility function of anyone earning an income. An owner, manager, or employee will sacrifice some money if offered certain nonmonetary benefits; congeniality, say, or preferences around race or religion. This can lead him to do things like discriminate, even where the discriminated-against labourer would have generated higher overall profit. Money income and intangible benefits, such as working conditions, are thus goods with a tradeoff rate between them.

The idea that owners or managers will sacrifice profit for moral or personal considerations goes back to Adam Smith, but it’s been neglected in favour of treating profit maximisation as the firm’s sole objective. Becker and Kessel applied this specifically to public utilities, arguing that firms already operating at their regulated profit ceiling had every incentive to shift toward maximising nonpecuniary factors instead: discrimination being one of them.

Maddox and Marris: managerial non-altruism

Maddox argues managers have some incentive to reduce owners’ profits in larger firms, since managerial salaries scale with firm size; meaning managers have reason to act in their own interest rather than the owners’. Marris counters that stockholders can police this, though the costs of detecting and policing such behaviour can be substantial. Alchian notes here that Marris conflates the rate of profit, expressed as the marginal return on additional investment, with absolute profit .

Williamson’s three channels of managerial utility

Williamson, as Alchian presents him, gives the best general theory of managerial behaviour. He argues a manager can raise his own utility using the firm’s resources in three ways:

1. He can simply increase the owners’ profit, and be rewarded with higher returns himself.

2. He can direct the firm’s resources; expanding asset size, for instance; to raise his own salary, even at the expense of declining profit.

3. He can maximise his own utility by consuming nonpecuniary goods directly (racial discrimination, lavish banquets, more time off, more attractive staff, and so on), spending on these even where it comes at the cost of overall firm profit.

What this entails.

From here, business expenditures can be analysed from a nonpecuniary angle and folded into managerial utility curves alongside pecuniary ones. Beyond that, we’d need to account for how taxes and institutional changes affect a manager’s ability to shirk in this way, and for the transaction costs owners face in detecting and policing deviations from profit-maximising behaviour.

Notes on Alchian: Uncertainty, Evolution, and Economic Theory

The sharp Armen Alchian (with his work summarised like two or three times already, that should tell you how good he is), as a junior professor at UCLA, read the bitter and seemingly never-ending marginalism debate between Lester and Machlup (with the likes of Stigler helping the latter) and was confused about why the debate had dragged on so long and so acrimoniously. In his view, the solution was simple and intuitive, and had great implications to firm behaviour.

Alchian proposes an analytical framework where incomplete information and Knightian uncertainty are built in from the start. This framework does not assume profit maximisation or predictable individual behaviour, but that, remarkably, doesnot stop economists from making useful prescriptions.

The problem with naïve profit maximisation

Neoclassical economists in Alchian’s time taught the simplified model that rational actors seek fully optimal solutions, and that the most appropriate action yields an optimal result. (Williamson would also address a similar thing later, summarised above). It’s acknowledged that this “acting by the margin” doesn’t actually happen in real life, because of uncertainty about what “optimal” even means over any given period (subject to fluctuations) but it’s still asserted (especially by figures like Machlup) that people act according to these principles anyway, if only unknowingly.

This methodology was attacked by G. Tintner. Under genuine or “Knightian” uncertainty, an individual can’t solve complex, multi-variable problems even in principle, optimum or not. Each action instead carries a distribution, that is to say, a probabilistic spread of potential outcomes, not a single determinate one. These distributions overlap, and so choice ultimately becomes a decision about which distribution to prefer, not a search for “the maximising distribution.”

To be precise about this: asking for a “maximum price” isn’t nonsensical in that there is indeed one maximum price. But asking for a “maximum distribution” is nonsensical, since the maximum-profit criterion would require the outcome distributions themselves to overlap and commensurate in a way that produces a single best answer, which they don’t.

Alchian’s proposed alternative.

Alchian proposes two things instead. First, that we study the optimisation calculus of society as a whole to understand market forces, rather than trying to model the individual decision-making unit. Second, that success in business is marked by realised positive profits, not maximum profits. The people who realise positive profits are the survivors and consequently the ‘successful’ ones and the people who don’t, aren’t. They are simply unsuccessful.

It doesn’t matter whether the people achieving this are smart, dumb, attractive, or anything else. Even a population of entirely foolish actors would still produce successes, because in a world of genuine uncertainty, being venturesome and lucky is rewarded over being logical and careful.

So success accompanies superiority, but that superiority may be a matter of fortuity rather than genuine insight. It may also be a matter of adaptation; that is, individual rationality, motivation, and foresight are secondary to the ability to adopt behaviours appropriate to the environment, whether or not that adoption was consciously reasoned out. To give a real-life example, plants grow along the side of a building not because they intend to, but because doing so adapts them to the available sunlight.

Longevity != foresight

Alchian also argues that a firm’s longevity doesn’t, on its own, demonstrate genuine foresight. He gives Borél’s example: two million Parisians tossing coins to match, one toss per second across an eight-hour day; after a thousand years, there would still be a dozen participants left in the game purely by chance. So even a firm that’s lasted a hundred years can’t automatically be credited with foresight rather than luck.

Fortunately, though assuming chance and uncertainty does not mean economists have useless work. With inductive knowledge of what is necessary for survival and alternatives, he can state behaviours that are more viable than other for certain firms.

In Economics there are a lot of issues. The greatest issue we face is the way to construct a system of rational economic planning. Or, put even more simply, we want to create institutions that can, when given certain parameters, those being information, preferences and knowledge of technological means, internalise and use them properly to produce and allocate scarce goods. Now, if we assume a perfectly competitive market, a “static state” so to speak, all the information, all relevant preferences and all knowledge of the best means are given. Then obviously everything becomes easy. Planning just becomes an optimisation problem.

All we have to do then is make sure Pareto efficiency holds with respect to allocation. This means no reallocations can increase utility more optimally. Put simply, the marginal rate of substitution between commodity X and commodity Y are the same in each of their different uses. So if the MRS between apples and oranges in juice is 2, the MRS between apples and oranges in fruit salad should also be 2. This is so that there is no capital reshuffling; this is Pareto efficient. Wow, that was very easy. Why all the fuss? Where is the “knowledge problem”?

But wait. In the real world, not all relevant preferences, information or knowledge about the best ways of technical employment or scarce goods are given. We cannot assume them to be complete or perfect, and we cannot assume that a "single mind", whether man or alien or machine or communist, could access and coherently integrate the net sum of knowledge and draw conclusions from them. Why? Because knowledge doesn't exist as a single datum that we can neatly model, put into a spreadsheet, or standardise into a single unit; a datum, if you will.

We will talk about non-scientific knowledge later, but for now, one must know that knowledge is not only dispersed amongst many individuals--a baker knows how to bake but not to drive, a taxi driver knows how to drive but not to bake, an investor knows how to invest but not the other two--but it is also incomplete and contradictory.

As Hayek further says, this knowledge cannot be entered into statistics. There is knowledge that may apply perfectly to one location and be nonsensical to the other. There may be forms of knowledge that differ in units; assuming you could even quantify them, how would you aggregate "the taste and viscocity of Brazilian mango juice", "the internal thermal quality of blast-furnaces", and "the level of acceptable rot and weevil degradation for wooden beer-barrels?" into a single variable or numerical unit? It would be like trying to add "Ruritania's forest is x hectares of land' to 'person y is z feet and q inches tall'. There would be no meaningful result.

It is best to illustrate what incomplete and contradictory knowledge entail with a few examples. For incomplete knowledge, consider this; a cargo-ship operator notices that the demand for space in his cargo-boat has lowered. Now, consider that he operates internationally; so one cargo company in France may have simply switched to handling cargo by rail, one company in Panama may have gone bankrupt, one company in México may have gotten firebombed, and so on.

Knowledge is incomplete here if the operator doesn't know the minute specifics of each condition; and only knows that supply has decreased, for whatever reason that may be.

In terms of contradictory knowledge, consider that one real estate analyst in the town of Polonia for Ruritania acquires knowledge that a new, lucrative computer sciences business has recently been built in the city. This would raise housing prices because, ceteris paribus, the demand for housing would increase. But consider that another real estate analyst acquires knowledge that mortgage rates have risen from 1 to 10%. This would lower housing prices because the purchasing power would decrease.

Both pieces of knowledge are "correct", but they are also mutually exclusive. So whose conclusion is ultimately correct? Well, we can't reason this out apriori. Only the market can arbitrate and deduce the "correct" party. So, creating a system of rational planning isn't just an exercise of optimising capital goods. It would be if all knowledge was a datum. But since it isn't, it's an issue of how to allocate goods with the knowledge we have, which is imperfect, flawed, dispersed and contradictory.

Let me give a florid example to wake you up. Economic planning is not like an adventurer calmly rowing his boat through gentle river water, following the shapes formed by the river, and occasionally avoiding rocks and trees every once in a while. it is, more like, through immense guesswork and a degree of luck, the adventurer violently rowing in the middle of the Ocean, with weather and temperature conditions perpetually unclear, in multiple directions he thinks may be the correct path, whilst also fighting the indeterminacy and fluidity of hungry, powerful waves.

But just to be clear, the issue is about constructing a system that can best utilise knowledge through economic planning. The issue is not whether to plan or not, because in the free market multiple, non-connected firms also do economic planning in that they utilise scarce goods and allocate them. The question is of who is to do the planning. Who can utilise dispersed and incomplete knowledge better.

One may think that the "knowledge" referred to here is just scientific knowledge. So, soil temperatures, the laws of physics, downward-sloping demand curves, and so on. But there is knowledge Hayek is concerned about that is not scientific, and in fact quite relative; the knowledge of circumstances in a particular time, place or situation. This is knowledge that cannot be deduced in a textbook, but is acquired through experience.

Crucially, not only can this form of knowledge not be quantified, but it may soon become worthless once time and place changes even slightly, making it even more fickle to work with. This form of knowledge is called "tacit knowledge" by Michael Polanyi. To give an example. To know that productive capacity for a pin-making machine can increase from 34,000 to 52,000 is knowledge.

But to assess from part experience in manufacturing, marketing, and accounting that this machine could be better employed to make plastic flowers because right now, at this place, there are signs of a potential boom in demand for plastic flowers because people are starting to like Ruritanian culture, which finely appraises plastic flowers, is also a form of knowledge.

To know based on seeing someone type that their vigorous dexterity, currently used to stock shelves, would be better off writing company reports, is also knowledge. But to know that using massive reserves of palm oil to replace current shortages of butter in baking products rather than buy margarine, because you have seen and discussed with people who frequently prefer denser baked goods, is also knowledge. This is not unfixable or codifiable knowledge, it is by no means an “iron law of nature”. Say the next day people find Ruritanian culture disgusting, or say the next day company reports are considered archaic, or consider people suddenly prefer flaky goods. Then the knowledge would cease to apply.

But it is all the same, specialised knowledge about conditions in a certain time, in a certain place. To know what to do in this instant, for this situation is a skill often derided, because often it cannot be formalised. But it is in fact essential. It cannot possibly be given to use before that situation happens (nor can we even have certainty on what said situation is!), but it is something that is necessary for making many dynamic decisions. Indeed, having the foresight necessary to act properly to change in the "times they are a-changin" is one of the skills of any successful entrepreneur or individual.

Perhaps this is why it is so unfortunate that economics oftentimes thinks of static conditions, for this undersells the very nature of the economic transaction. For if conditions were unyielding and constant, a planner could often just draft a plan well in advance, follow it, and that would be that. Where's the difficulty? The difficulty in planning lies in changes. Changes can make the most meticulously drafted plan completely fail if the entrepreneur is not vigilant.

They dwell constantly on a market, like a spectre; the spectre of rising costs. This spectre, if the businessman is not careful, can tear into the ripe flesh of his business, suck his profits dry, and turn success into failure. And all it takes are a few incompetent management decisions. Even the plant--the mechanised, the efficient, the mark of Taylorism--can only survive if it has resources that continuously replace things that may unexpectedly fail.

Say equipment X suddenly short-circuits; if you don't have a reserve stock for equipment Y or the money to buy it, what will happen? If the roof suddenly cracks, if the water system suddenly clogs, if the assembly machines jam, does it matter how advanced the machine was if you have no back-up plan? So we can see even more nuance in the economic plan.

The issue is not just 'how can we allocate capital goods and get optimal outputs', the issue is, 'how can we use knowledge that is changing, specific, contradictory and incommensurable to get a capital plan that might be optimal today and maybe tomorrow, and how can we adjust this plan to continuously fulfill the parameters when they change?

This is difficult, and it requires decentralisation so that 'each man on the spot for a time in place' can work out their plans and have the plans that optimally utilise the dispersed and contradictory (yes, I keep repeating it, but you must understand this!) pieces of knowledge given to them as promptly as necessary for the underlying conditions. But they cannot plan alone; they need to know how to fit their decisions into the broader economic system. And this is where the magic of the price system comes in.

If the planner had to consider every single factor that could potentially impact his decision in planning with factor goods, the search costs and time-lag costs would be astronomical for even one good. Even "why paper bags are more readily available than canvas bags", as Hayek says, could have a million causes, being geopolitical, environmental, cultural, and so on and so forth. And this question is one of probably hundreds of thousands he would have to ask. This would be borderline impossible for him to achieve. So, the question becomes one of relativity.

What is more significant is no longer why X or Y is harder or easier to procure, but how much more or less difficult they become to procure relative to other things, how they have changed over time, or the opportunity costs for his alternative goods. It is the price system that can simplify this further, by reducing all goods into a numerical index that changes for one reason or another due to these conditions or relative shifts, and having shifts in supply or shifts in demand being communicated by shifts in these indices, which tells him to act. This way he can act without these astronomical search costs.

Consider the case of tin. Assume that either in somewhere of the world has there been an opportunity for tin to be used, or somewhere a tin distributor has been eliminated. It doesn't matter whether the former or latter has made tin more scarce. All it matters to consumers is that it is more scarce, and therefore one must economise tin, because the price indices say so.

The price system has unconsciously and indirectly coordinated production, and it does so every single day. The beauty of this system cannot be understated. It is marvelous and impossible to comprehend in every sense. It is in a certain sense, a true “invisible guiding hand”.

But thus far these are all general claims. I shall make two detailed arguments refuting this view.

I.) The idea of laissez-faire, of free trade and production and absence (or at least minimum) of taxes/limiting restrictions and whatnot long precedes Smith.

To be sure, not every economist prior was laissez-faire. There was the prevailing Mercantilist school who were not for unbridled free trade like Postlethwayt, who defended the expansion of the British Slave Trade, Petty, who was also one of the original empiricists, who prioritised experience over rigid theory (as after all he was inspired by Bacon’s statistical methods and assumed that statistical investigation could substitute for experimentation) (Hull 1899) and Steuart, who argued that it was possible that society could consume in a “wasteful” manner and it was the goal of the state to introduce a more rational plan. (Anderson 1984) Smith discusses them in detail in the Wealth of Nations, tho he does not mention Steuart by name exactly.

But the Mercantilists, despite their interventionist natures, were by far not the only school that Smith were concerned with, and in fact there were another prevailing school of thought he was drastically critical of; the Physiocrats. The Physiocrats of course argued, in texts such as the Tableau Economique, that it was best for capital to be allocated in the productive sectors, that is to say, agriculture, before getting reallocated in the sterile sectors, that is to say, handicraft production and manufacture. Smith had some partial Physiocratic tendencies in himself, such as when he says “According to the “natural course” (quotations mine) of things, therefore, the

greater part of the capital of every growing society, is, first, directed to agriculture, afterwards to manufactures, and last

of all to foreign commerce.... “ (Wealth of Nations 304) but overall his tone is highly critical. Though this is the case it should be noted for fairness that a great deal of his critiques were centered around the Physiocratic conception of land as the source of all value and their consequent inconsistencies on how to treat land vs. how to treat handicrafts.

But regardless the Physiocrats were overall centered around the notion of laissez-faire (with the exception of land due to some exceptionally ruinous logic); it was Quesnay who said in the Tableau Economique that amongst the eight causes for an agricultural nations ruin were “Excessive cost of collection of taxes”… “Lack of freedom (a) in internal trade in raw materials and (b) in cultivation”… and bad form of taxation that cut into the capital of people doing agricultural investment. (Higgs 1897). Quesnay says also in his General Maxims, pertaining to what a government ought to do in its policy, is to let agriculturalists be free to cultivate in his own field those products that his interest, his faculties, and the nature of the earth suggest to him will produce the largest possible result. In other words, free production. (Quesnay, trans. E.R. Blake, 1915), and once again his attitude towards domestic trade is identical to that with international trade.

External commerce of the products of the land should not be arrested nor prevented in any way.”

Repeats Quesnay in the maxims.

Quesnay being a major source of influence in the Physiocratic School meant inevitably that Physiocrats would tend to echo his basic view. The jurist Gullierme Le Trosne says in Ch. 3. Of his De L’Administration provinciale et de la reforme de l’impot that taxes that diminish producer’s revenue, whether for capital or for his consumption goods, inevitably cut into his returns and make him spend less on the product. When these taxes impact wage-earners too, it ends up leading to of “the degradation of cultivation, of the diminution of the net product, and of the exhaustion of public revenue”. He uses the metoyage system as an example of such a ruinous effect, as it contains an “unforeseen” tax the landowner cannot deduct until he renews his lease and is not a result of produce, and so is a “spoliation” of their resources.

Physiocrat Merciere De La Rivière would make a similarly radical argument that free-trade is beneficial no matter the circumstance; that is to say that even if every other nation in the world was protectionist unilaterally removing regulations would still be a benefit. Turgot, who had actually managed to take royal office under the title of Minister of Finance, Trade and Public Works under Louis XVI, had managed to make the most tangible change according to Physiocrat principles, by introducing market reforms (abolishing medieval guilds, restrictions on trading and the informal corveé labour).

I do not wish to insist on the difficult-to-justify argument that the Physiocrats were completely laissez-faire, as they were rather inconsistent at times, having lacked a general theory of political economy, and advocated for direct taxes and control over the price of agriculture. But I do wish to show that seasoned defense for market mechanisms over the judgement of the state, even if somewhat confused at times, preceded Smith.

II.) Smith himself was nowhere near laissez-faire.

If the Physiocrats are considered interventionist for proposing a non-market agricultural system (due to their… rather unique connotation of land) then Smith can be considered so much more interventionist.

Smith said the function of the State could be both productive and preventive. The protective state should provide jurisprudence and national defence. The productive state, on the other hand, should provide public works. Smiths argument is most developed in p.214. of the Wealth of Nations, where he writes that :'The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public works”, but not just any public works, but especially that where they are “highly advantageous for a great society”, and ones that because of the dispersed and collective nature of benefits incurred by the product cannot repay the expenses for an individual (the issue of the collective action problem but very old) and because each individual will wait for their neighbour to pay the price (leading to no or underproduction, similar to market failure).

These arguments seem closer to the Samuelsonian notion of the “public good” as one where laissez-faire cannot possibly provide the preferences necessary to produce goods, and the free-rider problem as mentioned before than any inclination towards laissez-faire. Some general examples of such goods Smith deems applicable for this to occur are “good roads, bridges, navigable canals, harbours &c”. (P.215, idem.)

Furthermore, Smith was also critical of incorporation, specifically joint stock and limited liability corporations. He writes that incorporation often gives companies state privilege with respect to trade, and in P.233 writes that they can often grow excessively bureaucratic and be run by people with no priority/interest in the business who are preoccupied with short-term/minor interests. He says: specifically “Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's Honour, and very easily give themselves a dispensation from having it” He writes immediately after in a scathing manner that joint-stock traders are inferior to private adventurers because of the the 'negligence and profusion that usually prevails in such large enterprises.” (Ibid.)

More egregiously Smith is also one of the first major thinkers in my view to advocate for a rigorous system of public education. He says in Sec. VI of the Wealth of Nations that societies of animal husbandry (and barbarism in general) don't have such an educational system, as such a system precedes the division of labour. People know just the basics of governance and innovate just enough to subsist. They have little time to know about Latin, theology, philosophy, geometry, etc, which limits the level of societal innovation. It is much the same in the common people, especially the "labouring poor". They have little time for education, and education is expensive. And they work very menial, redundant jobs which means they become dull machines of sorts. Teaching them geometry, and mechanics can provide them practical knowledge, so to speak. But such an externality is covered with the public sector covering a small premium to build a parish school. (p. 777-779 of Smith, The Wealth of Nations).

All of these are not very “laissez-faire” arguments and show that Smith was at times in favour of the “public utility” and of non-market mechanisms funding things he deemed necessary. To be clear none of this detracts from the fact that Smith is an excellent thinker that should be taken more seriously—but, he should stop being looked at as a hero of laissez-faire. C’est fini.

Similarly, Charles Francis Adams Jr., President of the Union Pacific Railroad from 1884-1890, said that consolidation was but a descriptive “natural law of growth” one would have to accept much like one has to accept the laws of physics: only men and capital coalescing together create great projects. [2] James J. Hill remarked that the trust was a result of obviating “ruinous competition”, as did Rockefeller, Elbert Gary and Charles M. Schwab: Schwab and Rockefeller both pointed to large-scale consolidation being the “true” source of industrial progress.

Said Schwab: “The larger the output the smaller, relatively, is the cost of production, It holds good whether the output consists of pins or of locomotives. It is much more economical, proportionately, to run three machines under one roof than it is to run one… Therefore the large plant has an undoubted superiority over the small plant, and this advantage increases almost indefinitely as the process of enlargement continues…” [3] And said Rockefeller: “In the old days, before the Union of interests, murderous competition made any business venture precarious… it is combination that has produced the capital to open up mines and factories, to build great industrial plants…” [4]

I think it can be safe to conclude from these testimonies that large (or at least, the most well-known) industrialists did not like competition. Why then? Well, read beyond the moralising lines of “assisting  the labourer” and even the nascent argument of economies of scale (declining unit costs with greater production) and the argument is quite simple.

Businessmen want to maximise profits according to their production constraint… and an excess of competition cuts into said profit by making it uncertain. If I have absolutely no one to compete with (pretend that substitute goods are insignificant and the good I sell is perfectly inelastic, or pretend I have a legal monopoly), I can in essence make as much profit as I want without much objection. But now I have dozens of competitors, and simply put, if I attempt to raise my prices to an unpalatable level, or suppress quantity, this will be advantageous to my competitors. Hence the phrases “ruinous” or “murderous competition”; you must ask the question: “murderous for whom?”

The industrialists attempted to halt this process and attain the permanent rent they so desired through anticompetitive, “monopolistic” practises such as aggressive mergers & acquisitions; however, such solutions were temporary at best. As Kolko writes, many merged firms were overcapitalised, meaning their issued debts and equity exceeded the value of their assets.

“A government study in 1900 of 183 industrial combinations shows that stocks and bonds valued at $3,085,000,000 were issued for plants with a total capital worth of $1,459,000,000. “[5] Meaning that the value commanded or expected of a stock and the “value” the business actually had fundamentally differed. He also writes, in a more concrete sense: “Arthur S. Dewing, in a study of fourteen mergers, found that the average overcapitalization was well in excess of 50 per cent of the assets.” It turns out that most mergers capitalized their firms not only on the real costs of assets and property but also the costs of promotion, of acquisition, and the *expected* future earnings made from the mergers. On other metrics they performed similarly unexceptionally: their nominal return from 1903-1910 was 5,8%, which was unexceptional compared to other non-consolidated firms at the time. Expectations of their ten-year earnings were twice the actual performance on average. Ten mergers, according to Dewing, made an average of 65 percent their pre-consolidation profits. Forty percent of 328 mergers failed altogether according to Shaw Livermore, and 49% were somewhat successful. Nor could mergers even capture the market and eviscerate competition: I shall quote Kolko here again *adextenso.*

“During 1895-1904 there was an annual average firm Disappearance of 301 companies and a total annual average capitalization of $691 million. During 1905-1914 an average of only 100 firms disappeared each year, and average capitalization was $221 million. More important, from 1895 to 1920 only eight industries accounted for 77 per cent of the merger capitalisations and 68% of the net firm disappearance.” [6]

So to sum up, the dreaded merger movement was concentrated to a few industries in actuality, for a few choice years, consolidated firms did not perform better on average and after a period of time consolidation began to decrease without special interventions.

Even when consolidation was effective it was not guaranteed to last, at least in regards of removing so-called ruinous competition. Standard Oil, which one could consider the most famous example of a near-monopoly in the common mythos, with Ida Tarbell’s The History of the Standard Oil Company had managed to successfully quell the tide of competitors through the strategic “Cleveland Massacre”; but over time, their niche on kerosene oil fell with the rise of crude oil, which the Pure Oil Company was keen to supply; formed in 1895, by 1904 it had owned fourteen refineries, fifteen miles of crude oil pipeline, and 400 miles pipeline for refined products; it handled 8000 barrels of crude per day and was capitalized at $10,000,000. Other firms like the Associated Oil and Gas (1901), Texaco (1902), and Gulf (1907) were formed before the famous Sherman anti-trust lawsuit involving Standard Oil (1911), and by 1911 there were at least 147 independent oil refineries in total. Standard’s overall share of the petroleum market fell precipitously: from 88 percent in 1890, to 68 percent in 1907, and to 64 percent by 1911, when the lawsuit commenced. [7]

Even cartelisation, in a different realm compared to mergers and aggressive vertical integration, often had its issues. The railroad industry is perhaps the most well-documented case of pool and price agreements, yet even it did rather poorly when push came to… slightly heavier push.

The railroad industry through the 1870s was intensely cutthroat. Mileage increased by 50% from 1870-76 and shippers in St.Louis and Atlanta had over twenty routes between the two cities, from 526 to 1855 miles long. [8] There were thus a lot of bankruptcies over this time. Also, the amount of passengers carried in (millions) increased from 289 to 520 in just the span of 1882-90, but the revenue per passenger-mile decreased from 2.447 to 2.174 (cents) and the freight revenue per tonne-mile decreased from 1.236 to 0.927 consistently. [9]

The falling rates worried businessmen extensively. General attempts were made first in 1870 to stabilise rates in the Iowa area, and to exclude new competitors, the Chicago and Northwestern, the Michigan Central, the Chicago, Burlington and Quincy. But there were a lot of violations of rate agreements and aggressive rate-cutting that made this pool unsuccessful. [10] Then, Union Pacific joined the competition and destroyed the Iowa Pool's efforts for just a year. A more serious and coordinated attempt to collude came in 1876 or so, where many, many small lines and boats made competition most "ruinous" in the South. Thus, 32 large businesses joined a pool under Albert Fink to hold meetings with binding rates, binding division of market and traffic, and were the longest-lasting pool. The Southwestern pool, formed with seven companies, failed within two years. The Eastbound pool was violated by the Grand Trunk Line of Canada and failed within four months. [11] Collusion was frequently violated in the name of, not against, greater profit.

So this is a lot of historical summation. I have tried to demonstrate, in my somewhat middling but comprehensible rhetoric, that significant capitalists have been skeptical if not against of the concept of laissez-faire because it is detrimental to their continuous pursuit of profit, and that when they attempt to quash it through eliminating the market they oftentimes fail in either creating inconsequential results, going bankrupt entirely, or only succeeding in the short-run before competition arrives afresh. And arguably this concept by no means is solely applicable to the Gilded Age: Adelman [12] and Nutter [13] showed that industrial concentration in the first half of the 20th century did not significantly increase, especially in capital-intensive manufacturing.

But most of this argument thus far has been descriptive. Why should we want capitalists to not get a guaranteed profit? This all hinges on a view of the capital structure that is essential to production and the incentives gained through interpreting it correctly. [14]. In any economy an entrepreneur or a capitalist has a certain combination of capital (that is to say, lX+mY+nZ, where X, Y and Z are capital goods and l,m and n constants) that they must formulate ex-ante to the period of production, and such a combination is enacted within a production period.

The capitalist is rewarded for hypothesising the correct quantity of capital coefficients, and will obtain profit from such an investment, but there are also times where he has incorrectly appraised either the qualitative or quantitative composition of capital, and is punished through loss. Where he cannot accrue loss as a result of accumulated poor investment, likely due to legal privileges preventing exterior competition, he cannot adjust production according to dynamic opportunity-cost and thus he is rewarded for capital mal-investment. This also means that capital better employed in other services is continuously deployed or depreciated in such production.

In lesser words; only when the capitalist is adequately punished for his mistakes through the medium of competition can the economy gravitate (but never truly attain) an “ideal” state of allocation, investment and production. The capitalist may not find this preferable, he may tremble and he may cry, but it is “ruinous competition” and the potentiality of loss and not “rational, humanistic planning” that advances a system of production.

Cit.

[1] Kolko, Gabriel, “The Triumph of Conservatism.” p. 13-14.

[2] idem, 14.

[3] Cosmopolitan Magazine, issue Oct. 1908. From: “Owners of America, V. Charles M. Schwab”, written by Alfred Henry Lewis. p.479-480.

[4] Cosmopolitan Magazine, issue Sep. 1907. From: “Opportunity in America”, J.D. Rockefeller.

[5] Op. Cit. Kolko, p.22. Also see “The Financial Policy of Corporations” by Arthur Dewing.

[6] Op. cit. Kolko, p.19.

[7] Armentano, Dominick, “*Antitrust and Monopoly*”, p. 66-69.

[8] Kolko, Gabriel. “Railroads and Regulation.” p. 6-8.

[9] (I will try to find the specific historical statistical book for this information and edit it in the next edition. My sincerest apologies, but here is the table)

[10] Kolko, Gabriel “Railroads and Regulation”. p.8-10.

[11] idem.

[12] Adelman, Morris. "The Measurement of Industrial Concentration," in Mansfield. p.83-88.

[13] Nutter, Warren. “The Extent of Enterprise Monopoly in the United States, 1899-1939”.

[14] This argument is somewhat inspired off Ludwig Lachmann’s Capital and Its Structure.

The concept of capital has never enjoyed a settled definition in the history of economic thought. As Nassau Senior observed, a full catalogue of competing definitions could fill an encyclopedia — with some authors treating it as synonymous with all wealth, and others confining it to money alone. What follows is a brief survey of how capital has been conceived across the main traditions of classical and early neoclassical economics, from the fourteenth-century Arab historian Ibn Khaldūn through to Léon Walras and Carl Menger. The treatment of capital in relation to labour, land, entrepreneurship, and value constitutes the central thread of this inquiry. (This is part 1 of a 2 part series; on the next part I shall write about Knies, Röscher, Bohm-Bawerk, Lachmann, Sraffa, Keynes, JB Clark, etc.)

I. Khaldūn

It is fitting to begin not with Adam Smith — who was less a founder, in my view than a systematiser of economic thought — but with the fourteenth-century Arab historian and philosopher Ibn Khaldūn, whose Muqaddimah (Prolegomena) anticipates several doctrines that would not be formalised in European thought for centuries.

In the Muqaddimah, capital denotes accrued assets attained through the fluctuations of agricultural and commercial markets, accumulated for the purpose of profit.¹ Those who succeed in accumulating an abundance of such assets live in prosperity, but their wealth renders them vulnerable: rulers and other powerful actors may seek to expropriate it, and so capital requires the protection of stable communities.² Value, in Khaldūn's framework, is always represented in gold and silver, regarded not merely as money but as intrinsic treasures and is ultimately dependent upon labour, which transforms useless raw materials into goods of utility.³

What is remarkable about Khaldūn is the degree to which he anticipates both the liberal tradition the view that wealth creation belongs to merchants and entrepreneurs, and that the state ought not to interfere, and the labour theory of value that would later be associated with the classical school and, in its most developed form, with Marx.

II. Cantillon

Richard Cantillon, writing in the early eighteenth century, is generally regarded as a predecessor to the Physiocrats. His position is stated plainly: "Land is the source or the matter from which wealth is derived; labour is the form that produces it."⁴ Land, in his view, possesses intrinsically valuable goods — hemp, cotton, cereals — which makes the condition of the landowner naturally advantageous, yielding a consistent and secure income.

Nevertheless, Cantillon does acknowledge the rôle of the entrepreneur. The entrepreneur trades and sells under conditions of genuine uncertainty, lacking precise knowledge of future demand or prices, and purchases capital from other entrepreneurs.⁵ A sufficiently successful entrepreneur who has accumulated capital goods with "intrinsic value"; gold, silver, wheat, wool… may achieve a degree of independence and prosperity, though Cantillon emphasises that even such goods are subject to perpetual contingency, "accidents," and losses.⁶

Whatever the limitations of Cantillon's framework; and its influence on the Physiocrats would prove problematic in several respects: it contains three lasting insights: first, that capital goods are subject to the oscillating laws of supply and demand; second, that entrepreneurial decisions are made under conditions of irreducible uncertainty; and third, that pre-existing plans of capital investment are always liable to fail. These propositions are not entirely distant from the arguments later advanced by von Mises and Ludwig Lachmann within the Austrian tradition.

III. The Physiocrats: Quesnay & Turgot

François Quesnay did not advance a particularly refined theory of capital. He appears to have regarded productive expenditure as confined to agriculture; meadows, vineyards, ponds, and gardens — while classifying the raw materials used in handicrafts, along with merchants themselves, as belonging to a "sterile" or unproductive class.⁷ He also warned against the excessive accumulation of monetary wealth, arguing that it impedes the redistribution of wealth necessary for economic vitality.⁸

Turgot, by contrast, offers a more nuanced account. He recognises "proprietors of capital" in industry — holders of accumulated movable property; who deploy it to pay for wages and raw materials, receiving profit in return, a portion of which is reinvested. Turgot also extends the term "capital" to cover fundamental productive goods such as cattle and agricultural equipment.⁹ In this respect Turgot begins to dissolve the rigid Physiocratic hierarchy between agriculture and industry, without entirely abandoning it.

IV. Smith

Adam Smith introduces what one might ordinarily call capital under the rubric of "stock," a term he uses somewhat inconsistently. His initial account establishes that certain individuals accumulate stock and "employ" it by using it to pay for labour and the raw materials and sustenance labourers require, who in turn add value to the product. This added value is eventually remunerated as profit, which covers the cost of labour, raw materials, and money advanced. Crucially, profit from stock is distinct from wages earned through labour.¹⁰

Smith further distinguishes, within the total stock an individual may hold, between what he calls "dead stock" — circulating gold and silver, as well as ready money — and productive stock. Dead stock is so called because it produces nothing of itself, serving only as a medium through which productive stock may be acquired: the money used to purchase a shovel, as opposed to the shovel itself.¹¹ Within productive stock, Smith demarcates capital — that portion expected to yield revenue — from stock reserved for immediate consumption. Capital is further divided into circulating capital, which is advanced in the purchase and manufacture of goods for sale and thereby returns to its owner; and fixed capital, which is invested in machinery and does not continue to circulate. The ratio between these two forms varies considerably across industries.¹²

V. Ricardo

Ricardo's treatment of capital is less comprehensive than Smith's, though he adds several original observations. He notes that variations in the ratio of fixed to circulating capital, as well as differences in the durability of fixed capital — including depreciation — can alter the exchange value of a commodity independently of the quantity of labour time required to produce it. Steam engines and ships are cited as illustrations: identical labour hours may be employed in producing them, yet their varying standards of durability affect their value differently.¹³

Ricardo also recognises, though he does not develop the point sufficiently, that the distinction between fixed and circulating capital is itself contextual and partly arbitrary. Wheat in the possession of a farmer who must hold it for a season before sowing is fixed capital; the same wheat, once sold to a baker who grinds and bakes it within a week, becomes circulating capital to the baker.¹⁴ Ricardo acknowledges the classification as variable, then sets it aside… a greatly missed opportunity, given that he continued to attribute the principal cause of value fluctuation to variations in labour time alone.

VI. Malthus

Malthus follows Smith in defining capital, at least in part, as the portion of accumulated stock including raw materials employed in anticipation of future profit.¹⁵ He notably excludes skills and education from this category, though he acknowledges their role in facilitating production and distribution. He also distinguishes between productive labour, engaged in the production and distribution of goods, and personal services ;the former generating a surplus that sustains the latter.¹⁶

Of particular interest is Malthus's anticipation of arguments later associated with Keynes. He questions the Smithian assumption that frugality is unambiguously virtuous. Excessive saving what he terms accumulated capital beyond productive necessity, would, he argues, destroy the incentive to produce. If consumers were satisfied with bare subsistence goods, there would be no stimulus for producers to improve methods or expand output; the quality and variety of production would stagnate accordingly.¹⁷ The parallel with Keynes's arguments about aggregate demand and the paradox of thrift is evident, though Malthus was never able to develop these intuitions into a fully systematic theory.

VII. Say

It is Say who, among the classical economists, most directly challenges Smith's framework while also reintroducing the entrepreneur as a theoretical figure. Say partly accepts Smith's account of productive capital, acknowledging that pre-existing products assist the labourer and require his agency to be put in motion. These include implements such as the weaver's loom, goods sufficient for his subsistence, and raw materials; and money, insofar as it is invested in productive industry.¹⁸

His departures from Smith, however, are equally significant. Say argues that Smith neglected an entire class of capital: "natural or acquired talents" — musical ability, scientific knowledge, artistic skill — which are no less real as capital for being intangible. The capacity to perform a comedy, he contends, yields as solid a return as the capacity to manufacture a box of sweets.¹⁹ Here Say anticipates, with some prescience, the modern concept of human capital. He also challenges the premise that value is exclusively infused through labour, pointing to natural processes like wind, sunlight, and rain that contribute to production entirely independently of human effort.²⁰

VIII. Bastiat

Bastiat's contribution takes the form less of a systematic theory than of a sustained moral and analytical defence of capital against its critics. He quotes Thoré's socialist charge, that since the aristocracy invented the fiction that capital reproduces itself, workers have been at the mercy of idleness and Proudhon's condemnation of interest as the "true cause of misery" condemned by Christian ethics under the name of usury.²¹

Bastiat's response is that both critics commit the error of equating capital with money. Because money cannot remunerate itself in any straightforward sense, they conclude that capital in general cannot. But capital comprises far more than gold and silver: it includes wool, flax, leather, wood, machinery, tools, and subsistence goods… all materials possessing recognised market value and complementary to labour.²² Capital of this kind makes labour more productive; and because it is difficult to produce and maintain, the expectation of remuneration including continuous remuneration, is not merely justifiable but necessary to sustain investment.

IX. Proudhon

Proudhon's account of capital is more radical, drawing on and criticising the Physiocrats, Smith, and Say alike. He contends that neither land, nor labour, nor capital is productive in isolation. Production requires the cooperation of all three, and no two factors in combination suffice: one may till desert soil with the most advanced technology and the greatest physical exertion and obtain nothing whatsoever.²³

Proudhon's famous critique of capitalist ownership follows from this. When a worker produces the capital a proprietor requires for future income, the proprietor acquires a resource that secures a comfortable existence while the worker receives barely above subsistence wages: an exploitation of man by man.²⁴ Furthermore, because production is inherently a collective process, the product belongs in a social sense to all who contributed to it and cannot be exclusively appropriated by any single party.²⁵ Finally, Proudhon argues that the manufacturer of a machine is paid once; if paid repeatedly, he makes multiple machines. The proprietor, however, is paid indefinitely from the same asset without ever relinquishing it.²⁶

X. Marx

Marx's theory of capital is embedded in a larger analysis of the commodity form and cannot be understood independently of it. Wealth under capitalism, he begins, appears as an immense accumulation of commodities.²⁷ A commodity possesses use value, arising from its physical properties and realised in consumption, and exchange value, which appears as a proportional ratio between commodities but is in fact governed by a common substance. That substance is, in Marx's formulation, "mere congelation of homogeneous human labour, of labour-power expended without regard to the mode of its expenditure" …in other words, abstract human labour.²⁸

Socially necessary labour time, the time required under average conditions of skill and intensity determines value. Technology modifies this calculation: the introduction of the power loom in England, Marx notes, reduced by approximately half the labour required to weave a given quantity of yarn.²⁹ Use value, by contrast, is generated by concrete, purposive labour of a specific kind. These two dimensions of labour abstract and concrete.. run through Marx's analysis.

Within the labour process, the labourer adds fresh value to a commodity by expending additional labour, regardless of the particular character of that labour. The value of the pre-existing capital goods is simultaneously preserved and transferred to the product. Thus labour performs a dual function: it adds new value and conserves the old.³⁰ Capital goods behave differently from one another in this process: raw materials are consumed and reappear transformed; machinery transfers its value incrementally as it wears out; instruments of no human origin, such as wind or water, generate use value but transfer no exchange value.³¹

From this analysis Marx derives his central distinction. Constant capital: means of production, including raw materials, machinery, and auxiliary instruments undergoes no quantitative change in value during the production process: it loses use value but transfers its exchange value. Variable capital, by contrast, reproduces its own value and generates surplus value: this is labour power itself.³² The formula for the value of a commodity is accordingly expressed as C = c + v + s, where c denotes constant capital, v variable capital, and s surplus value; and the relationship between surplus value and variable capital constitutes, for Marx, the rate of exploitation.³³

XI. Senior

Senior opens his discussion of capital with a candid observation: the definitions offered in the existing literature are so various and so contradictory that cataloguing them would be a substantial undertaking in itself.³⁴ Smith and Ricardo have neglected or abused the concept; the Physiocrats, in Senior's reading, rejected it. What does Senior himself propose?

Capital, in his account, is that portion of wealth employed, through human exertion, in the production or distribution of further wealth.³⁵ Wealth itself is defined by three criteria: utility, relative scarcity, and transferability. Capital, however, is not reducible to any single instrument such as labour or raw materials; it is constituted by a combination of factors. A hammer, for instance, could not be produced simply by discovering the relevant materials in nature. What actually constitutes the hammer and what capital in general is composed of is the conjunction of labour, natural agents, and abstinence.³⁶ The last of these terms, abstinence, refers to the decision to forgo present consumption in favour of future productive capacity: rather than burning wood immediately or using steel for an immediate purpose, one waits and directs these resources toward the creation of a durable productive instrument. The structural proximity of this notion to time-preference theory in the Austrian tradition is clear.

Senior also offers a pointed critique of Smith's classifications, observing that if a diamond necklace qualifies as capital in Smith's scheme, there is no principled reason why a house built for speculative sale should not; and if the gas used to light a manufactory, which is certainly perishable counts as capital, perishability cannot serve as the criterion for exclusion.³⁷

XII. McCulloch

McCulloch defines capital as the portion of the products of industry directly available for subsistence or for the initiation of further production; in short, capital is coextensive with stock.³⁸ This places him in disagreement with Smith, who distinguished between capital (productive stock) and revenue (unproductive stock consumed directly). McCulloch regards that distinction as arbitrary: the food and clothing that sustained Arkwright and Watt while they were developing the cotton mill and the steam engine were, under Smith's definition, unproductive; yet they were the material precondition of inventions that generated wealth on an enormous scale.³⁹

The distinction between fixed and circulating capital he similarly regards as arbitrary in its rigid form: circulating capital… food, clothing, subsistence goods… is required to produce fixed capital, and without tools and engines, circulating capital itself could not be reproduced. The two are necessarily cooperative.⁴⁰ Accumulation of stock, in McCulloch's view, is unambiguously beneficial: it secures the future, makes possible goods that could not otherwise be produced, reduces and economises on the costs of labour, improves the quality and efficiency of production, and crucially raises both the level of advantageous employment and the level of wages.⁴¹

XIII. Menger

With Menger we enter the Marginalist Revolution. His framework distinguishes between lower-order goods: consumption goods available in the present and higher-order goods, or capital goods, which are required in order to produce them.⁴² The value of these two orders of goods need not correspond: artificial ice may have no value in summer, yet the goods required to produce it may retain value nonetheless.

The value of lower-order goods is a function of present demand and available quantity; the value of higher-order goods is derived from the expected value of the lower-order goods they will eventually yield; prospective rather than present value.⁴³ The transformation of capital goods into consumption goods is, moreover, not instantaneous: it is a process that unfolds through time. A nomad who chooses to breed rather than consume his animals will produce greater output in the long run, but must accept a delay of months or years before receiving any return.⁴⁴ This involves a genuine trade-off: present needs must be met before future needs can be provided for, and meeting the former necessarily constrains the resources available for the latter: a reasoning very close to the doctrine of opportunity cost.⁴⁵

XIV. Léon Walras

Walras defines capital as forms of wealth that survive beyond their first use; that is, scarce resources not immediately exhausted by consumption, such as furniture or machinery. Income, by contrast, consists of wealth consumed entirely in a single use, such as bread. The distinction is economic rather than material: bread loses its economic value once consumed; a machine, under ordinary circumstances, retains its value after a single application.⁴⁶ Walras acknowledges the classification is partly arbitrary… a tree is capital when used to bear fruit, income when used to produce lumber but maintains its analytical utility.

Capital and income stand in a relationship of mutual generation: capital produces income, and income may in turn be capitalised by exchanging it for capital goods. Both may be material or immaterial; the tangibility of the asset is not the relevant criterion. Land, or natural resources more broadly, constitutes a form of capital that is, in Walras's view, essentially indestructible; human beings constitute consumable capital, liable to be depleted through use and accident; and capital assets proper are artificial and therefore destructible.⁴⁷

Conclusion

The foregoing survey reveals not a linear progression toward a settled definition of capital, but a series of overlapping and often conflicting attempts to delineate the boundaries of a concept that resists precise formulation. What counts as capital; whether money, land, tools, subsistence goods, human talent, or accumulated labour varies substantially across the traditions examined. The role of time, uncertainty, and the entrepreneur likewise appears and disappears across different accounts. What is striking to me, in retrospect, is how many of the major debates of twentieth-century economics over human capital, time preference, the relationship between saving and investment, and the heterogeneity of capital goods were already implicit in this earlier literature.

Bibliography

Primary Sources

Ibn Khaldūn. The Muqaddimah. Translated by Franz Rosenthal. Princeton: Princeton University Press, 1967.

Cantillon, Richard. Essay on the Nature of Trade in General. Translated by Henry Higgs. London: Macmillan, 1931.

Quesnay, François. Tableau Économique. Translated by Marguerite Kuczynski and Ronald L. Meek. London: Macmillan, 1972.

Quesnay, François. General Maxims for the Economic Government of an Agricultural Kingdom. In The Economics of Physiocracy, edited by Ronald L. Meek. London: Allen & Unwin, 1962.

Turgot, Anne-Robert-Jacques. Reflections on the Formation and Distribution of Wealth. Translated by W.J. Ashley. London: Macmillan, 1898.

Smith, Adam. The Wealth of Nations. Edited by Edwin Cannan. Chicago: University of Chicago Press, 1976.

Ricardo, David. On the Principles of Political Economy and Taxation. Edited by Piero Sraffa. Cambridge: Cambridge University Press, 1951.

Malthus, Thomas Robert. Principles of Political Economy. 2nd ed. London: W. Pickering, 1836.

Say, Jean-Baptiste. A Treatise on Political Economy. Translated by C.R. Prinsep. Philadelphia: Claxton, Remsen and Haffelfinger, 1880.

Bastiat, Frédéric. Capital and Interest. Translated by Patrick James Stirling. London: T. Fisher Unwin, 1890.

Proudhon, Pierre-Joseph. What is Property? Translated by Donald R. Kelley and Bonnie G. Smith. Cambridge: Cambridge University Press, 1994.

Bastiat, Frédéric, and Pierre-Joseph Proudhon. Letters between P.J. Proudhon and F. Bastiat. Letters 13 and 14.

Marx, Karl. Capital: A Critique of Political Economy, Vol. I. Translated by Samuel Moore and Edward Aveling. London: Lawrence & Wishart, 1954.

Marx, Karl. Capital: A Critique of Political Economy, Vol. III. Edited by Friedrich Engels. Moscow: Progress Publishers, 1966.

Senior, Nassau W. An Outline of the Science of Political Economy. London: W. Clowes and Sons, 1836.

McCulloch, John Ramsay. The Principles of Political Economy. 5th ed. Edinburgh: Adam and Charles Black, 1864.

Menger, Carl. Principles of Economics. Translated by James Dingwall and Bert F. Hoselitz. Glencoe, IL: Free Press, 1950.

Walras, Léon. Elements of Theoretical Economics. Translated by Donald A. Walker and Jan van Daal. Cambridge: Cambridge University Press, 2014. Lesson 17.

Footnotes

¹ The Muqaddimah, trans. Rosenthal, 360.
² Ibid., 426.
³ Ibid., 446.
⁴ Ibid.
⁵ Cantillon, Essay on the Nature of Trade in General, Sec. 1.
⁶ Ibid., Sec. 13.
⁷ Ibid.
⁸ Quesnay, Tableau Économique, trans. Scott Palmer, 2–3.
⁹ Quesnay, General Maxims, Maxim VII.
¹⁰ Turgot, Reflections, 66 & 70.
¹¹ Smith, The Wealth of Nations, 45–46.
¹² Ibid., 48–49.
¹³ Ibid., 261–62.
¹⁴ Ibid., 224–25.
¹⁵ Ricardo, Principles, 25–27.
¹⁶ Ibid., 30.
¹⁷ Malthus, Principles of Political Economy, 50–51.
¹⁸ Ibid., 54–55.
¹⁹ Ibid., 33.
²⁰ Say, Treatise on Political Economy, 29–30.
²¹ Ibid., 50–51.
²² Ibid., 30.
²³ Bastiat, Capital and Interest.
²⁴ Ibid.
²⁵ Proudhon, What is Property?, 164.
²⁶ Ibid., 117–18.
²⁷ Ibid., 120; see also 147.
²⁸ Ibid., 166.
²⁹ Letters between Proudhon and Bastiat, 13 & 14.
³⁰ Marx, Capital, Vol. I, 27.
³¹ Ibid., 28.
³² Ibid., 29.
³³ Ibid.
³⁴ Ibid., 28, 32.
³⁵ Ibid., 40.
³⁶ Ibid., 41.
³⁷ Ibid.
³⁸ Ibid., 43.
³⁹ Ibid., 67.
⁴⁰ Ibid., 142.
⁴¹ Ibid., 143.
⁴² Ibid., 143–44.
⁴³ Ibid., 144.
⁴⁴ Ibid., 145.
⁴⁵ Ibid., 146.
⁴⁶ Marx, Capital, Vol. III, 22.
⁴⁷ Senior, Outline of the Science of Political Economy, 4.
⁴⁸ Ibid., 59.
⁴⁹ Ibid., 60–61.
⁵⁰ Ibid., 65.
⁵¹ McCulloch, Principles of Political Economy, 5th ed., 96.
⁵² Ibid., 98.
⁵³ Ibid., 99; see also 101.
⁵⁴ Ibid., 77.
⁵⁵ Ibid., 104–05.
⁵⁶ Menger, Principles of Economics, 149–50.
⁵⁷ Ibid.
⁵⁸ Ibid., 153.
⁵⁹ Ibid., 155.
⁶⁰ Walras, Elements of Theoretical Economics, Lesson 17, 191–200.
⁶¹ Ibid.

“THE productive Expenditures are employed in agriculture, meadows, pastures, forests, mines, fishing, etc. to perpetuate riches in the form of grain, beverages, wood, cattle, raw materials for the handicrafts, etc. The sterile Expenses are made upon handicraft products, housing, clothing, interest on money, servants, commercial expenses, foreign commodities, etc.”

Further, his third Maxim in “Economic Maxims”:²

“Let the sovereign and the nation never lose sight of the fact that the earth is the sole source of all riches, and that it is agriculture which multiplies riches. For it is the augmentation of riches that assures the wealth of the population; men and wealth cause agriculture to prosper, extend commerce, animate industry, increase and perpetuate all wealth. Upon that abundant source of wealth, agriculture, depends the success of all the parties concerned in the administration of the kingdom.”

And still further:

Let the price of agricultural products and merchandise, in a country, be not lowered ; for then reciprocal commerce with foreign countries would become disadvantageous to the nation. As is the purchasable value of things, so is the revenue. Abundance and no value is not wealth. Dearth and high prices is misery. Abundance and high prices is opulence.

The language used here may be confusing, so let me explain. What Quesnay is saying is essentially that land is the sole source of all wealth, for agriculture, pastures, forests, mines, tangible environments produce tangible materials and said materials—grain, wood, cattle are the noble riches because said wealthy products are what truly sustains the population and provide the capital goods for the “sterile” goods such as clothing, interest, manufacturing, &c. which Quesnay viewed (hint: it’s in the name sterile!) as useless. Because land, or that is to say, the natural environment is the sole source of wealth, the State must fix prices to be as high as can be for when price is high, revenue is high and production is high as well, meaning that there will be lots of “riches” for everyone and lots of value.

This is a very archaic argument that is refutable through very simple analysis. There are many, many lines of attack one can levy against such a statement. For one, as Adam Smith himself noted, the activity of manufacturing and the capital process in itself increases the raw materials the gifts of nature bestow.³ If said increase in price through such an activity is sufficient to renumerate the costs of fixed and circulating capital, how could manufacturing, even within the goods we consider “light industry” today, be “sterile”?

For another, is it not true that industrial nations in their mechanisation increase the capital productivity of their capital goods as a whole, and ergo spend their lion’s share of expenditures towards Manufacture, and decrease expenditures on agriculture? But is it also not true that despite the lowering of expenditures on agriculture, agricultural production on aggregate still rises, and ergo people still have more “wealth” than they would in a purely agrarian-focused nation?⁴

Is it not even true (and to be fair, some of my rebuttal will be anachronistic) that the so-called riches Quesnay talks about have less of a market price (I omit the term “value” here) without the factors Quesnay considers sterile? Certainly Quesnay is correct when he says one cannot produce manufactured/sterile goods without agriculture. But conversely, one often partakes in agriculture only with manufacturing and “sterile” goods; one would not invest, or at least he would be heavily disincentivised to partake in the process of tilling land, of using oxen, of watering the crops, had he not housing that protects him from acts of God and disease, had he not clothing for similar purposes, had he not capital goods to use which were produced from the foregoing of immediate consumption for such riches, made through a time-intensive production process, and in the case he may not leverage or liquidate his savings outright, loan interest? How can (most) of what Quesnay mentions then, be fruitless, when they in themselves assist in generating the wealth he so extols? To use an unnecessarily academic term to sound more pretentious, the two sectors exhibit mutual causation⁵, wherein A ←→ B, instead of strictly A → B or B → A.

And finally, (and again I cannot blame Quesnay and his kind too much, for they wrote pre-marginalism and even pre labour theory) is it not true that the agricultural riches are not profitable in themselves? They bring wealth if they are considered wealth. A tree—let us call it Amabilius, or “lovely” in Latin, again to sound excessively pretentious—can generate lovely, milky-white timber, that can serve multiple purposes and is abundant, but if, say, the use of Amabilius was made obsolete by an artificial replacement (I am thinking vinyl) or if it was replaced by mahogany, the most durable wood, what would the “wealth” by cutting it down, refining it and so on generated be? No wealth at all! The wood would become as useless as junk. So agriculture in itself is not even a source of wealth.

This of course makes us question what is “legitimate” and what is “illegitimate” wealth. As Herbert Davenport wrote in The Economics of Enterprise⁶, something is productive—and ergo generates wealth—if it is exchanged for a pecuniary profit. This in itself cannot be a normative claim. Normative claims must come ex-post. What is “fruitful” and “fruitless” can only be a question for the consumer receiving the final product.

Now. The reader might ask. Why criticise a paper that was written two and a half centuries ago?

Have you finally (supposing that I am not) gone mad?? What is the meaning of writing this nonsensical claptrap when Menger introduced subjective-value theory a century prior?

Unfortunately… it is you, the reader, who has committed an elementary mistake. Not I. I do commit mistakes often, but this is not one of them. You have made the mistake of presuming that once a fallacious idea in economics is refuted, it disappears quietly into the night. That it, like tallow greased for antiquated machinery gears, vanishes into thin air. It does not. Not at all.

Take your mind out of the environment you are reading this article in, and transport yourself to the Roman Empire. Diocletian, in an act of desperation, standardised wages and prices for thousands of goods⁷, from foods to textiles to sewing-machines. Lactantius criticised this policy very harshly in his De Mortibus Persecutorum for causing misery amongst the general people. That was 301 AD. This is, at the time of writing, 2026 A.D. That was the period of the Romans. This is not the period of the Romans. I ask you now, has a price control on any good been proposed within your lifetime? We do not live in the time of Galerius and Maximus. Our cities are not theirs, nor are our food, our language, and our culture. But our bad ideas are, to an extent, their bad ideas. Isn’t it amazing, but also oh-so saddening? How stubborn the human condition is in dispelling falsehoods?

Now our little history trip has concluded. Transport yourself out of the Roman Empire, and back to the banal modernities. I hope by this time I have made my point clear. That Smith and the Classical School refuted the Physiocrats, and that Menger refuted them further, does not mean that the Physiocratic idea has died. On the contrary, it has evolved into different forms.

We hear today that the service sector is “fake”, “fictitious”, “illusory” because it doesn’t produce tangible goods but intangible ones. We obtain pleasure from a haircut, but it doesn’t produce anything of “real value”; perhaps steel or airplanes or something we can observe and command. We hear that the service industry overtaking manufacturing is something to lament, something to fear. That unlike China, who builds roads and bridges and high-speed rail networks “good for the people”, Americans spend on finance and things that “don’t actually exist”. We hear the exact same argument, to this day, about the financial sector and how it is “built on nothing” (as if that isn’t the case for literally any other social relation!) and how it produces nothing useful. We even hear the same for light industry (consumer good production, that is). X sector is unproductive and fake. Y sector is productive and beneficial.

Is this not, in a most literal sense, what Quesnay’s argument was, but just with “agriculture” and “manufacturing” substituted with “heavy industry” and “light industry” respectively? Is it not even using the exact same line of argument as Quesnay, except instead of purely agricultural goods it is tangible consumer goods people can see and appraise? And when people advocate for subsidies on certain industries and thus supposedly bolstering their competivity; are they not merely arguing a variant of the argument that prices must be necessarily high and competitive for reciprocal trade?

Where is the variety? These arguments seem so lofty and novel until you begin to dissect and parallel their logical structures and realise that they are really as lofty as a paralyzed dwarf and as novel as a book of Milton with its papercover torn and replaced with a different name.

To be clear, it is not that I believe that the manufacturing sector is unimportant, or that more manufacturing output is a bad thing, or that the financial sector, with pump-and dump plus Ponzi schemes⁸ is a hundred percent scrupulous—I would be nothing short of a hypocrite to say such. But rather, to dismiss the entire financial or service sector, or to naturally assume that increased expenditures in manufacturing is a good thing, is wrong for the exact same reasons the Physiocrats were mistaken with.

I said earlier that it is manufacturing can in itself renumerate the costs of fixed and circulating capital, and thus put the so-called gifts-of-nature, or capital goods to use in the same way agriculture can. The same can be said for the service or “light industry” sector.

The pure potato, carrot, sea-salt and water within a restaurant can be considered in part capital goods because their consumption can be foregone to employ within a future process of production that can produce another good. To deny this would be to have an awfully machinistic view of what “capital” is. Yet, on their own, they may have little utility. Once, however, the “process of production”, that is to say, the creation of stew occurs, the market price of the stew may be higher than the price of the goods brought to market individually, or even by aggregate and without combination. Or, if restaurants dissatisfy you, look at furniture manufacturing, considered light industry. The saws, lathes, sanding machines, and polyester may command a particular market price when uncombined. But they, once assembled together through a particular form of production, may suddenly command a higher price then the net sum of the equipment, machinery and craft supplies. How is this different than the production of a computer or rocket, except that the latter may be more complex in steps and materials accrued? Isn’t this even true for Finance, who has to use hardware and software in forms of infrastructure to produce desired results?

And if such a statement is true, why is the fact that a capital structure exists treated as some cardinal variable, when it ought to be qualitative? Is it not merely value judgement?

Is it not true, that with respect to manufacturing, that manufacturing output has actually increased even as it the nation is supposedly “deindustrialising”, or in other words when manufacturing payrolls and thus a form of expenditures have declined?⁹ In other words, the U.S. no longer has its lion’s share of G.D.P. dominated¹⁰ towards manufacturing, but instead through services, but they also produce higher value-added goods, with $141,000 of manufacturing¹¹ value added on a per-worker basis, and with an abundance of essential goods like cars, medical instruments, and commercial aircraft which people happen to find utilisable. So my criticism of the Physiocrats there remains prescient even now.

And thirdly, is it not true that whilst the manufacturing sector helps significantly to bolster the service sector, is the same mutually causative relationship—also pertaining to finance—not also true?¹² Logistics and marketing, considered inter-business services, certainly do more to help than harm the competiveness of a manufacturing business. Education and healthcare are considered services, in the sense that they do not produce anything tangible per se, but hardly any owner of a steel refinery would find it very enticing if their workers were thin, frail, and completely illiterate. Software is a service in that it is considered intangible, but they, inter aila help manufacturers optimise inventories. Engineers are considered a service when they are consulted for product development, but hardly any entrepreneur would tell you product design is unimportant when it comes to the good’s status on the market. And of course, financial capital, like the oh-so-pernicious loan interest decried by the Canonists, can be used to purchase assets and capital goods to be used in future wealth generation.

One may lament that this article is too simplistic, or that I didn’t elaborate on the finer aspects of manufacturing, even with my knowledge of the business process. To which I would reply that this is a theoretical, not a technical work, but that theoretical works are necessary and important nonetheless because much of the most pernicious ideas people have—price controls, rent controls, nationalisation—are not greatly substantiated from a posteriori observations but instead a priori judgements, or even worse and perhaps even more true for the majority of people, whims and judgements. So don’t think for a second that theory, particularly simple theory, is inherently useless or unnecessary. For, to repeat, it is simple theory that leads people to—uncritically or critically—parrot the most confused sophisms.

Bibliography.

¹ François Quesnay - Tableau Economique, trans. A. Monroe, p. 2-3.

² Quesnay, Economic Maxims, Maxim III. (See also Maxim XVIII and VIII).

³ Adam Smith, The Wealth of Nations, Book IV (Of Systems of Political Oeconomy)

⁴ This phenomena is described, I think in the best manner, in A Concise Economic History of Britain: From 1750 to Recent Times. W. H. B. Court.

⁵ The process of mutual causation is best described in THE SECOND CYBERNETICS: Deviation-Amplifying Mutual Causal Processes by Marugoh Maruyama.

⁶ The Economics Of Enterprise, Herbert Davenport, p. 127.

⁷ An English translation of the Edict on Maximum Prices, A. Kropff

^{8 A pump-and-dump scheme is wherein misleading information is spread about a security , causing its price to rise, and then to sell their own holdings at the peak price, making said security essentially worthless. A ponzi scheme is where “older” investors are paid from the money of newer investors who are lured in by unfeasible/unrealistic promises.}

^{9 https://fred.stlouisfed.org/series/MANEMP}

^{10 https://fred.stlouisfed.org/series/VAPGDPMA}

^{11 https://www.cato.org/publications/reality-american-deindustrialization#united-states-remains-manufacturing-powerhouse}

^{12 A statistical study is procured upon here: https://www.sciencedirect.com/science/article/pii/S0304387819300288… I have included very little maths in my analysis to be non-intimidating, but there are more statistical justifications for such claims.}

This is understandable, given the uncomfortable and barbaric disposition of the City, but it is also unfortunate and frankly, reductionist. For if the City was so horrible, why did citizens object so clearly to its demolition? This is not to say that every citizen was pleased with their living conditions, but it is not as if, as we will see, residents of the Walled City were disproportionately poor, that they were isolated far away from civilisation (the Walled City was in the Kowloon District and was thus of reasonable proximity to other neighbourhoods in that area), or that State housing, built en masse after the Shek Kip Mei fire, did not exist. In certain cases, dentists and doctors of the Walled City were competent enough to practise outside of the City itself. So it is not as if people had no choice to live there. Oftentimes it was a conscious choice.

So more consideration is needed. I do not plan to refute each negative point made about the City, except perhaps somewhat tangentially and indirectly. I merely plan to offer a more nuanced, and one might say, mildly positive analysis about a City that up to this point has been little more than a target of derision. Is this a radical proposition or target? I do not believe so.

Structural Integrity

The British Government made it clear in January of 1987 that they planned to demolish the rogue structure. Despite the fact that these interests were at play, and despite the fact that the government periodically visited the City (more on this later) there were no reports finding structurally defective or unsafe buildings 17 years after the Walled City's construction, when it had fully developed into the pernicious block of buildings we associate it today⁴. This was so even after factoring potential factors such as collapse, fire, disease outbreak, or a plane mis-approximating its approach to Kai Tak Airport (one of the most challenging approaches in the world, mind you; airplanes would have to perform a sharp bank before landing, and flew often just a few hundred feet above the Walled City). This is obviously no small feat at all. It seems⁵ as if the buildings being tightly packed together actually formed a strong collective framework that was more robust against collapse.

In contrast, the Memorandum for the Building Committee: Legal Action – Defective Housing Blocks⁶ report conducted a year later discovered that up to 27 public rental buildings had to be demolished, and 411 remained costly periodic maintenance to not collapse; and this does not even encapsulate the entirety of buildings that were deemed to lack structural integrity. Below is a table of some of the publicly constructed buildings demolished within 20 years of construction.

Property on Aggregate

The fact these buildings maintained decent standards is all the more "surprising" (to the individual who thinks zoning laws are essential) when you consider that zoning laws were minimal. The Hong Kong government did produce a set of “outline zoning plans” under the Town Planning Ordinance but they did not regulate “existing use”. Also, the jurisdiction to enforce the Town Planning Ordinance required the Buildings Ordinance, which was not enforced by the Government except for a height limitation at the behest of Kai Tak Airport⁷. In any case the City was classified “commercial/residential” which was the loosest classifying system. And lastly, internal construction was not limited by planning nor building laws.

Property prices were more affordable in the City (around 30% less expensive than government-controlled units per. Anderssen’s research)⁸ than in most other urban areas of Hong Kong, and their units of 400-700 ft (square) were around 3 1/3 to 5 2/3 times larger than resettlement or government housing estates. There were also no “turf wars” or pricing wars between housing developers during this period. In addition, the flats on Teng Tau Tsuen Road had toilets and kitchens, and a balcony whilst the ones on West City Road had internal corridors, increased internal partitions and likely toilets/kitchens.

A graph is attached again as illustration.

The infrastructure market, despite having no formal regulations for reasons aforementioned, was very competitive, with 29 different builders identified, some including Hop Yick Co., Sam Hing Co. and Tung Ning Const. Co⁹. The market was not dominated by triad gangs (institutions somewhat akin to the mafia) as four major triad gangs constructed a net sum of three buildings—the Hing Yuen, 37-40 West City road and Tung Nam buildings—and only seven builders were found to have triad connections. In addition, as one Ms. Chan put it, the unregulated construction workers were effective, and were “taking it even more seriously than [those who worked in] public housing construction”.¹⁰

Some public/private comparisons.

This is in comparison to the Hong Kong public housing projects at the time, which as I have mentioned before was inadequate for a variety of reasons. First of all, the public housing programme began due to an emergency circumstance (the Shep Kip Mei fire) and was building houses cheaply and en masse; although the effort was decently coordinated, single family homes without toilet, tap or kitchen were somewhat accepted¹¹. Despite "newer" (1964) blocks having more amenities, such as a private balcony, water tap, toilet and shower, the size as mentioned before was only 24 sq ft per adult--only twice the area of a grave for living; and density was eight times higher than that of Latin American projects with an average net density of 2,200 persons per acre.¹² This was as every block contained up to 2,000 people; it was “humans packed upon humans”.

Population density did not significantly increase during the "peak overcrowding" time of the 1970s-late 80s as well; at the time of demolition (1987) population was roughly the same (lower in fact) then it was in 1965, and more high-rise units were built to accomodate any changes in population.¹³ Government estates were more known for overcrowding; there were 350,000 people living under 24 ft^2 per adult.

In general it was found that there were certain advantages to living in squatter settlements (of which the City was one) to private or public tenements. Squatters payed no rent and only 15% had to share their kitchen with other households, as opposed to 61% in private tenants. Only 23% of squatters had a cubicle or room shared with another family, as opposed to 56% of households living in private tenements.¹⁴

Also, as a general social class squatters were not significantly poorer than residents of private tenements. Their rate of unemployment was similar and 36% working in traditional sectors does not far eclipse 30%, and squatters had a higher share of workers in the modern and service sector. Squatters thus could be impoverished, but a good deal were of the middle-class. Hence what I meant beforehand when I said citizens of the City were not necessarily disproportionately poor.

Amenities of the City

Residents of the Walled City generally had access to a variety of public goods, as the Neighbourhood Welfare Association specialised in conflict resolution and acted as witnesses of house sales and sanitary conditions, and there were community night watchmen and fire brigades established prior by citizens.¹⁵ Electricity companies like China Light and Power, telephone and (some) water companies also supplied services to Kowloon for flushing, supposedly by contract.¹⁶ However, potable water mostly came from public fire hydrants.

Also, much like the “claim clubs” of the Wild West, kaifong associations also provided a form of informal property rights. They would stamp and write a contract between sellers (unlicensed developers) and buyers (customers) that expresses the existence of title transfer along with the sale price, date of sale, the location of the unit sold, and the claim that the seller had to bear liability for disputed title transfers and for “acts of God” (demolition)¹⁷ They would then log this contract as a written record of sorts and charge a transaction cost for viewing it when title disputes came along.

An example of such a contract.

One should not be too surprised to hear that due to the lack of rent control, building regulations, occupational licensing, protectionist policy etc. Kowloon was a pretty strong industrial centre. Most businesses were food processing (fishballs and noodles, as a matter of fact 90% of fishballs within Hong Kong were made in Kowloon), metalworking and plastic factories were 718. 718 businesses in 6-7 acres is pretty impressive.¹⁸ 170 of these were shops and restaurants, and around 80-90 unregulated medical clinics and dental clinics, some of which employed modern technology and had “licensed” doctors in China that fled due to the Maoist Revolution(s).

From pg. 20 of Anderssen’s Paper.

Conclusion

I do not wish to say Kowloon Walled City was an anarchist heaven. It was not. The Hong Kong Police would come periodically and engage in law enforcement, make arrests, collect trash and vaccinate prostitutes, as well as provide (some) public water. Also, a great deal of buildings were originally built by the English (although as time passed, more buildings were built by unlicensed developers).

However, this is still a lot less intervention than what most of the states today (if not all) impose. I am positive that most people, even Libertarians, would prefer the State only enforcing basic laws from time to time and providing a marginal level of public goods in comparison to the bloated regulatory State many Western (and Eastern) States impose nowadays.

And there are good examples we can learn from the less regulated aspects of it. One of which is that property rights do not, strictly speaking, require a state apparatus as we have seen with kaifong associations. They need some form of recognition, but even libertarians would recognise that arbitration in some form is desirable. Another is that strict zoning policies and land-use regulations may be detrimental when it comes to growth, as one can see without significant zoning rights that land can be allocated in a decent manner. Perhaps we should not merely look at the Walled City as an example of prostitution, opium, crime and filth and also look at it as an example of a spontaneous and well-coordinated community that found ways to adapt.

Bibliography

^{1, 2, 3- https://www.atlasobscura.com/articles/kowloon-walled-city, https://www.nationalgeographic.com/history/article/kowloon-walled-city-history, https://www.discovermagazine.com/the-lasting-legacy-of-hong-kongs-kowloon-walled-city-45430}

^{4- Lau, Leung Kwok Prudence & Lai, Lawrence & Ho, Daniel. (2018). Quality of life in a “high-rise lawless slum”: A study of the “Kowloon Walled City”. Land Use Policy. pg 161. 10.1016/j.landusepol.2018.04.047.,}

^{5- ibid.}

^{6- Housing Authority. 1988. Memorandum for the Building Committee: Legal Action – Defective Housing Blocks. Confidential Building Committee Paper No.BC 78/88, file ref. L/M in HD15101 12/107. Public Records Office, Hong Kong.}

^{7- Reinterpreting the Kowloon Walled City: From a “cesspool of iniquities” to an entrepreneurial discovery lab, D.E. Andersson et. al pg. 8.
8- Supra. note, Anderssen, pg. 12.}

^{9- Supra. note, Lau, pg. 163.}

^{10- 我聯住佢（建築工人）起（城寨樓）。開始起個時候，但地挖個樁，雖然不是打樁，但係挖得好深，真係挖得好深。材料方面，我細個會搬開沙找貝殼。我覺得真係起得好，好認真。係真材實力的磚、石屋上面，聯住佢地 石屋用個盤來撈，無蜂窩狀——不會滲水。牆身唔似現在樓宇會滲水[...]挖得好深，打石屎落去個地基，所以好穩陣。}

^{11- Hong Kong: The Industrial Colony; a Political, Social and Economic Survey, David Hopkins, pg. 296-298.}

^{12- ibid.}

^{13- Lawrence W.C. Lai, Mark Hansley Chua, Ken S.T. Ching, Rational development under uncertain de facto jurisdictional boundaries, Land Use Policy, Volume 68,
2017, pg. 387-88, see also. Supra note. Lau, pg. 161
14- Supra note. Hopkins, page 286-288.}

^{15- ORDER AND DISORDER: THE GOVERNANCE OF THE KOWLOON WALLED CITY IN HONG KONG DURING THE LATE 20TH CENTURY, Sophie Liu, pg. 33-36., Columbia University.}

<sup>16- Supra. Note Lau, pg. 161-162

17- Informal land registration under unclear property rights: witnessing contracts, redevelopment, and conferring property rights, Lawrence W.C. Lai, Frank T. Lorne, K.W. Chau, Ken S.T. Ching, pg. 231-33</sup>

^{18- City of Darkness – Life in Kownloon Walled City, Greg Girard and Ian Lambot, pg. 208-09.
Supra Note Anderssen, pg. 20.}

I.) Von vorrangiger Bedeutung ist die Minimierung restriktiver Vorschriften. Das heißt; Protektionismus, Auflagen für die Landnutzung und das Bauwesen sowie alles, was das Wachstum künstlich bremst, muss unterbunden werden. Denn ihr ausdrücklicher Zweck besteht darin, das Angebot nach staatlichen Präferenzen zu beschränken; sie versuchen die natürliche Ordnung der Volkswirtschaft zu verzerren, meist zugunsten bestimmter Gruppen.

Dies ist offensichtlich nicht förderlich für die Gesellschaft im weiteren Sinne. Das soll nicht heißen, dass beispielsweise Zwangsverträge oder verfälschte Produkte nicht strafrechtlich verfolgt werden sollten, aber es sollten nur sehr wenige nachträglich geschaffene Markteintrittsbarrieren bestehen.

ii.) Eine Zunahme der Kapitalintensität, d. h. ein Anstieg des Verhältnisses von Kapital zu Arbeit; dies ist positiv, da zwar die durchschnittliche Produktionsdauer zunimmt, die Umweghaftigkeit des Produktionsprozesses gleichzeitig zunimmt, was bedeutet, dass es komplexere und damit kapitalintensivere Produktionsphasen gibt, was letztlich sowohl zu einer Steigerung der physischen Produktivität aufgrund der zunehmenden Investitionen in komplexe und mechanisierte Produktionsweisen als auch zu einer Zunahme von Mehrwertgütern führt, deren Wert sich über einen längeren Zeitraum akkumuliert; dies schafft Reichtum, wie man es in der industriellen Revolution beobachten konnte.

Es ist jedoch wichtig zu beachten, dass dieser Prozess nicht künstlich, d. h. als Folge der Kreditausweitung, erfolgen darf.

iii.) Eine Minimierung der „Rent-Seeking-Gruppe“, d. h. von Gewerkschaften, Interessenverbänden der Landwirtschaft und Ärzteverbänden, die sich für besondere Schutzmaßnahmen und damit für den Ausschluss des Wettbewerbs einsetzen, um ein gesetzliches Monopol zu schaffen, und gleichzeitig Ressourcen zum Vorteil ihrer eigenen Gruppe abschöpfen, die auf dem Markt hätten genutzt werden können.

Die Rent-Seeking-Gruppe ist im Wesentlichen ein Trittbrettfahrer, und eine große Anzahl solcher Gruppen führt zu willkürlichen Vorschriften und Beschränkungen, die Anpassungsfähigkeit einer Wirtschaft behindern.

Historisch gesehen gibt es zahlreiche Beispiele dafür, wie Interessengruppen die Regierung unter ihre Kontrolle brachten und das Recht sowie den wirtschaftlichen Austausch für ihre eigenen Zwecke missbrauchten; so schreibt beispielsweise Gabriel Kolko über die Fleischverarbeitungs- und Eisenbahnindustrie, die in der Regierung vertreten waren und somit Gesetze verabschieden konnten, die für Neueinsteiger nachteilig und für bereits etablierte Unternehmen vorteilhaft waren. Solche Praktiken können, wenn sie als Tradition beibehalten werden, paradoxerweise zum Ruin führen – es war die tief verwurzelte Praxis des Schutzes und der Begünstigung traditioneller Produktionsmethoden, die es beispielsweise der Baumwollindustrie in Manchester und Lancashire unmöglich machte, sich an die aufstrebende Japanische Baumwollindustrie.

iv.) Die seit langem verhassten und beklagten „informellen Sektoren“ (das heißt Schwarzmärkte) sowie kleine, „kleinbürgerliche“ Dienstleistungsbranchen wie Handwerk, Textilindustrie, Tourismus usw. dürfen nicht behindert, sondern müssen im Gegenteil gedeihen können.

Denn sie sind es, die 1.) in Ländern mit noch jungen Industrien (Nordkorea und Afrika sind vielleicht das beste Beispiel) für Nahrung, Strom und andere Grundbedürfnisse sorgen können, 2.) wertvolle Arbeitsplätze schaffen und oft bessere Löhne bieten als die grobe Arbeit der vorangegangenen Zeit (die, sozusagen, ganz traditionell, im Haushalt oder in der Gemeinschaft verrichtet wurde), 3.) eine wertvolle Quelle für das Lernen durch Praxis in dem Sinne, dass sie angehenden Kapitalisten ermöglicht, den Prozess der Unternehmensführung zu erleben (und erfolgreichen Kapitalisten das Fortbestehen ermöglicht) und zudem Erfahrungen im Arbeitssektor vermittelt, und 4.) die Kapitalakkumulation ermöglicht, die für die meisten weiteren Expansionen der Industrialisierung notwendig ist.

Meiner Meinung nach hat Stephen Broadberry hervorragende Arbeiten dazu verfasst, dass die industrielle Revolution und die Meiji Restauration keine aus dem Nichts entstandenen Ausweitungen der Industrie waren, sondern vielmehr den Höhepunkt einer jahrhundertelangen Zunahme der Kapitalintensität darstellten.

v.) v.) Freie Märkte für Kapital und Arbeit so weit wie möglich zulassen, unternehmerische Freiheit gewähren und schließlich den freien Handel ermöglichen. Es ist wichtig, freie Märkte für Arbeit und Kapital zuzulassen, da ein Verbot von Schwankungen und/oder die Zerschlagung bestimmter Formen von Arbeit oder Kapital eine Wirtschaft mit nachhinkender Leistungsfähigkeit und die Bevorzugung bestimmter veralteter Produktionsweisen zur Folge hätte; und vor allem, weil sie komplementäre Produktionsfaktoren innerhalb des Kapitalprozesses sind und eine Verzerrung der Preise die unternehmerische Einschätzung der Produktionskosten behindern würde, die die realen und heterogenen Produktionskosten am besten widerspiegeln.

Mit anderen Worten: Es bestünde die Gefahr einer Verzerrung der Produktion. Die Freiheit des Unternehmertums ist wichtig, da man die richtige Menge, Qualität und strukturelle Produktionsweise nicht im Voraus bestimmen kann; nur Unternehmer können dies angemessen einschätzen, und die richtige Anzahl oder Qualität von Unternehmern im Voraus festzulegen, bedeutet, das Unmögliche zu versuchen. Und schließlich ist es aufgrund der Verflechtung bestimmter Produktionsprozesse mit anderen – in dem Sinne, dass ein Unternehmen ohne die Zusammenarbeit mit einem anderen geeigneten Unternehmen bei der Bereitstellung bestimmter Produktionsfaktoren nicht überleben könnte – und aufgrund der Vorrangstellung der Arbeitsteilung nur sinnvoll, den Handel zu liberalisieren.

Eine Nichtliberalisierung des Handels würde vielen inländischen Unternehmen die Kalkulation erschweren, da es ebenfalls eine exogene Verzerrung darstellt.

Das fasst meine Ansichten recht gut zusammen. Ich glaube zwar nicht, dass dies eine vollständige Aufzählung ist, da es noch viele weitere Faktoren gibt, die berücksichtigt werden müssen, aber ich betrachte diese als die Faktoren, die jede erfolgreiche Wirtschaft berücksichtigen muss, und als die Faktoren, deren Verzerrung zu einer schweren Katastrophe führen kann. Ich beende es hier.

Since the dawn of time bureaucratic governments (there are several categories of “Statism”, such as “aristocratic” or “cultic” statism as David Graeber was kind enough to point out in his… most interesting book The Dawn of Everything) have been interested in controlling foodstuffs for citizens and particularly a military apparatus which is useful for establishing legitimacy, social control and in the case for military supporting and establishing loyalty to a base of soldiers that engage in plunder. (Max Weber calls this “booty capitalism”; I am partial to the term but James Scott’s Against the Grain goes into more detail).

Ancient Egypt

In Ancient Egypt the economy was primarily agricultural. Oleaginous (containing oil) grains — flax, sesame, etc. — emmer wheat and barley were primarily harvested, with fertile, dark loamy soil obtained through the summer flooding of the Nile. ¹

The State made an immense attempt to harness this agricultural wealth, particularly with grain, primarily through the means of procurement. As early as the 5th Dynasty (2089 BC) do we see references to such, when on nomarch (provincial governor) Henku’s tomb it is inscribed: “I was lord and overseer of southern grain in this nome.” ² The Book of Genesis also alludes to this practice continuing in the 13th Dynasty, in Genesis 43:33-36, where Pharaoh’s advisors tell him to appoint commissioners to collect 1/5th of the grain harvest during the 7 years of abundance so the nation will have enough in the following years of famine.³

Genesis 4:33-36, the verses in question. (DRB translation)

Joseph, the historical figure (and not the father of Christ), was one of the commissioners appointed to do such. The Roman historian Josephus gives us a rough account of what happened. The multitude whom had poor harvests and reserves had to exchange their cattle to the state, and then their land, to obtain grain. They thus were indebted to the State and essentially became slaves, consequently increasing Joseph’s power.

Enmer, quite the detailed Egyptologist, details what the granary might have looked like. I do not have sufficient time to explain, but in essence, granaries were little conical mud buildings surrounded by a wall with a low and high window, with the lower one typically closed and the higher one where grain would enter. After grain was threshed, heaped, and sacrificed in part to the gods, it would be taken by officials who would measure the heaps before taking them into the granary.⁴

Adolf Enmer’s model of the granary.

During the Middle Empire — Classical Egypt, where Joseph likely lived — granaries had a flat roof reached by an outside staircase, where the scribe could keep track of grain. In this era, sacks of grain were likely carried by ships.

Model of the Granary’s interior, as in how such grain was organised.

Many workers complained of having to carry large sacks in a quick amount of time, with little rest. Under this system, most land belonged to the Pharaoh, and was rented by the agricultural class, creating a system of heightened control. During the Hellenistic era, this form of state control intensified. In the Lagid Dynasty, started by Ptolemy I at around 305 BC, the state monopolised many work tools, mines, quarries, salt pans, workshops and fisheries.

It also had a monopoly on oleaginous grain which it rented to farmers at very high interest rates, and consequently fixed grain prices by fiat at set levels, even for retailers. They also increased bureaucratic enforcement of these policies through censuses, land surveys, and inventories, through a large and coordinated army of inspectors. Unused tools were sequestered and absentee land was given to farmers who could bear such policies.

The results were rather predictable. While royalty lived in excess, indigenous labourers had no capital, livestock or raw materials. They had to endure inspections, constraints and price controls and had little incentive in producing. Egypt’s political stability collapsed, money devalued, prices for oil and wheat increased, and workers who could tolerate no further retreated from the city-state.⁵

A particular account of abandonment (anachoresis) given by Jean-Phillipe Levy.

Sumer

Sumer harboured many city-states in Mesopotamia, amongst one of them being the State of Lagash. The State of Lagash was ruled by ishakku, who may have been initially elected by the people but later became hereditary. The economy was relatively free for a good period, with merchants doing free trading with surrounding states, until war came.

The imperialistic regime of Ur-Nanshe at around 2,500 BC waged war for a reason unclear to us today. They won quite a bit, and were even dominant within the region for a period of time, but such success was transient. To raise resources for war, the State had to tax citizens and appropriate property, which carried on to a very complex bureaucratic system. ¹

In the words of a Sumerian historian, the boatmen inspector seized the boats, the cattle inspector the cattle, the fisheries inspector the fisheries; shearing sheep would have a State-set cost of 5 shekels, divorcing one’s wife five shekels, the cost of oil preparation 5 shekels, and taxes and controls for barley and bread were present. It was an absolute nightmare of an administrative state. ²

An example of the nightmarish bureaucracy that had plagued peoples’ lives.

We do not know too much about what citizens felt about this, but probably very negatively. When the actions of Urukagina — a radical reformer who abolished price controls and taxes — are described, the word 𒂼𒄄 (ama-gi) is often used. Literally “return to mother”, it came to be used for freedom: freedom from a multitude of obligations. It was often said in tablets that “Urukagina established the freedom of the citizens of Lagash.” We can infer, then, that the price controls and bureaucracy that weakened Lagash were broadly disliked.³

Babylon

The Code of Hammurabi was written some time around 1755–1750 BC. While it is famous for extremely draconian, “eye for an eye” laws, it also contains a multitude of price and wage controls. Below are a few examples of such.¹

Laws 269-277 in the Code of Hammurabi. Actually there are more Laws (218-225) that have to do with price controls, but they are omitted from this discussion.

During Hammurabi’s time, trade also happened to strongly diminish. Prominent and wealthy tamkaru (merchants) were very rare during and after his reign, and only twenty existed, all minor tradesmen and moneylenders. Only seven to eight existed in Larsa, ten in Sippar, and two in Nippur, only appearing periodically through tablets. This trend was apparently not new to him. Tablets from Kish indicated private property was rampant, as Sumsunuwatar and Sisunawirat were rich private men, Balmunamhe owned large estates, and many tamkaru like Istar-ili and his son Idin-Amurrum owned many.² But there was a profound change around the time of Rim-Sin.

Multiple factors point to Rim-Sin launching radical reforms. Transactions relating to immovables; for instance, property — greatly decreased around Rim-Sin’s 33rd to 60th year in rule, and were typically made by one Ubar-Samas. The earlier tamkaru are also mentioned many times through their earlier texts, whereas the later ones appear mostly once, and tamkaru overall decreased from 37 within years 1–32 of Rim-Sin’s rule to 11 in years 33–60. Administrative documents also proportionally increased during the latter period.³

What is the cause of this? One potential reason could be the conquest of Isin in his 29th year or so of rule, which helped him consolidate power over Sumer and Akkad, and also granted him divine worship.

Confucian-Era China

Although Confucius himself said little about profits in the Analects — and may have had some anti-government leanings from time to time (See Analects 13:18 and 2.3) — his successors did not. Liu Te argued that officials should establish the five equalisations: equalising every class of people, making prices uniform, increasing public finance, and satisfying both producers and consumers. Prices for shops and crops during famine were also imposed to prevent merchants from chheating consumers and earning surplus profit. Wang Mang was the one to formally implement this, opening up bureaus in trade and banking which would fix the prices of different degrees of commodities. When shortages happened, the bureaus would buy commodities at market price. When price was above market price, the bureau would sell at market price, and when below, they would leave enterprisers alone. But rapid famine entailed peasant dissatisfaction, which entailed peasant rebellion, and later Wang Mang was overthrown and killed — which, of course, means he failed.

Wang An-Shih, more than a thousand years after the case of Wang Mang, tried something similar. First by setting a product quota on certain provinces, which led merchants to simply raise prices exorbitantly. Next, he tried to get bureaus to sell ice, sesame, etc. at profitable state-mandated prices while buying for cheap, but this in fact made little profit (only 1.332m “strings”) and may have been more detrimental than selling services at market rates. Controls had failed there as well. ¹

The folly of the ruler Wang An-Shih, demonstrated.

Ancient Greece

In Greece, many goods including corn were price-controlled. It was not permitted for one to carry more than fifty loads of what a man could carry, nor was it permitted to sell the volume for even one obolus — one sixth of a drachma. The punishment for disobeying was death. But corn-dealers, often immigrants, sold it one drachma higher regardless of such threats. The police (or proto-police) tried to enforce price controls, but people like Cleomenes of Alexandria still managed to speculate by ascertaining the current state of the market and hoarding large volumes of corn. He would collude with dealers, appear to agree to sell at 10 drachmas, but then sell for 32.

Lysias, a politician, expressed frustrations at the inability to enforce such price controls:

"μέγιστον δ᾿ ὑμῖν ἐρῶ καὶ περιφανέστατον τεκμήριον ὅτι ψεύδονται· ἐχρῆν γὰρ αὐτούς, εἴπερ ὑμῶν ἕνεκα ἔπραττον ταῦτα, φαίνεσθαι τῆς αὐτῆς τιμῆς πολλὰς ἡμέρας πωλοῦντας, ἕως ὁ συνεωνημένος αὐτοὺς ἐπέλιπε· νῦν δ᾿ ἐνίοτε τῆς αὐτῆς ἡμέρας ἐπώλουν δραχμῇ τιμιώτερον, ὥσπερ κατὰ μέδιμνον συνωνούμενοι. καὶ τούτων ὑμᾶς μάρτυρας παρέχομαι. δεινὸν δέ μοι δοκεῖ εἶναι, εἰ ὅταν μὲν εἰσφορὰν εἰσενεγκεῖν δέῃ, ἣν πάντες εἴσεσθαι μέλλουσιν, οὐκ ἐθέλουσιν, ἀλλὰ πενίαν προφασίζονται, ἐφ᾿ οἷς δὲ θάνατός ἐστιν ἡ ζημία καὶ λαθεῖν αὐτοῖς συνέφερε, ταῦτα ἐπ εὐνοίᾳ φασὶ τῇ ὑμετέρᾳ παρανομῆσαι."

Or, translated in English: “I will tell you the greatest and most obvious proof that they are lying: for if they had done these things for your sake, to appear to be selling at the same price for many days, until the one who had agreed with them left; Now, however, they sometimes sell it on the same day at a higher price, as if they had agreed on it beforehand. And I offer you as witnesses to these things. It seems to me to be a terrible thing if, when it is necessary to bring in the harvest, which everyone intends to do, they are unwilling, but make excuses, on which they are liable to death and it is profitable for them to err, they say these things to flatter you.”

Lysias, Against The Grain Dealers, 22:10.

The distilled point from Lysias is that the State tried to threaten merchants with the death penalty and attempted to enforce it very broadly, but merchants were still able to collude, and find loopholes around the government. The price controls, although extremely strict in every shape in form, lacked any proper effect.

Ancient Rome

The Roman State became more and more regulatory and interventionist by necessity. To maintain the vast hegemonic power it possessed over its domain, it had to maintain an army, and consequently men, arms, and supplies; and as such it had to feed its men and obtain materials, making it an economy oriented towards defence — not dissimilar to a siege economy. As such, it did various things: it taxed wasteland and absentee land by holding the village accountable for it, and also attempted to prevent currency speculation by banning the hoarding, buying and selling of coins, appointing officials to enforce this with death. These efforts were of little success.¹

Levy’s description of the absentee tax.

Another major policy the government took was price and wage controls, perhaps one of the most expansive in the Western World, as ordinarily controls were only instilled for a few goods. In 301 AD, Rome was undergoing rampant inflation. Diocletian fixed maximum prices in denarii for more than 1,200 goods — from raw materials to labour, to transport, to consumer goods, and even slaves. Here is an excerpt of fixed prices.²

As Lactantius, a contemporary historian, points out, this made people afraid to sell things, making scarcity worse, until the price controls were lifted. The denarius also rose 250% and price controls were basically ignored until they were abrogated, indicating they were generally unsuccessful.

“He also, when by various extortions he had made all things exceedingly dear, attempted by an ordinance to limit their prices. Then much blood was shed for the veriest trifles; men were afraid to expose aught to sale, and the scarcity became more excessive and grievous than ever, until, in the end, the ordinance, after having proved destructive to multitudes, was from mere necessity abrogated…”³

Bibliography

Ancient Egypt:

¹ Levy, Jean-Philippe. The Economic Life of the Ancient World. pg.2.

^{2 J.H. Breasted, Ancient Records of Egypt, Volume I, pg. 126.}

³ Book of Genesis, 43, Douay-Rheims Bible edition.

⁴ Erman, Adolf. Life in Ancient Egypt, 433-34.

^{5 Op. Cit. Levy, 40-43.}

Sumer

¹ Kramer, Samuel Noah. From the Tablets of Sumer: Twenty-Five Firsts in Man’s Recorded History, 43.

² idem, 44.

³ idem, 45.

Babylon

^{1 https://avalon.law.yale.edu/ancient/hamframe.asp}

² Leemans, V.F. The Old Babylonian Merchant: His Business and His Social Position, 109, 113.

^{3 idem., 114-117.}

Ancient China

¹ Chang, Chen-Huan. The Economic Principles of Confucius and His School.

Ancient Greece

Boeckh, August. The Public Economy of the Athenians.

Lysias. Against the Corn Dealers.(22.10)

Ancient Rome

¹ Op. Cit. Levy, 88.

^{2 An English translation of the Edict on Maximum Prices, also known as the Price Edict of Diocletian. (Edictum de pretiis rerum venalium). Antony Kropff, 15.}

³ Lactantius. De Mortibus Persecutorum.

Before I begin with my formal criticisms, I wish to preface by saying that I mean no ill will towards the legacy nor academic prowess of Dr. Polanyi. It is of my view that Dr. Polanyi was a respectable author in the sense that his writings are very much a product of his time period and he tried to create a grand and overarching theory of the economy in the same way Adam Smith attempted in The Wealth of Nations and Karl Marx attempted in Das Kapital. There is no doubt his work requires more consideration then is given today.

However, praise aside, I also believe that his work is riddled with historical errors, leaps of logic, inconsistencies, poor argumentation, and plainly incorrect assertions. Of course, just asserting this is not an argument in itself, so I shall proceed to outline some specific gripes.

I. What Polanyi argues.

The major propositions Polanyi makes within the course of his text, and which I will be analysing are the following; (to avoid the potentiality of being criticised for strawmanning, I have sought to provide the relevant quotes where Polanyi denotes what I am thinking. This makes this part of writing extremely long, but if you have faith that I have represented him correctly you can skip the quotations; moreover, if you are familiar with his arguments you can also skip.):

I. The school of “liberalism” and the Liberal order as a whole, with its propositions of universal peace, the self-regulating market, the gold standard etc. demonstrably begun to and definitively fell apart with a multitude of economic and social catastrophes; including but not limited to the Great Depression, the Great War, the rise of Fascism etc.

“Nineteenth century civilization rested on four institutions. The first was the balance-of-power system which for a century prevented the occurrence of any long and devastating war between the Great Powers. The second was the international gold standard which symbolized a unique organization of world economy. The third was the self-regulating market which produced an unheard-of material welfare. The fourth was the liberal state... Of these institutions the gold standard proved crucial; its fall was the proximate cause of the catastrophe. By the time it failed most of the other institutions had been sacrificed in a vain effort to save it.”

The root cause of the crisis, we submit, was the threatening collapse of the international economic system. It had only haltingly functioned since the turn of the century, and the Great War and the Treaties had wrecked it finally. This became apparent in the twenties when there was hardly an internal crisis in Europe that did not reach its climax on an issue of external economy. Students of politics now grouped the various countries, not according to continents, but according to the degree of their adherence to a sound currency.

-The Great Transformation, pg. 2 and 14.

II. Before the rise of the market economy, individuals in communities lived in a “gainless” and “marketless” economy and society; even if prices existed, they were administered by the state-apparatus. Any trade that existed in such societies was reciprocal and redistributionary; profiteering was frowned upon, trade for personal gain was not the norm, the propensity to barter, truck and exchange per Smith and Menger is nonexistent.

“The institutional pattern of centricity, again, which is present to some extent in all human groups, provides a track for the collection, storage, and redistribution of goods and services. The members of a hunting tribe usually deliver the game to the headman for redistribution. It is in the nature of hunting that the output of game is irregular, besides being the result of a collective input. Under conditions such as these no other method of sharing is practicable if the group is not to break up after every hunt. Yet in all economies of kind a similar need exists, be the group ever so numerous. And the larger the territory and the more varied the produce, the more will redistribution result in an effective division of labor, since it must help to link up geographically differentiated groups of producers. Symmetry and centricity will meet halfway the needs of reciprocity and redistribution; institutional patterns and principles of behavior are mutually adjusted.

As long as social organization runs in its ruts, no individual economic motives need come into play; no shirking of personal effort need be feared; division of labor will automatically be ensured; economic obligations will be duly discharged; and, above all, the material means for an exuberant display of abundance at all public festivals will be provided. In such a community the idea of profit is barred; higgling and haggling is decried; giving freely is acclaimed as a virtue; the supposed propensity to barter, truck, and exchange does not appear. The economic system is, in effect, a mere function of social organization.”

-idem. pg. 28.

III. The market, thus in its capitalist configuration is not a natural and spontaneous entity; it does not exist ex nihilo but rather through the effort of political institutions through specific policies. For instance, the cotton industry that brought Britain much of its fame was reliant on protective tariffs like the Calico Act in mercantilism. More specifically, the abolition of Tudor-era protectionism, the Enclosure Acts, the Poor Law Amendment of 1834 and most importantly--Speenhamland, which whilst ensuring workers subsistence reduced their standards to an extent that they yearned for a competitive labour market. The capitalist market also commoditised “fictitious capital” (e.g. labour & land) through imposition of the State for the sustenance of its existence.

‘Nor are they even today. It is still widely held that it simply meant indiscriminate poor relief. Actually, it was something entirely different, namely, systematic aid-in-wages. It was only partially recognized by contemporaries that such a practice was in head-on collision with the principles of Tudor law, nor was it realized by them at all that it was completely incompatible with the emerging wage system...

Burke and he understood what Pitt had failed to see, that the truly vicious principle was that of aid-in-wages. Engels and Marx made no study of the Poor Law. Nothing, one would imagine, should have suited them better than to show up the pseudo humanitarianism of a system which was reputed to pander to the whims of the poor, while actually depressing their wages under the subsistence level (powerfully assisted in this by a special anti-trade union law), and handing public money to the rich in order to help [280] them to make more money out of the poor.”

- idem. pg. 160.

“Cotton manufactures, the marvel of the time, had grown from insignificance into the leading export industry of the country—yet the import of printed cottons remained forbidden by positive statute. Notwithstanding the traditional monopoly of the home market an export bounty for calico or muslin was granted. Protectionism was so ingrained that Manchester cotton manufacturers demanded, in 1800, the prohibition of the export of yam, though they were conscious of the fact that this meant loss of business to them. An Act passed in 1791 extended the penalties for the export of tools used in manufacturing cotton goods to the export of models or specifications. The free trade origins of the cotton industry are a myth.”

-idem, pg.78.

The story has been told innumerable times: how the expansion of markets, the presence of coal and iron as well as a humid climate favorable to the cotton industry, the multitude of people dispossessed by the new eighteenth century enclosures, the existence of free institutions, the invention of the machines, and other causes interacted in such a manner as to bring about the Industrial Revolution.

- ibem. pg. 23.

IV. Trade emerged on a scale en masse between nations-to-nations and not between localities-to-localities and are not related to the internal mode of economic organisation; meaning trade cannot be equated to markets and Adam Smith’s theory of the division of labour is heavily flawed.

“The reasons are simple. Markets are not institutions functioning mainly within an economy, but without. They are meeting places of long-distance trade. Local markets proper are of little consequence. Moreover, neither long-distance nor local markets are essentially competitive, and consequently there is, in either case, but little pressure to create territorial trade, a so-called internal or national market. Every one of these assertions strikes at some axiomatically held assumption of the classical economists, yet they follow closely from the facts as they appear in the light of modern research.”

- idem. pg. 34.

V. The liberal economists such as Townsend and Malthus created the theory of ‘naturalism’ (biologicalism) when they treated humans as beasts (focusing on their waste, their population size, etc.) in order to justify the theory of the “self-regulating” market and as the core thesis of modern economics today.

“The paradigm of the goats and the dogs seemed to offer an answer. The biological nature of man appeared as the given foundation of a society that was not of a political order. Thus it came to pass that economists presently relinquished Adam Smith’s humanistic foundations, and incorporated those of Townsend. Malthus’ population law and the law of diminishing returns as handled by Ricardo made the fertility of man and soil constitutive elements of the new realm the existence of which had been uncovered. Economic society had emerged as distinct from the political state. The circumstances under which the existence of this human aggregate—a complex society— became apparent were of the utmost importance for the history of nineteenth century thought. Since the Verging society was no other than the market system, human society [115] was now in danger of being shifted to foundations utterly foreign to the moral world of which the body politic hitherto had formed part. The apparently insoluble problem of pauperism was forcing Malthus and Ricardo to endorse Townsend’s lapse into naturalism.”

-ibem. pg. 67.

He does give more arguments throughout the course of the text, including the argument that Fascism ideologically was a reaction to the excesses of liberal capitalism that started at Speenhamland. This is interesting and somewhat cogent but for sake of brevity I shall omit a critique of such.

II. My response to each major argument.

I.) The school of “liberalism” and the Liberal order as a whole, with its propositions of universal peace, the self-regulating market, the gold standard etc. demonstrably begun to and definitively fell apart with a multitude of economic and social catastrophes; including but not limited to the Great Depression, the Great War, the rise of Fascism etc.

This is perhaps the argument I can most easily understand, but also requires the least theoretical refutation. At the time The Great Transformation was published (1944), Polanyi had already witnessed WWI (The Great War), WWII, the Great Depression, the rise of Fascism and Nazism, the Bolshevik Revolution, &c. It is logical for a scholar to glean these examples of illiberalism without a contemporary counterfactual and conclude that the world is moving beyond the liberal principles of laissez-faire, universal peace, and the haute finance system/gold standard. (more important though in Polanyi’s view that the gold standard and haute finance symbol represented sound money.) “Yet not until the 1825 panic did sound currency become a tenet of economic liberalism, i.e., only when Ricardian principles were already so deeply impressed on the minds of politicians and businessmen alike…” (Polanyi 79).

This critique certainly seems difficult to stomach today given the vast body of evidence that appears against it, which I will discuss in time. There are some theoretical elements that we can still criticise, however. For one, if liberal institutions and consequently ideology had collapsed or were severely collapsing before the inter-bellum era, then it stands to reason that Liberal ideology by large would be relegated to a minority view. But it seems to me that the literati had not abandoned liberal notions of power and property. Take Calvin Coolidge’s ruling on how German alien property ought to be handled post-WWI:

"'…It has always been the policy of America to hold that private enemy property should not be confiscated in time of war. This principle we have scrupulously observed. As this property is security for the claims of our citizens and our Government, we cannot relinquish it without adequate provision for their reimbursement.”

The fourth annual message of President Calvin Coolidge, made to the Sixty-ninth Congress, second session, Messages and Papers of the Presidents, Coolidge 1925-29, at page 9629.

And as Mr. Justice Butler said in delivering the opinion of the Supreme Court with regards to a ruling with Deutsche Bank;

“To grant to former alien enemy owners of the privilege of becoming entitled upon conditions specified to have returned to them the property of which they had been deprived by exertion of the war power of the United States was made by the Congress in mitigation of the taking and in recognition of "the humane and wise policy of modern times"

Cummings, Attorney General et al. v. Deutsche Bank and Discontogesselschaft, p.122.

Or, as is stated in the Trading With the Enemy Act of 1917, in Article I:

“…indemnities, reparations, or advantages specified in the aforesaid joint resolution of the Congress of the United States of July 1921, including all the rights and, advantages stipulated for the benefit of the United States in the Treaty of Versailles which the United States shall fully enjoy notwithstanding the fact that such treaty has not been ratified by the United States.'“

These are all isolated examples and obviously do not reflect the opinions of every single statesman in every country to ever take office in the inter-bellum era; but at least in certain nations, such as the United States, notions of foreign policy and restitution (very key components of the international order) still abided by the Monroe Doctrine, of “strongmen with a weak republic”, and enforces jurisdiction onto enemy property as would a court of chancery and not a court of punitive Law.

With regards to other forms of liberal institutions, they also did seem to survive and adapt to the interbellum period. For instance, liberal attitudes such as that of the Vienna Circle (which Polanyi was surely familiar of, and in fact he cites indirectly in pg.14 as economists attempting to “operate” on the krone) persisted at least until the presence of the Vaterländische Front in Austria. In short, If Polanyi was correct in that saying liberal institutionalism had collapsed during the Great War, and a rise in institutional anarchy was the cause, how did liberalism persist in institutional thought? More importantly, if liberalism had failed and this caused the Great War, why did contemporaries not recognise this threat, but during WWII when nations like Germany and Italy fell to National Socialism and Fascism did opposing powers recognise the threat? Why this disproportionality in comprehension?

Of course, what is more damning than theoretical nitpicking is that Polanyi’s theory is nowadays very predictively untrue. The conflict and disarray of the Great War and WWII supplanted the Long Peace of 1815-1914 (Pax Britannica), but in turn was supplanted by the Peace from 1945 to the current-day, which at least de jure is predicated on a multilateral and cooperative rules-based international order and lacks direct military conflict between major powers. Attempts to rein in the market for good (“high modernism”) were attempted in Ghana, India, Brazil, Mexico and Tanzania, amongst other nations, in the 1960s to 1980s in the form of premia on foreign exchange, import-substitution industrialisation, exclusive government control and subsidies (MacHovec 63, Perfect Competition and the Transformation of Economics) yet failed almost unilaterally, and led to extensive market reforms, including that in India (Dismantling the License Raj: The Long Road to India’s 1991 Trade Reforms by Douglas Irwin is a great paper to read on the Indian reform). Also, so-called “neoliberalism”, floating signifier as it is, was enacted en masse in the 1980-90s in Britain, America, Chile, Argentina &c. It sought to paradoxically (in Polanyi’s epistemology) undermine the “double movement” dialectic through reducing the public sphere and consequently revive the liberal system seemingly on its death knell. (It should be noted that I am not against such measures; I merely wish to state the facts.)

The gold standard had indeed fallen out of favour but was replaced with the ‘dollar standard’ and the notion of sound fiat reinforced through Gold through Bretton Woods before Nixon had ended it. And of course, there came the “Third Wave” of Democratisation, from the 1970s to the 90s, that oversaw the resurgence of liberal democratisation and the notion of the “liberal State”, from Indonesia to Italy to South Korea.

I must repeat myself when I say that I believe this line of reasoning was by-and-by not Polanyi’s fault. No individual at the time could have foresaw that the Great Depression would not radically outlive WWII, or that we would have decades of relative peace, or that the collapse of the gold standard did not in practice spell out the death of liberal hegemony in the field of International Trade, or that privatisation would make a return decades after it seemed like John Maynard Keynes had gotten the last word in his General Theory. And besides, Polanyi was right when he said that the so-called foundations of liberalism had been intensely challenged in the Great Wars, with the rise of Fascism, with the collapse of the gold standard &c. He just didn’t see that Liberalism would, like a phoenix, reinvent its premises and rise up from the dead.

This may seem like an odd argument to nitpick so strongly. So Polanyi got a few details incorrect, big deal. But I think it goes beyond mere pedantry. For one, if liberalism is able to survive the supposed organisational restraints Polanyi posits it is consisted of, that liberalism is less dependent on fixed and foundational principles than Polanyi argues. For another, it undermines in some areas the viability of the 'double transformation’ theses Polanyi espoused (the idea that reactionary counter-movements would universally spring up after the excesses of the ‘self-regulating market’) for, if the so-called self-regulating market had globally heightened its crises to a point where collapse was imminent, would such a ‘reactionary tendency’ not embed itself permanently within society? But it seems like the reaction was not uniform and even gradually despised. Polanyi’s claim, then, seems dangerously deterministic.

II.) Before the rise of the market economy, individuals in communities lived in a “gainless” and “marketless” economy and society; even if prices existed, they were administered by the state-apparatus. Any trade that existed in such societies was reciprocal and redistributionary; profiteering was frowned upon, trade for personal gain was not the norm, the propensity to barter, truck and exchange per Smith and Menger is nonexistent.

Given that Polanyi seems to be making a very strong sociological/anthropological claim here, it stands to reason that his overall school of thought has been very influential in such a field. Marshall Sahlins, Douglass North, James C. Scott, and Daniel Snell are many such scholars influenced by he. This means that there are those who have put his idea of “gainless societies”, “reciprocity” and whatnot to the empirical test. Unfortunately, like I.), with newer evidence his theory rapidly proved to be untrue. Even more unfortunately, giving Polanyi the grace of hindsight is difficult on this one, as contemporary anthropologists already had sufficient evidence to refute him. I will first summarise roughly Polanyi’s sociological claims, before pointing to contemporary evidence against his example, and then cite a wide variety of "modern” literature to thoroughly refute his claim.

To give a clearer view into what Polanyi posited with respect to societies, Polanyi’s argument is that there are four distinct types. I am mostly drawing from pages 27-32 of The Great Transformation in my truncated summary. There is reciprocity, which leads to a symmetrical model of society. There is redistribution which leads to “centricity” within society. There is house-holding which leads to self-sustained autarchy. And finally there is barter which leads to a market mode of production and social organisation.

Reciprocity is, well, reciprocal. Individuals give and receive something, and this goes beyond economic exchange into, say, sex. These transactions are not formulated through “gain” (the motive to make surplus economic profit). The mode of production is “symmetrical” because every individual is both a recipient and a giver. The example Polanyi gives of such is the Trobriand Islanders of Western Melanesia, where there is the trade of white-shell armbands and red-shell necklaces of traditional make, the kula ring, where “no profit is involved, either in money or in kind; no goods are hoarded or even possessed permanently; the goods received are enjoyed by giving them away; no higgling and haggling, no truck, barter, or exchange enters; and the whole proceedings are entirely regulated by etiquette and magic.” (Polanyi 29).

There is redistribution, where a central figure (the tribesman) takes on the role of reciprocity; his role is to take from the people and give back, albeit not perfectly proportionately. This is called centricity because economic production is, to hammer the point in an intentionally redundant manner, oriented around the central figure. The hunter after he catches game meets with the tribesman to redistribute the meat. Such is the case in feudal societies such as ancient China, Greece, India, the Inca’s, Hammurabi’s Babylonia, Dahomey, so on and so forth. Once again there is no principle of “gain” nor is there great importance of markets. Householding is production for one’s use, with the Greeks calling this mode of production oeconomia. This was just as ancient of an institution and was present in the Roman familia, the South Slavic zadruga and so on. Yet again there is no principle of ‘gain’ nor do markets hold importance.

I will brush over an explanation of barter and market as this as it is not germane to the criticism at hand. Anyways, what Polanyi is doing incorrectly here (besides trying to apply an all-encompassing theory of production with only a few examples) is that he attempts too much for each definition. It is undoubtedly true that the Trobriand Islanders had an element of reciprocity to them in the kula ring. It is also true without a doubt that the Incas, Babylonians, and other feudal societies had a significant element of redistribution. And it is true that Roman society had organisations designed for personal sustenance. But it is not true that “gain”, self-interest and barter were essentially irrelevant in these societies. I will focus on the Trobriand Islanders first, with the same great level of care and exposition that Polanyi undertook.

Firstly, self-interest, or “personal motive”. The anthropologist Malinowski (who Polanyi also cites extensively) says that in fact the Islanders are not immune to shirking or being discontent about their partners: “Whenever the native can evade his obligations without the loss of prestige, or without the prospective loss of gain, he does so, exactly as a civilized businessman would do. When the ‘automatic smoothness’ in the run of obligations so often attributed to the Melanesian is studied more closely, it becomes clear that… seldom is a man completely satisfied with his partner.” (Malinowski, CRIME and CUSTOM in SAVAGE SOCIETY, 30). He also states that in part the reason they do act generously is because it brings them social status and praise: “Since, again, largesse is a matter of honour and praise, the average native will strain all his resources to be lavish in his measure. He knows, moreover, that any excess in zeal and generosity is bound sooner or later to be rewarded. (ibid. 31, emphasis mine).

This does not tell us that the Trobriand Islanders were rugged individualists or that reciprocity and mutual love were not factors in their decision-making nor present in their societies. But it does tell us that they were not the only factors, and self-interest from prestige was, given Malinowski’s wording, nontrivial.

Next, barter. Malinowski notes the kula reciprocal system which Polanyi so richly praises is concomitant to a broader system of barter, gimwali, which the natives “practice extensively” and have a “clear idea” for (Malinowski, Argonauts of the Western Pacific, 73). They comprehend it well in that they define the “lack of ceremony”, the “permissibility of haggling”, the goods tradable through it and the manner in which it can be done between non-strangers. (ibid., 145-46). (However, close partners rarely practise gimwali; see Malinowski, Argonauts of the Western Pacific, 280). A specific example of the haggling and adjustment is given by a native islander:

They bring their areca-nut, their sago, they put it down. They want some article of ours, they say: ‘I want this stone blade.’ We give it, we put the betel-nut, the sago into our canoe. If they give us, however, a not sufficient quantity, we rate them. Then they bring more.

Malinowski, Argonauts of the Western Pacific, pg 280.

Malinowski goes on to state that this mechanism, even if second to the kula ring, was not insignificant; “But if I say that every visitor from Boyowa, brings and carries away about half-a-dozen articles, I do not under-state the case.” (Malinowski, Argonauts of the Western Pacific, pg. 281.) He also provides means for where transactions and thus “prices” can be formed: from instance, in Kuboma to Sinaketa 1 comb is worth 4 coconuts, and from Dobu to Sinaketa 4 coconuts is exchanged for is worth 4 coconuts and 1 bunch of betel. He does note that this information is sure to vary in the “gain in which they afford”) (ibid.) but there is undoubtedly a gain obtained by the middleman.

(A rough table of primitive transactions between the Trobriand Islanders, ibid.)

Finally, “gain”. I must admit before I begin, that what precisely Polanyi considers “gain” is never clearly defined, but it is used in practise to define economic surplus: that is, when someone has obtained more in exchange than they gave up. (Notice the Aristotelian/Ricardian assumption of “equal trade” here…) As A.M. Sievers points out in “Has Market Capitalism Collapsed?” (A most exemplary book), however, this definition is just referring to the technique and lacks the motive behind the action. The motive is to increase the power and status of oneself with certain “socially desirable” goods. As he further points out, to give up what one does not want for what one wants, or what one wants less for what one wants more (in fact, this is what the money-system fundamentally is). Gain does not even need exchange to facilitate, as I can hoard goods for an individual surplus without looking for exchange. As such, “the gain motive would appear to be identical with the desire for possession of goods.” (Sievers, Has Market Capitalism Collapsed 126) And as such, gain in the form of desiring more goods seem to be universal across culture.

Sievers goes on to anticipate a particular critique by Polanyi, that this is too broad and does not define gain in an economically significant sense. This type of gain “does not integrate economic activity” and goods are sought for non-”economic” ends involving prestige and other social issues. He responds by saying, and I agree with;

“(a) profit-type of gain is not unknown (in the Islands, as we have seen), (b) subsistence and standard of living do depend upon success in accretion of goods even if the direct motive is not subsistence, and (c) it is arbitrary and unrealistic to dissociate prestige elements from the scope of the term economic —the reason for seeking the goods is irrelevant.”

Has Market Capitalism Collapsed? A.M. Sievers, pg. 127.

So even if prestige and not “monetary” gain is the driving force of certain transactions separating goods-for-prestige from the economic sphere, where said goods are embedded in social reputation is incoherent and incorrect. The procurement of goods and services beneficial for an individual and this psychology encoded within an individual is fundamentally the mentality of “gain”. It is irrelevant if said procurement was spurred by religious, artistic. purposes or not; if said procurement involves advanced machinery or merely sticks and stones; the mentality is the same. And indeed, this is why I said earlier Polanyi is doing “too much”; saying that elements of self-interested behaviour (“gain”) and market behaviour existed within primitive societies, but was not the main form of production, does not in itself contradict his broader claim that the capitalist market is a political invention. Polanyi goes for the proverbial “kill shot”; he tries to show that markets are universally a sociological impossibility to prove a far less universal claim.

The presence of prestige in the Kula ring system is arguably from the possession of certain goods. Malinowski says that “the Kula native loves to possess and therefore desires to acquire and dreads to lose.” (Malinowski, Argonauts of the Western Pacific, pg. 74). He goes on to say that the "vaygu’a” (valuables) have sentimental value to Natives because they have historical and cultural value, not dissimilar to gold or jewelry in the West. This is not to say that they can be paralleled completely, because possession is always transient and flexible in the Kula system unlike the European system where there is no obligation for such, but the mechanisms of acquiring goods beyond mere subsistence for surplus remain, and it is stated that people “delight” from this gain in a sense explainable only through self-interest.

“Also both heirlooms and vaygu’a are cherished because of the historical sentiment which surrounds them… Crown jewels or heirlooms are insignia of rank and symbols of wealth respectively, and in olden days with us, and in New Guinea up till a few years ago, both rank and wealth went together”

“In this the Kula articles differ from heirlooms, but resemble another type of valued object, that is, trophies, gauges of superiority, sporting cups, objects which are kept for a time only by the winning party, whether a group or an individual. Though held only in trust, only for a period, though never used in any utilitarian way, yet the holders get from them a special type of pleasure by the mere fact of owning them, of being entitled to them.”

“But the temporary ownership allows him to draw a great deal of renown, to exhibit his article, to tell how he obtained it, and to plan to whom he is going to give it. And all this forms one of the favourite subjects of tribal conversation and gossip, in which the feats and the glory in Kula of chiefs or commoners are constantly discussed and re-discussed.”

Malinowski, Argonauts of the Western Pacific, pg. 68. & 72.

Moreover (and Sievers also points this out in page 129 of his book), that the demarcation between the “subsistence” and the “prestige” economy, or the “real” and “fantastical” economy Polanyi would probably complain about given the broad definition of ‘gain” is arbitrary and never set in stone. For instance, in order to construct canoes, a tree is cut down and wielded as well as altered into a proper canoe. But it is cut and shaped at the raybwag (the jungle) and must be transported to the beach. This is of course laborious because logs are quite heavy; it requires the labour of several men. And these men do not work for free—they are “paid” in recurring gifts of pork, yam, as well as coconut water and sugarcane. These gifts are called þuwaya and so it shows how subsistence goods can enter forms of exchange and labour within Kula society. (Malinowski, Argonauts of the Western Pacific, pg. 99).

Outside of this arrangement it is clear that Malinowski dedicates a fair level of care into arguing that the Kula men are not “primitive communists” or even altruists, but just as “poisoned” by the “ghastly” ill of greed just as people are today. He makes it clear to the extent where I feel as if Polanyi might have been slightly selective of his reading. I too am guilty of selective reading at times—I have no reason to believe Polanyi was being deceitful or malicious. However, I must still speak truthfully.

“I only want to enter a caution against such exaggerated views as those of Rivers, Sidney Hartland, Durkheim, and others, which would make this unselfish, impersonal, unlimited group loyalty the corner-stone of all social order in primitive cultures. The savage is neither an extreme ' collectivist ' nor an intransigent ' individualist '—he is, like man in general, a mixture of both.”

“Far also from being exclusively a group affair, his rights and his duties are in the main the concern of the individual, who knows perfectly well how to look after his interests and realizes that he has to redeem his obligations.”

“The association of a semi-commercial transaction with definite public ceremonials supplies another binding force of fulfilment through a special psychological mechanism: the desire for display, the ambition to appear munificent, the extreme esteem for wealth and for the accumulation of food".”

“But the idea of personal property, and the joy of possession, attach above all to articles of luxury like glass beads, shell rings, bone necklaces, and the like.”

“But it is most of all in advanced systems of communal economics, that private property is found to exist and objects of value, such as mats, are hoarded.... The possession of these valuables confers personal respect and distinction and, in these stratified societies, it is limited to the chiefly caste.”

Malinowski, Crime and custom in Savage Society, pg. 55-56, 74, 29, 180, 186.

I must repeat for the sake of clarity that I am not saying that reciprocity did not exist in the Kula Ring or that the Trobriand Islanders were by-and-by solely selfish capitalists who exploited surplus-labour or price-gouged or whatever capitalists are accused of doing. I merely complain that Polanyi has done the inverse of what certain liberals do when they look at a free-market aspect of a society and call the entire society free-market; he spots reciprocity as a tenet in a social relationship and is hasty to immediately dismiss contradictory trends. But enough about the Islanders. There is a lot more to discuss.

In 1960 or so, the classicist F.M. Heichelheim published a pretty scathing criticism on one of Polanyi’s other books, Trade and Market in the Early Empires, in which Polanyi claims as he did in The Great Transformation that, through the reading of Mesopotamian and Greco-Roman tablets, a market economy did not exist in these areas. Heichelheim points out that this conclusion was made through amateurish and rough scholarship; for instance, on page 16 of Polanyi’s book Polanyi cites Herodotus I, 153 (“These words Cyrus threw out scornfully with reference to the Hellenes in general, because they have got for themselves markets and practise buying and selling there; for the Persians themselves are not wont to use markets nor have they any market-place at all.”) as proof that Babylon had no marketplace as late as the 5th Century B.C, but the passage refers to Persian Iran and the copy of Herodotus used was not written by Herodotus but the interpretation of a post-Classical copyist with Stoicist influences in anthropology. (Heichelheim 109, Review of Trade and Market in the Early Empires, by Karl Polanyi, Conrad M. Arensberg, and Harry W. Pearson.)

He also points out that when Polanyi cites a lack of references to “marketplaces” in Cuneiform tablets that this does not mean that there were no markets; there were “markets” established at the quays where there was a good deal of traffic at the rivers oriented for such a purpose; and here “both foreigners and natives could buy and sell here legally what state planning did not require.” (ibid.). Also, just because there was no mention of money as a medium of exchange in tablets does not mean money in Sumerian, Akkadian, Assyrian, Neobabylonian or Persian Mesopotamia was at no time used as a medium of exchange. That is an excessive generalisation. He also points out that the evidence amongst the Attic Stelai gives indication of many forms of prices existing in trade, making it proper to conclude that Athenian/Greek society was not gainless or marketless at least in its entire duration, and developed a robust market system in the 4th Century BC. (It is best to read Pritchett and Amyx’s monograph in depth, as there are many more examples of prices that I have not cited for brevity).

A list of prices for Firewood at Delos throughout the years 310-231; it tended to fluctuate between 1 drachma to 1 drachma and 1 obol. It seems like 245 BC was an anomaly for whatever reason. The point is to illustrate, however, the general presence of prices w. commodities, something Polanyi denies was more significant with the production and distribution of commodities compared to (in the Greek case) household labour. (Pritchett 205, The Attic Stelai Pt. II).

Also to note in contemporary criticisms was that not soon after The Great Transformation was written, an extensive amount of Mesopotamian accounting tablets and Egyptian papyri pertaining to prices were discovered. (Hejeebu and McCloskey 289, Reproving of Polanyi). The Mesopotamian tablets recorded revenue, obligations (debts and loans in the modern sense), expenditures, rents, leases, and income. Of course, their notion of “expenditure” is simple and merely refers to a reduction in money, goods or animals and does not suggest they had extremely sophisticated “balance sheets”, (Keister 374, Commercial Record-Keeping in Ancient Mesopotamia) but it shows an interconnected and nontrivial price system nonetheless.

A transcription of a price tablet provided by Raymond Dougherty, describing various transcriptions from various historical documents. Wood was worth 5 shekels, 5/6 mina (around 400-630 grams) of lead was 1/2 shekels, food for this individual was 1 1/2 shekels per month, etc… (Daugherty 25, Archives from Erech, Time of Nebuchadnezzar and Nabonidus).

There is more to be said on contemporary refutations, but I believe this covers significant ground, especially considering that there is still much to talk about with regards to modern counterargument. I do wish to halt here by saying that Polanyi does argue at times that markets might have existed, but they played “no important” rôle within society and other institutional systems "prevailed.” (Polanyi 34) (I say “in part” because he previously argues from 29-32 that the Kula Ring was entirely gainless and marketless and that redistribution was the same, and specifically for householding “The need for trade or markets is no greater than in the case of reciprocity or redistribution.”. (Implying none with basic deduction).

The issue is the word “important” is vague and difficult to test or falsify; what denotes importance? If government places a single price control, is the market “unimportant”? What about 10, or 100? At what point does the market become important or unimportant? Certainly the evidence of non-administered prices for everyday commodities, and of gain and self-interest within actions seems to imply that the market was not a trivial institution limited to the élite class or had no rôle in active exchange. But with such a vague and unfalsifiable classifier of “important” empirical testing is nigh-impossible. I will merely assume for analytical purposes that Polanyi argues that markets and gain had no role whatsoever in society pre-sixteenth century, which would make these critiques and recent developments hold.

This is not a strawman in my view, because as I mentioned earlier Polanyi argued in his later books that certain systems like the Greco-Roman system, the Mesopotamian system, and Dahomey did not have a market economy nor money as a medium of exchange; as well as him saying, and I repeat, that all three non-market systems had the same level of importance for trade, market or gain which was nil, plus his later argument that any notion of a formalised market was created by specific political controls, and him saying in the text that “While history and ethnography know of various kinds of economies, most of them comprising the institution of markets, they know of no economy prior to our own, even approximately controlled and regulated by markets.” (Polanyi 44). I think this interpretation is actually charitable to Polanyi, in that he would not be contradictory when he says earlier that gain and the market is not present in primitive society and that for the other systems it is the same.

But enough gish-galloping. I will at last provide some modern counter-examples and direct refutation against Polanyi’s sociological theory. Do note that some of the pieces of evidence are beyond the scope of The Great Transformation and address some of Polanyi’s later books, such as Dahomey and the Slave Trade, The Livelihood of Man, and Trade and Market in the Earlier Empires. This is not a non-sequitur in my view, because Polanyi’s core thesis that pre-capitalistic societies were not oriented around market exchange or the money-form/the procurement of profit did not change throughout these books—in fact, these books are empirical and historical attempts to corroborate Polanyi’s initially broad thesis in The Great Transformation. So far from strawmanning him, I am steelmanning him by refuting his more serious and scientific attempts at justification. But let us go on.

Philip Curtin, a distinguished economist with a focus on a historical study of the African economy, criticised several of Polanyi’s conclusions. One that he touches upon is about Polanyi’s interpretation of Dahomey. Polanyi (and in his defence, a great deal of other economists) argued that because prices quoted for European products in local currencies tended to stay stable for decades on end, royal officials at the port of Whydah “arranged prices”, “administered the port”, and “seldom allowed Europeans to stray.” (Curtin 58n32, Cross-Cultural Trade in World History). It would appear from sch a conclusion that redistribution was the primary form of societal organisation and that trade was not a feature of the market. However, Curtin points out that this supposed “price stability” was only apparent, as although the price attached to each European import was stable, European and African traders knew that they fluctuated in European and African markets. (Curtin 58-59) Hence the Europeans and Africans would arrange a meeting, agree on the price to be payed for export commodities (Slaves, gold, etc.), agree on a particular currency, then agree on the total value on export goods and finally agree on the assortment of goods. So superficially prices may seem “administered” but actual terms of trade had prices and goods fluctuate to supply and demand.

Curtin, like Heichelheim earlier, also criticises Polanyi on misreading (or not reading) classical texts. In this case he argues that Polanyi, despite writing a passage called “Marketless Trade in Hammurabi’s Time”, fails to actually cite Hammurabi’s code and thus misses out on what Hammurabi’s code actually had to say. He also, and once again mirroring Heichelheim, argues that Polanyi’s conclusion that Akkadian had no word for “market” is wrong, because much of the trade was done by river, that the word for market is the word for quay (karum). Karum is also part of the root for the word merchant. (Curtin 67n16) He also argues that during the Amorite period (of which Hammurabi was part of) temples became less economically relevant and most royal monopolies were abolished. The independent tamkarum (mercantile class) became proto-capitalists who did or hired others for trade, lended money for loans, financed the trade of others, and divided risk amongst several investors. (Curtin 67) The government still taxed and redistributed food, but there was a significant element of private enterprise. The tamkarum are mentioned in Hammurabi’s Code, but because Polanyi did not cite it, he misses out or simply selectively ignored it.

Polanyi is also accused by Curtin of mischaracterising the Ports of Kanesh. Polanyi took the early 20th century anthropological assumption of a “Temple Economy” and more or less ran with it, along with incomplete studies of the Kültepe tablets, (Curtin 70) when arguing that the Ports of Kanesh were a port of marketless trade. (You’ll see that Polanyi repeats the same mistake in many, many areas.) In reality, Garelli, Larsen and Veenhoff’s studies proved that prices fluctuated very quickly and merchants were “sensitive to small changes in price” (Curtin 70) despite attempts to intervene in the economy. But this is still not the dint of the evidence.

Raymond Sidrys notes that obsidian was an important commodity in the Mayan economy, even a “status good in religious, political and craft specialist subsystems.” (Sidrys 596, Supply and Demand Among the Classic Maya). It was mostly traded with jade and shell beads, cacao, and cotton-mantles (Sidrys 594), all of which were similarly influential in everyday society. It is simple to extrapolate that because there was a lot of corveé labour in the ancient economy that the price, thickness, etc. of obsidian was simply determined by the State, but in reality it was not. Mayan producers 50-100km from the source had a tendency to maximise the number of prismatic blades produced per core in response to transport/import costs (Sidrys 595), indicating both a response to prices and elasticity in supply, whereas producers 300-450km away were less elastic because of diminishing returns.

Daniel Snell tests Polanyi’s claims with regards to the Mesopotamian city of Umma (the earliest set of prices known) in The Livelihood of Man (yet another later book of Polanyi’s where he tries again to refute the “self-regulating market”) that “Prices are originally set by tradition or authority, and their alternation, when it occurs, is again brought about by institutional, not by market methods.” (Polanyi LIII, Livelihood) and “equivalencies agreed on by governments in treaties or promulgated by them or sanctioned by custom may change when affected by supply, but the principle of having a set equivalency will be maintained so that the later equivalency will bear some round-number relation to the former.” (Snell 132, paraphrase of Polanyi LII, Livelihood in Marketless Trading in Our Time). He does this by treating increases in large percentages of the former amount (or goods with one/no deviation) as equivalencies or politically administered. It was found that 42% of products were potentially administered (“significant but not predominant”) (Snell 133-34), but that consumer goods with no equivalencies had five times the total value (9022 to 1698 shekels) to consumer goods with equivalencies (Snell 134), and that capital goods with no equivalencies had 21 times the total value (6414 to 292 shekels). Thus administered prices were not the case for the majority of prices nor were they economically predominant.

Economist, historian, poet, graphic artist and movie producer (a true jack of all trades) Kirti Chaudhuri wrote a seminal text called Trade and Civilisation in the Indian Ocean from the perspective of la longue duree (the long history) in the manner of Braudel and Le Roy Ladurie (the former of which we shall discuss here). In it, he discovers that demand was influenced significantly by fluctuating relative prices; and that merchants took extensive account of these prices, recording even the minute details. For instance, in Ma Huan’s work, “The incense produced in Champa (central Vietnam), he (the merchant) wrote, was expensive.. its weight in silver was the price charged. the king of Cochin minted a gold coin called the fanam, each one weighing one fen and one li on the Chinese steelyard… exchangable for fifteen silver coins of four-li weight.” (Chaudhuri 223). Such precision with regards to prices would only be necessary if prices had individual significance, that is to say, if merchants were independent and motivated by personal gain.

Klaas Veenhof highlights the market elements of the old Assyrian economy and is yet another historian who challenges the core of Polanyi’s claim that it was an example of a “marketless, gainless” economy. Polanyi’s analysis of Assyria was written before the works of Lewy, Garelli, Larsen and Orlin (Veenhof 349, Aspects of Old Assyrian Trade and Its Terminology) and thus contains a great deal of misinterpretations and factual errors—as he either did not read or did not cite Benno Landsbergers’s Assyrische Handelskolonien in Kleinasien (AHK), he wrote that the “rationale” of the Assyrian trading port was to “procure” copper to the city of Assur, but as AHK says, copper was almost never imported into Assur except in a refined form, and it was mostly silver and gold that was imported, and not for industry or for stock in the treasury but for merchants who did not use it for consumption, but rather to exchange for tin or textiles that would also be exported into Anaolia because gold and silver were accepted as a medium of exchange. (Veenhof 350) Thus, gold and silver were an “indirect medium of exchange” used by merchants for individual profit.

Fernand Braudel refutes Polanyi’s claim directly. Not only are there remnants of markets now from the “antidileuvian world” of every form in every place not “politically administered”—from the shepherd-markets in Bahia, to the elementary markets by the Red River, to the spontaneously appearing markets of Kabyila and the mountainous markets of the Faucigny— (Braudel 225, Civilization and Capital Vol. 2) but Polanyi is much too quick to dismiss all of price history, too quick to ignore all of the classical and contemporary works of price history made by historians like Ernest Labrousse and Wilhelm Abel, and thus bases a supposedly a universal theory based on a select few historical examples. (Braudel 226) Moreover, he points out that Polanyi has almost a “theological taste of definition”, in that he believes (or believes the classical liberals believe which would also be untrue) that the market “is” demand, supply and prices & nothing more and thus mutually exclusive with reciprocity and redistribution. But in reality, the market can both be a spontaneous entity and concomitant to opposing modes of production, as we ourselves saw with the Trobriand Islanders. Braudel also challenges the notion that price controls and politically-guided exchange are in direct contradiction to the narrow definition of the market given; desirable or not, they cannot magically transcend the laws of supply & demand. (Braudel 227)

There is a plethora of other evidence from a variety of distinguished authors—for instance, Le Roy Ladurie’s studies on Languedoc, Landsberger’s study of Babylonia, Peter Temin’s study of the Roman market economy, Morris Silver’s challenge of Polanyi’s characterisation of Mesopotamia—but I do not deem it pertinent to summarise all of them here in order to make an a fortiori argument. At some point it would go beyond mere justification and enter the realm of ad nauseam. So I shall stop here at last, and move on to point iii.)

III. The market, thus in its modern configuration is not a natural and spontaneous entity; it does not exist ex nihilo but rather through the effort of political institutions through specific policies. For instance, the cotton industry that brought Britain much of its fame was reliant on protective tariffs like the Calico Act. More specifically, the Enclosure Acts, the anti-Corn Laws, the Poor Law Amendment of 1834 and most importantly--Speenhamland, which whilst ensuring workers subsistence reduced their standards to an extent that they yearned for a competitive labour market. The market also uniquely commoditised “fictitious capital” (e.g. labour & land) for the sustenance of its existence.

I could very easily point to the plethoras of counterexamples I provided in part ii.) against the idea of the so-called “self-regulating market” as a recent and modern invention and declare the matter finished. However, that would be too simplistic of an exercise and disrespectfully dismissive to the breadth of research Polanyi has conducted with regards to mercantile and modern England. So I will once again steelman a claim that Polanyi has made and subject it to the utmost scrutiny.

Let us replace the word “market economy” and “self-regulating market” from here on out with “capitalism”, which Polanyi almost never uses, but is generally agreed upon to be the particular configuration of the market system that arised with the Industrial Revolution and is a lot less easily refutable. Polanyi’s general thesis is as follows; I shall summarise and treat it with more detail than in the introduction.

Mercantilism was at its core a system of long-distance trade, which supplanted the previous system of local trade; “On the local market, production was regulated according to the needs of the producers, thus restricting production to a remunerative level. This principle would naturally not apply to exports…” (Polanyi 37) and caused tension between “town” and “Country”, the former of which often in opposition to it. “Mercantilism destroyed the outworn particularism of local and intermunicipal trading by breaking down the barriers separating these two types of noncompetitive commerce and thus clearing the way for a national market…” (Polanyi 38). It was uniquely national, and commercial, yet in Polanyi’s view cannot be equated to Capitalism because it is strongly characterised by regulation and intervention. Both were done initially to ensure special interests; “The Hanse were not German merchants; they were a corporation of trading oligarchs, hailing from a number of North Sea and Baltic towns. Far from "nationalizing" German economic life, the Hanse deliberately cut off the hinterland from trade.” (Polanyi 36), then to prevent monopoly (as “competition must ultimately lead to monopoly was a truth well understood at the time” (Polanyi 38)) and Schumpeterian-esque competition that would “disappoint regular buyers and sellers” by destroying the balance. (Polanyi 38). Certain policies such as the Calico Acts were also done to ensure the growth of industry.

Polanyi concludes his rough summary of mercantilism there. It was machinery which began the long march to capitalism. But not just any form of machinery; elaborate machines. “It was not the coming of the machine as such but the invention of elaborate and therefore specific machinery and plant which completely changed the relationship of the merchant to production.” (Polanyi 43). The use of ‘specialised’ machines led to the creation of the capitalist, mass-production and the selling and buying of factor goods, namely land and labour; “Since elaborate machines are expensive, they do not pay unless large amounts of goods are produced.... For the merchant this means that all factors involved must be on sale..” (Polanyi 24). What is important to note is the last part, the buying and selling of labour and land, for mercantilism despite its tendency towards commercialisation did not do so. “They were all equally averse to the idea of commercializing labor and land—the precondition of market economy.” “Under feudalism and the gild system land and labor formed part of the social organization itself (money had yet hardly developed into a major element of industry).” (Polanyi 40). Polanyi stresses that this is like mentioned earlier fictitious capital because they are not produced to be “bought and sold”, but the market has to pretend they can be bought and sold, and that of course this is an unique development.

So fictitious capital and industrial advancement spurred upon the Industrial Revolution and thus the ‘capitalist’ market which supposedly lacked any sense of regulation. This was diametrically opposed to the mercantile system, which was commercial but heavily regulated, although they were still paradoxically speaking created with state policy; the land market with the well-known Enclosure Acts, the labour market with the new Poor Laws of 1834, which we will touch upon. However, this also brought on terrible social conditions; the “ravages of the satanic mill” (Polanyi 42), affected lives such that effects on the lives of the people were awful beyond description. Indeed, human society would have been “annihilated but for protective countermoves which blunted the action of this self-destructive mechanism.” (Polanyi 44).

The Speenhamland Act in 1795 (a particular form of enforcement of the preexisting Old Poor Laws) was the most noticeable and final effort to “stop” the capitalistic economy by forestalling a labour market; it gave every labourer, the “universal right to live”, it assured people income and thus lowered their incentive to work. “Hence, no laborer had any material interest in satisfying his employer, his income being the same whatever wages he earned…” (Polanyi 45) But it was absolutely “ghastly” in the long-run: it lowered productivity such that “the productivity of labor began to sink to that of pauper labor” (Polanyi 46), which lowered wages to the point of bottomlessness, which made labourers end up in the poor-house, which was thoroughly dehumanising. Liberals realised that capitalism could not exist without a competitive labour market, and in essence repealed all the measures of Speenhamland with the Poor Law Reform of 1834, formalising the fictitious sector of labour markets along with that of land. And there the last barrier against the capitalistic market perished, and Thus Spoke Liberalism.

To be even more succinct than I was before:

Polanyi’s crux of the argument is that mercantilism = disruptive commercial system with trade but inflexible labour and land institutions (so for instance, Polanyi cites the Statute of Artifices which made it so that labourers required an apprenticeship) and strict regulations that firmly prevented unhindered markets. Capitalism = the concomitancy of specialised intensification in technology and the commodification for land, labour and money (fictitious commodities, and do note Polanyi gives the greatest level of detail for the first two), which led to the advent of the capitalist, capitalistic exchange and of the idea that supply and demand can regulate everything. But these sectors were nascent and not fully developed, and they led to a lot of suffering such that there were reactions against them. Reactions against land failed with the Enclosure Act, which drove previously the farmer-class to the “satanic mill” and put a price on soil, and reactions against labour failed when Speenhamland, the last desperate attempt to encode the ‘traditional ways’ along with the Old Poor Laws, drove workers to unbearable misery. This created the New Poor Law of 1834 which was even more ‘cruel’, removed any protections Speenhamland had, but created a modern labour market. Thus, and most importantly, capitalism was not a spontaneous set of institutions that came exnihilo, but was codified by a set of particular policies. Thus, the idea of the ‘free market’ is a myth.

Polanyi argues a lot of historical claims. In fact moralistic terminology like ‘satanic mill’ aside every claim he makes is historical. So I will attempt to analyse some particularities, whilst showing how certain errors—particularly his characterisation of the Poor Laws and Speenhamland—undermine his overarching historical theory.

First of all, I shall go straight to the offensive; Polanyi makes the same mistake he does in his claim about “gainless, marketless” societies in that he is desperate to show that market capitalism has no cousin(s) in just about every respect. For this exact reason he mischaracterises the mercantilist system by generalising it with the conventional caricature. He deems it uniquely characterised by rigid inflexibility and constancy assured by a strict set of regulations and even contingent on it, but contemporary (in both Polanyi and my time) research has shown that the importance of such regulations has been quite overstated.

For instance, Polanyi writes of cotton protectionism as a prime example of the underlying logic within the mercantilist mode of production, in that it was spurred on by protectionist policies like the Calico Act, almost reminiscent of modern-day “import-substitution” and that cotton producers wanted this: “Cotton manufactures, the marvel of the time, had grown from insignificance into the leading export industry of the country—yet the import of printed cottons remained forbidden by positive statute… The free trade origins of the cotton industry are a myth. Freedom from regulation in the sphere of production was all the industry wanted; freedom in the sphere of exchange was still deemed a danger.” (Polanyi 78).

However, producers in reality often swapped Indian calicoes with fustians (a mixture of cotton and linen) which were exempt from the protectionist Acts starting in the year 1736 and became a stronger competitor to light woolens and silks (whom the Acts sought to protect) which meant the acts were widely evaded (although still a nuisance) (Mokyr 33-34, EDITOR'S INTRODUCTION: THE NEW ECONOMIC HISTORY AND THE INDUSTRIAL REVOLUTION). In addition, there is little evidence to suggest that this protectionism significantly grew the cotton industry or that this act was effective in general, as: 1.) British textile imports from India increased during the time suggesting circumvention (see table below), 2.) it is not apparent that the hand-spinning and hand-weaving promoted by the Acts fostered the knowledge spillovers to invent the innovative Arkwright Mill (see figure below), 3.) the aforementioned fustians, hosieries and Manchester velvets were nontrivial competitors to the industry not subjected to the Acts and arranged by independent ‘entrepreneurs’ (see the figure directly below the aforementioned one), and 4.) most important inventions (the mule, cylindrical printing, the power loom, the carding machine) with regards to the cotton-industry were created after the Acts were abolished. (Mokyr 34)

From Broadberry and Gupta’s study of the Cotton Industry (2019). During the entire 18th century imports from India would increase, suggesting smuggling or circumvention to an extent.

From page 59 of The Robinson Mills: Proto-Industrial Precedents by Stanley Chapman. George Robinson who later influenced Arkwright’s mill and worked in hosiery, was influenced by Dutch techniques in bleachworks and William Elliott’s technique of dying cloth black. Arkwright was also influenced by Italian silk-reeling mills, mills in Derby, and Robinson’s mill in Banff. (Chapman 59-61).

From pg. 21 of Enterprise and Innovation in the British Hosiery Industry, 1750–1850 also by Stanley Chapman. Samuel Need’s Hosiery business progressed onto derby rib patentees with Strutt and Woolatt, before progressing onto professional cotton spinning with Strutt and Arkwright—John Whitt’ merchant hosiery business progressed onto silk mitt manufacturing; and so on. In addition there was a fair level of knowledge transfer between hosiers and inchoate cotton producers.

The Statute of Artificers as emphasised by Polanyi was also supposedly the reason a competitive labour market in the mercantile era did not exist (In itself an incorrect proposition as I will demonstrate later). But as a matter of fact this regulation was actively skirted decades before Adam Smith wrote The Wealth of Nations (1776), Speenhamland (1795), and the rapid increase in specialisation Polanyi attributes to the “creation” of fictitious commodity-markets. Paul Mantoux’s Industrial Revolution in the Eighteenth Century describes such patterns of avoidance so clearly that I shall cite it ad extenso:

“Had these really been strictly enforced, they would have opposed serious obstacles to the progress of industry. For this reason they were constantly broken, and complaints of their evasion were heard at a very early stage. In 1716, the Colchester weavers accused the manufacturers of taking on too many apprentices. In 1728, those of Gloucester protested against men being engaged who had not served their legal term of apprenticeship. In order to put an end to all these claims, employers sometimes took the line of asking for the formal repeal of regulations which limited their freedom of action. This was the course taken by the hatters, the dyers, and the calico-printers. The latter acknowledged that in their workshops hardly one-tenth had been apprentices, and they gave their reason: ‘The trade does not require that all the men they employ should be brought up to it; common labourers are sufficient.’ This was an argument to which the introduction of machinery was soon to give additional strength.

-Paul Mantoux, Industrial Revolution in the Eighteenth Century (1928), pg. 464-65.

This and other forms of evasion, as well as the disruption of mercantilism that Polanyi himself recognised, is what led historian T.S. Ashton to conclude that even if Britain did not have political strife, “central direction must almost certainly have broken down”, and that “for more than a hundred years before the Industrial Revolution the State was in retreat from the economic field.” In other words, most regulations were bygone products of the Tudor and Stuart era and mere formalities long before the supposed “self-regulating” market set itself into place.

It is also confusing that Polanyi treats mercantilism not as a market system, and sometimes he does. He says: “Only in the institutional setting of market economy are market laws relevant; it was not the statesmen of Tudor England who strayed from the facts, but the modern economists, whose strictures upon them implied the prior existence of a market system…” (Polanyi 22), implying that the Tudors lacked a market system and that the mercantilists “thought of markets in a way exactly contrary to market economy” (Polanyi 40), but he also says “From the sixteenth century onwards markets were both numerous and important.” (Polanyi 31).

He says on the enclosure question that “Commercialization of the soil was only another name for the liquidation of feudalism which started in Western urban centers as well as in England in the fourteenth century and was concluded some five hundred years later in the course of the European revolutions” (Polanyi 104), implying feudalism had land markets and some level of mobility, but he also says that mercantilists “were all equally averse to the idea of commercializing labor and land—the precondition of market economy.” (Polanyi 41) and that the traditional organisation of land and labour was “took for granted”. (Polanyi 41). He also cites the anti-enclosure policies of the Tudors and Stuarts as evidence that mercantilism was by-and-by protectionism, but said policies were in response to the challenge of a socio-political anti-protectionist movement. These are all self-contradicting claims.

I must also profess that I believe Polanyi’s characterisation of a flourishing land and labour market as a unique development of capitalism (fictitious capital, after all) is obsolete, and perhaps based on the archaic understanding of the feudal institution.

Formal labour markets were present as early at the thirteenth century and responsive to supply and demand; as M.M. Postan notes, “We have seen that in the years following bad harvests and high mortality manorial bailiffs could be found complaining of the caristia of labourers, and in this context caristia meant both scarcity and high price.” (Postan 631, Medieval Agrarian Society in Its Prime: England). They also greatly expanded just as the proportion of compulsory labour (the feudal labour Polanyi talks about) declined. (Postan 567) In the thirteenth century as much as a third of the total rural population was available for full or part time wage labour (Postan 568) and the “servile disabilities of villeinage” was greatly weakened there, almost gone in the 14th and 15th century. By the beginning of the sixteenth century serf labour was relegated to “certain legal and tenurial incidences of copyhold tenure.” (Postan 605)

Formal land markets also were a product of the 9th century and Charlemagne’s time, long before the Enclosure Acts were even discussed. They originated amongst the laity, in the monasteries of Ely, Crowland, Ramsey and Thorney (Dyer 30, Making a living in the middle ages: the people of Britain 850-1520), before rapidly expanding in the tenth century due to an infusion of currency in the rural markets, which also increased the lesser aristocracy (the ‘thegn’ as they were called) by offering new opportunities for wealth. (Dyer 35, 76). The land market would get more decentralised over time throughout the 13th century, as tenants would arrange landholdings clandestinely, creating an illicit land market that was in areas like Essex “divided among a few tenants” through “smallholders” with a few acres. (Dyer 175). Analysis of the manorial court records of Norfolk and Suffolk in the late 13th-early 14th century showed “91 and 87 per cent respectively of the land transfers were made between people who were not related.” (Dyer 176). And the most commercialised areas, East Anglia and Kent, contained a high portion of free peasants.

It is, and this is more a nitpick than a grand criticism, additionally not clear to me that living standards (of course, a very broad phrase) declined to the point of unbearability (which I will briefly re-mention when discussing Speenhamland) from the late 1760s or 1770s (when laissez-faire mentality started to arise with Adam Smith’s work and industrial specialisation begun to commence) to the 1790s, which Polanyi identifies as the “last-gasp effort” to save traditional labour as a counter-reaction to all the general misery. Polanyi speaks of the disasters of the initially so-called self-regulating market during this period; “the country folk had been dehumanized into slum dwellers; the family was on the road to perdition; and large parts of the country were rapidly disappearing under the slack and scrap heaps vomited forth from the "satanic mills." (Polanyi 23). He also talks about child labour and the rise of factory towns later on and the low wages of “certain categories” of workers

It is difficult to test all of these claims specifically by any empirical standard because yet again Polanyi uses moralistic language where he should not (how does one exactly do statistical testing for ‘dehumanisation’?), and often fails to specify (overall throughout the text, Polanyi has a trend to over-specify where a few examples would be sufficient, but to use moralistic language where he should use clearly falsifiable statements). but in general the intensification of child labour as a manner of production began with the pre-1750s cottage industries (De Vries 1994, The Industrial Revolution and the Industrious Revolution), crude mortality rate showed a significant declining trend overall from 1760 to 1850, life expectancy from 1760 to 1820 showed an overall increasing trend and it seems like less optimistic interpretation of labour markets within the first Industrial Revolution, such as Brown (1990) (The Condition of England and the Standard of Living: Cotton Textiles in the Northwest, 1806–1850) show a rise in real wages for adult male workers but no improvement within living standards during that time, which is certainly not something positive but by no means as apocalyptic as Polanyi is proposing.

Thus far I have contested a great deal of topics in Polanyi’s neatly presented historical theory of capitalism. I have proposed that mercantilism was only strictly regulatory and a ‘non-market system’ de jure as protectionist policies were often either ignored or inconsequential and, whilst not laissez-faire (take the trading monopolies as an example), had elements to it Polanyi would deem laissez-faire (the pseudo-entrepreneur investing in hoiseries and fustians, some of which would become industrial capitalists, the commercialisation of land), that the very notion of a labour and land market (the fictitious commodities) being a necessary creation of capitalism is false because they had existed in significant capacities even before the Poor Laws, Speenhamland or the Enclosure Acts, and rather that land and labour markets were transformed and not part of “social organisation” one day, commodities the next, and (this is a pretty minor point) I have proposed that the characterisation Polanyi gives of immiseration within the first Industrial Revolution to be exaggerative and incorrect in certain aspects.

So thus far the point has been to demonstrate that the claims of certain tenets of capitalism being created from political enforcement (the land market, the labour market) is incorrect, and they were moreso a form of transformation and intensification from aspects of pseudo laissez-faire preexistent in the mercantile era. Perhaps certain policies like the Enclosure Acts may have aided in such a profound transformation, but as we shall see there are other confounding factors to consider (the Napoleonic Wars, technological productivity, etc.) that make it difficult to definitively attribute their success to the enforcement of specific political policies. Indeed, Polanyi himself says that the creation of “special technology” helped spearhead the process of creating capitalism’s economical transformation, but (erroneously as does Adam Smith, as I have discussed) attributes the hindrance of such transformations to be due to certain policies such as the Statute of Artificers, only to be overturned by new policy.

It is important to note/remember that there are two cycles of Enclosure that Polanyi discusses, the Tudor and early Stuart enclosures in the 16th century and the ones directly anteceding the Industrial Revolution, in around the 18th. I believe that Polanyi’s characterisation of the early Enclosure Acts are essentially correct (“Enclosures have appropriately been called a revolution of the rich is against the poor. The lords and nobles were upsetting the social order, breaking down ancient law and custom, sometimes by means of violence, often by pressure and intimidation.”) (Polanyi 20), although as said previously he does contradict himself by saying that they represented a radical attempt at creating a market system leading to revolts like Kett’s rebellion and anti-enclosure movements never stopped enclosure in full whilst also saying that land was essentially traditional and unchanged during that period. In terms of the latter Enclosure Acts, however, Polanyi basically takes the orthodox view that the Acts significantly mobilised the land, forced peasants off the commons &c. This I take greater issue with.

As W.H.B. Court points out in A Concise History of Britain, the land labourers possessed was usually respected, both in the form of land proper and in gardens, and they would typically receive compensation in formally recognised land rights or in money (which they did not value as greatly). (Court 39) Enclosure followed “equity” and the sense of fairness previously present in the Courts of Chancery. Moreover, access to land was not just confined to rural areas; customary rights for the use of land by the commons, such as grazing cows or poultry were typically respected. Enclosure may as a whole have increased agricultural employment through the intensification of cultivation and declining agricultural employment as a consequence of enclosure were localised, not national, and the widespread migration to the towns could have been due moreso to 1.) an over-abundant population, and 2.) fluctuations in agricultural investment during the time of war. (Court 40, also refer to J. D. Chambers, ‘Enclosure and Labour Supply in the Industrial Revolution’ for a detailed treatment on the subject).

Investigation on the so-called ‘class robbery’ of the later Enclosure acts that E.P. Thompson (and Polanyi) so vividly decried also suggests little in substantiation of the idea. Deirdre McCloskey, whose rich and detailed work I am presently returning to, notes that if the small landowner had sold his allotment to the large landowners before fencing it that the landowners would be willing to pay “the present value of the net return from future crops minus the amount that it would cost to fence the purchased land along with their other land.” But if the net productivity of the crops from future enclosure was higher than if it had not been fenced, then the net return mentioned would also be higher, and so large landowners would end up paying a higher price had there been no enclosure, implying that small landowners could potentially use the Acts as speculation. (A full discussion of the costs and benefits of Enclosure are included in McCloskey, The Economics of Enclosure: A Market Analysis 146-47; this is mostly a distilled summary.) F. E. Emmison documents this phenomenon occurring in his study of Bedfordshire, of which he writes that a “cursory examination of Bedfordshire documents revealed evidence in eight parishes of strong buying of strips and common-right cottages by the chief owners during the years before enclosure." (Quoted in McCloskey 147). So in short, small landowners may have consciously sold their land for personal profit.

McCloskey also investigates the claim that even if some landowners the later Enclosure Acts could have benefitted, the Acts typically significantly dispossessed the yeomanry or the small landowners to the point where it could be labelled as class robbery. The evidence does not seem to be in favour of this claim; George Fowler notes that in an village in Bedfordshire enclosed in 1804 that 98.3% of the cultivated land was owned by large landowners, implying that the small landowners were of minimal proportion even before Enclosure; Gordon Mingay estimates that by 1780 only 11-14% of Sweet Auburn was occupied by the small landowners; and J.M. Martin shows that in Warwickshire the small allottments only made up 14.5% of total acreage. (All statistics are quoted in McCloskey 149-50). In short, the mythical productivity gains and mass dispossession of the Acts are likely greatly overstated.

So there it is. Rest assured that although this is near the end of my broader criticism, that I will give these points the same level of focus as Polanyi does. I shall discuss Speenhamland before the Poor Laws as the former is of greater priority. Polanyi as stated before treats Speenhamland as a watershed, the last bastion of protection before the storm, and somewhat contradictorily, a source of misery and destitution, but one that fought against the capitalist self-regulating labour market nonetheless.

Firstly, the traditional assumption that Speenhamland marked a significant moment in relief administration is exaggerated. Real per capita relief expenditures increased almost twice as much from 1748/50-1782/84 compared to 1782/84-1832/34 (an increase of 1.42 versus 0.78 percent per year). (Boyer 452, The Economic Role of the English Poor Law, 1780-1834) Not to mention relief expenditures for subsidised and non-subsidised counties had similar crests and troughs (See graph). (Blaug 165, The Myth of the Old Poor Law and the Making of the New). Secondly, Polanyi’s argument that the Speenhamland system of outside relief became “the law of the land” in most countysides also seems exaggerated; the system of aid in wages was used in a minority of counties. Most parishes in Hampshire, Kent, and Surrey, at least half in Essex, Suffolk and Sussex and Hertfordshire and Middlesex (w/ London) did not substantiate the claim of having wages “by the rates” nor the claim of having practiced Speenhamland at all. (Mokyr 35, see also Boyer 116 and Blaug 159). Thirdly, the claim that “the productivity of labor began to sink to that of pauper labor” (Polanyi 46) is not held up by the evidence, as estimates all suggest a continued increase in output during the first half of the eighteenth century. (Blaug 176)

Graph provided by Mark Blaug pertaining to a composite index of relief in non-agricultural vs. agricultural counties. As said, they have similar values for the crest and trough, and exhibit a similar trend to boot.

Fourthly, the theory that Speenhamland drastically depressed wages or led to relative immiseration; does not seem all too accurate based on modern findings. Nottinghamshire and Leicestershire whom were subsidised by the Speenhamland system payed wages above the national average, wages in the North where there were wages “by the rates” were not significantly lower than that of the East and North Riding where wages were subsidised above the rate. Wages in Buckinghamshire, Bedfordshire, Norfolk, Essex, Cambridge, Northampshire, Warwick and Devon were higher in 1824 compared to 1795. And in Sussex where Speenhamland was said to be done most prominently, agricultural wages were higher in any county of the South excluding London. It seems as if the wages subsidised were already substandard for other reasons. (A detailed discussion of the overall Speenhamland effect is in Blaug, 168-70).

A composite index of wages of Speenhamland counties versus. the average for England and Wales. (Blaug 168). Wages in the Speenhamland counties tended to stagnate, but not drastically decrease from 1795-1824, and would rise in 1833 (years before the Poor Law Amendment Act was passed).

And fifth, as Boyer (1990) demonstrates (cited in Mokyr 36-37), the Speenhamland system may not have forestalled the creation of the labour market and may have in fact contributed to it. By subsidising agricultural workers in the off-season a busy labour force could be ensured in the off-seasons, and workers could be laid off without the possibility of starving, ensuring a constant labour force. As a matter of fact pauper apprenticeships and recruitment of workers within workhouses may have provided an additional sense of labour. So the effects of forestalling may have been quite overstated.

So Speenhamland wasn’t the watershed that Polanyi had donned (and criticised) it in any sense. Nor were in honesty, the New Poor Laws. Polanyi says the New Poor Laws created a competitive labour market, but as we have seen labour markets throughout England already existed in a “competitive manner” many times throughout history, and the Old Poor Law may already have contributed to the so-called proletarianisation of the formerly rural labour force to boot (as Solar (1995) points out, the insurance system of the Poor Laws supplanted the previous dependency on asset titles as a form of insurance; thus also decreasing the relative importance of land and causing labour mobility; and the Settlement Acts, which were concomitant to the Poor Laws and which Polanyi cites as “restricting their (the people)’s mobility to the utmost…” (Polanyi 50)” were weakly and irregularly enforced (a statement by Sir F.M. Eden that is empirically supported by Boyer’s study… (Quoted in Mokyr 35-36)

So at the very least the claim that the New Poor Laws were a watershed in proletarianisation cannot be taken as hard and definitive fact without evaluating the effects of such by the Old Poor Laws, the wars, agricultural productivity, the transformation of small industries (Like the cottages) and so on.

The other claims Polanyi levies about the Poor Laws are that the acts 1.) “…for the first time since Queen Elizabeth's reign were effectively supervised by central authority; or the increase in governmental administration entailed…” (Polanyi 81) which is true prima facie but ignores what happened in practise, in that localities tended to apply policies according to local variance (fluctuating prices, wages, etc.) and the interests and administrations behind such regional variations constantly changed themselves over time. (See “The 'Hungry Forties' and the New Poor Law: A Case Study.” by Peter Dunkley for a good discussion and example of such). 2.) the act was vehemently cruel in every sense of the term; there was “psychological torture”, “genuine destitution”, and “homelessness throughout society” and the loss of one’s kin. (Polanyi 48) Part of this was caused by bureaucracy, and part of it through uprooting of the traditional system.

Is this true? Well, just like the ‘satanic mills’, it is very difficult to test a good deal of Polanyi’s claims here mostly of how much he dramatises what should be empirical claims. But overall much of the horrors about the New Poor Laws seem to have been done in opposition to the will of such Acts and the Poor Laws provided better—even if marginal—living conditions compared to the prior status-quo. David Roberts’ work on this is quite scholarly and in-depth, and as a result I shall cite it extensively.

'“But one oversight by the Law’s opponents relieves the historian from an exact unravelling of true from false: namely, the failure to realize that the New Law and its commissioners were not the cause of those cruelties which were truthfully reported. The governor of Hoo workhouse had violated, not fulfilled, the New Law in whipping young girls; so had Hamlin of St Luke’s in refusing relief to Wilde and Mulloy. The commissioners explicitly prohibited the whipping of women and explicitly ordered parish officers to relieve those in urgent need. The Times would not admit these obvious facts.

"The voluminous correspondence of the commissioners with the local guardians leaves no doubt that dramatic instances of overcrowdings, beatings, confinements, and disease resulted from a local negligence which the commissioners worked hard to end…”

-How Cruel Was the Victorian Poor Law?, D. Roberts (1963), pg. 109.

And, with regards to living conditions:

”The poor of England preferred the workhouse to starvation. The diet, clothing, bedding, and quarters prescribed by the commissioners were not so harsh as to repel the destitute.At Petworth they gave the paupers each week 10 1/2 pints of gruel and 3 lb. of bread for breakfasts, 4 pints of soup, il lb. potatoes, 15 oz. meat, and 14 Oz. suet pudding for dinners, and for suppers 3 lb. of bread, 8 oz. cheese, and 42 pints of broth. Around Petworth ordinary labourers ate each week about 14 lb. of bread, 28 oz. of cheese, 48 oz. of bacon and 7 pints of beer. The fare in the workhouse was less good, but not markedly less, than the fare outside.”

-ibid.

I want to repeat that I do not wish for my claims here to be misconstrued in any fashion. I am not arguing that the Statute of Artificers were completely irrelevant, or that the Enclosure Acts did not spur the rise of a land market in any sense, that the labour markets Postan discovers in the 13th century were identical in form and function to the capitalistic labour market, that mercantilism was completely free in exchange, and so on. I merely wish to argue against universalist claims Polanyi makes that X or Y policy was the birth of a distinctive social form (such as, the free labour market), or that the rise of the labouring class was because of the Enclosure Acts, and so on. Polanyi was certainly right on the conceptual levels when he made the observation that certain characteristics of the contemporary “market economy” were implanted by specific policies, but on the other hand said policies cannot be treated as a “totalising” factor for how certain institutions appear today.

It would be excellent and convenient if we could just reduce capitalism and “market economy” by extension to a few policies—a few breaks in historical development—and say “well, before this policy, this capitalistic institution had no probability of existing”, because then we could form very linear and “clean” conclusions on the characteristics of the market. Unfortunately, economy and history has seldom conformed to such proper and deterministic narratives.

IV. Trade emerged on a scale en masse between nations-to-nations and not between localities-to-localities and are not related to the internal mode of economic organisation; meaning trade cannot be equated to markets and Adam Smith’s theory of the division of labour is heavily flawed.

This criticism may seem strange and/or attacking a strawman to anyone who has not read Adam Smith’s theory in-depth. But it is actually, prima facie, a decent point. Smith’s core argument is pretty simple; when the division of labour sufficiently expands, there comes barter; I take my surplus and sell it to you for yours if I want it. But the more intense the division of labour is, this more of exchange must have been “clogged” and “embarrassed”. If I have X and need Y but you have Y and need Z, then we can’t exchange, and so there’s a good (say, salt in Abyssinia, cod at Newfoundland, tobacco at Virginia are some examples Smith gives) we can both use that “few people would be likely to refuse”. (Smith 13, The Wealth of Nations). This helps exchange scale. So exchange would seemingly go from small societies to larger ones.

What Polanyi is arguing (besides the “gainless, marketless” idea that I explored previously in ii.) against this is that markets are instead long-distance and noncompetitive, and that local markets are inconsequential. So instead, markets emerged international —> local and not: local —> international as the classicists would put it. Furthermore, markets are nothing but a “meeting-place“ and of course, as Polanyi puts it in great pains to elucidate, filled with politically administered and not prices set in supply and demand. I have no desire to address the last claim ad infinitum, so let us discuss the former point and see if it seriously challenges Smith’s core theory.

The first thing I shall comment about this was that Smith was not being firmly teleological or anthropological in his claim about society. There is a reason that Smith takes the time to discuss the absence of a sophisticated division of labour within the “rude state of husbandry” (Smith 638, The Wealth of Nations), that “the varied occupations of every man oblige every man to exert his capacity, and to invent expedients for removing difficulties which are continually occurring” (people can hold many jobs with equal prestige and lack innovation) (ibid.), that every man is simultaneously a warrior and a statesman, but no man contains an “improved and refined understanding” of particular subjects. Every man has many different jobs but the variance in jobs are low. In short, the level of technological development, of manufacturing and of education is insufficient for the process of specialisation, of division of labour, and of market exchange en masse to happen.

The second thing I will comment was that Smith took this idea to logical conclusions and was also not ignorant of mutual aid and reciprocity taking place within said pastoral and interconnected communities where the division of labour had yet to occur. He says, in fact, that these communities will explicitly associate with one another because of the utility of collective association and connection; implying that in-group status is a necessary factor for inter-group exchange/reciprocity. Thus there is a “gift” and not a strict “market system”.

“Their association is frequently necessary for their common defence. They are all, from the highest to the lowest, of more or less importance to one another. Their concord strengthens their necessary association; their discord always weakens, and might destroy it. They have more intercourse with one another, than with the members of any other tribe. The remotest members of the same tribe claim some connection with one another; and, where all other circumstances are equal, expect to be treated with more distinguished attention than is due to those who have no such pretensions. It is not many years ago that, in the Highlands of Scotland, the Chieftain used to consider the poorest man of his clan, as his cousin and relation.”

Smith, The Theory of Moral Sentiments, pg. 638.

Mischaracterisation about the function of market-places notwithstanding (what with equivalences and all), we can see that the so-called contradiction Polanyi has found in Smith’s work is no contradiction at all. Rather, cottages, farmers or whatnot were self-sufficient, and/or traded based with kin inconsequentially or did not employ the market because of a lack of task specialisation and mechanisation, or because of sufficient relationships of kinship, but towns or “nations” and the merchants therein may have traded with gold and silver (or other accepted mediums of exchange) because that may have been where technological mobilisation was the highest and between strangers, there were a greater scale of commodities traded such that the “double coincidence of wants” issue materialised (see Carl Menger’s Geld, I. The Origin of Generally Used Intermediaries for Exchange for a quoted example of such by V.L. Cameron in Tanganyika and H. Barth in Sudan) and emotions of kinship or reciprocity were too insufficient to facilitate any sort of gift exchange.

Indeed, Smith elucidates upon the last matter when he makes it clear that commoners or “lesser kinsmen” who try to bond over the citizens of other nations are usually reminded that they are bad genealogists, and to put it simply, that they should not expected to be inherently treated the same way a family or kinsmen do.

“Great lords, indeed, are, in every country, proud of remembering and acknowledging their connection with one another, however remote. The remembrance of such illustrious relations flatters not a little the family pride of them all; and it is neither from affection, nor from any thing which resembles affection, but from the most frivolous and childish of all vanities, that this remembrance is so carefully kept up. Should some more humble, though, perhaps, much nearer kinsman, presume to put such great men in mind of his relation to their family, they seldom fail to tell him that they are bad genealogists, and miserably ill-informed concerning their own family history. It is not in that order, I am afraid, that we are to expect any extraordinary extension of, what is called, natural affection.”

Smith, The Theory of Moral Sentiments, pg. 639.

V. Market psychology (or as it is better known today) market fundamentalism, as well as the classical economic school. is a creation of the liberal economists who were ‘biologicalists’ and utilitarians --Polanyi gives examples of Malthus and Ricardo for this.

This is the least economic and most philosophical claim that will be evaluated. I have throughout the course of my life been ambivalent at best to philosophy, besides perhaps Kant or Hume whom I consider both quite insightful. So I will have to borrow citations extensively from Allen Sievers’ Has Market Capitalism Collapsed? It does help somewhat that Polanyi does not really make a philosophical claim himself, but is attempting to summarise what certain philosophical schools believe in.

We pick up from the ending of the Speenhamland system, where market capitalism seemingly begun. Ignoring the truth-value of this statement, Polanyi believes it is during this period that the major liberal economists, such as Ricardo and Malthus really began to formulate a new theory of political economy to deal with the issue of the Pauper question (how could society be rich whilst individuals stay poor?) predicated inter aila, the theory of biologicalism (or naturalism, as he calls it). Biologicalism is essentially reducing the human element of economics, the morality, the physical element to biological factors such as hunger, reproduction, etc.

This is in Polanyi’s view, very contrary to what the Classicists like Adam Smith thought. Soil, climate, &c. for Smith were less relevant to Smith than the skill of labour and the proportion of useful/idle workers in society. As Polanyi opines: “This exclusion of the biological and geographical factor in the very beginning of his book was deliberate. The fallacies of the Physiocrats served him as a warning; their predilection for agriculture tempted them to confuse physical nature with man's nature…” (Polanyi 65).

The Liberals took out this human element beginning with the work of Townsend’s Dissertation: “"It is the quantity of food which regulates the number of the human species.” (Cited in Polanyi 65). Townsend further applied this logic to the Poor Laws: “"Hunger will tame the fiercest animals, it will teach decency and civility, obedience and subjection, to the most perverse. In general it is only hunger which can spur and goad them [the poor] on to labor; yet our laws have said they shall never hunger.” (Cited in Polanyi 65). Aristotle taught that man was neither god nor beast; Hobbes taught that man behaved like a beast but was not actually one, but Townsend insisted that men were literally beasts. Burke and Bentham were opposed to this “natural law” understanding that economics could not be put above “politics proper”; but Townsend, Malthus and Ricardo divided themselves onto their own line. Only Robert Owen, in Polanyi’s view was logical enough to reject the Christian notion of individualism and such narrow conceptions of society and State. (Polanyi 74)

Ricardo had sought a (fallacious in Polanyi’s view) humanistic element in this theory by accepting the labour theory of value, as Locke and Smith had done. Marx had done the same in his attempt to correct the classical and liberal school, but was too heavily bounded by Ricardo. Discussions of the Poor Law and Speenhamland was the first major event in which biologicalism had major credence; it was also during this period that Malthus adopted the iron law of wages which attempted to show that pauperism and “depressed wages” were, put simply, a biological necessity. And so, modern economic theory got off the wrong foot, a fallacy. And it was only then that this type of thinking was used to (falsely in Polanyi’s view) analyse and support the existence of a “self-regulating market” (market capitalism) and substitute humanistic analysis with that.

I conclude with my summary of Polanyi here. First of all, it seems like the criticism of the Liberals analysing the market as a system proper seemingly contradicts with the analysis of certain thinkers he gives that precedes Speenhamland. For instance, as he says about Daniel Defoe: “And yet, as far as it went, Defoe's paradox was a forecast of the perplexities to come: "Giving alms no charity"—for in taking away the edge of hunger one hindered production and merely created famine; "employing the poor, a grievance to the nation"—for by creating public employment one merely increased the glut of the goods on the market and hastened the ruin of private traders.” (Polanyi 63). Defoe was a thinker pre-Industrial Revolution firmly opposed to giving alms legislation, in Polanyi’s view, because it caused underproduction and slowed down the market. But wouldn’t saying this presuppose that Defoe have an idea of what a market system—and of course, the logic behind it—is?

Moreover, as (Sievers 119) points out, Defoe was against the ideas of Humphrey Mackworth, a reformer who wanted to introduce profitable workhouses. So even if, say, before Speenhamland pauperism was not as severe, and the market economy was not as intensified, the issues the prior school dealt with, of pauperism and exploitation, the similar solutions and the notions of understanding the “market system” are still present. Adam Smith, although considering moral problems, also talks about market prices in the short-run converging to “fluctuations” as a result of market conditions: “Even though that demand, therefore, should continue always the same, their market price will be liable to great fluctuations, will sometimes fall a good deal below, and sometimes rise a good deal above, their natural price.” (Smith, Wealth of Nations, 54). John Bellers, himself a parallel to Owen with his idea of “labour-notes” based charity , also exhibits the profit motive at times; “However prevalent arguments of Charity may be to some, when profit is joined with it, it will raise most money, provide for most people…” (Bellers 37, A College of Industry).

So the idea of a profit motive, of divorcing market from society, of the pauperist problem is not a mere characteristic of the liberal economists. It did not originate with Ricardo. What is next to evaluate is how much the idea of natural law and biologicalism was exclusive to Ricardo, Malthus and the like. As I said before, most of this part is borrowed from a reading of Allan Sievers’ analysis of the classical theoreticians.

The Greeks initially conceptualised knowledge from the axioms, or the ἀρχαί. What νόμος (nomos), often translatable to “law” meant was behest, as in an obligation. This was also the case with the Romans, and it parallels the understanding of “Law” in the Torah as a set of divinely ordained commands. Thus ethical natural law, or a law created perhaps by a general higher power was not unknown to them, even if scientific natural law was, as when νόμος and φύσις (physis, nature) are linked together they referred to intrinsic ethical laws. Aristotle discusses explicitly in the Nichomachean Ethics the distinction of jurisprudential law (X lawmaker makes law Y) which can be moral but also not, and universal law, which is, well, universal and based on objective and fixed notions of justice. From then on the Stoics would proceed to intensify this by positing that the universe was ordained by divine creation and thus subject to universal laws of Reason, or Nature. Roman thinkers like Cicero expanded upon this and believed in multiple theories of natural Law (jusnaturalism, lex naturae) and a universal commercial law (the jus gentium) which Justinian cites.

But overall the concept of natural law remains grounded in the ethical sphere. Mathematics, Science and Philosophy employed notions like axiom, postulate, hypothesis and proposition; Ptolemy said the impression of irregularity can be explained by the eccentricity and epicycle hypotheses with geocentricity being presupposed for the purpose of utility. Even with Newton his “laws of motions” are axioms, or presuppositions. Now, however in the modern ages as Polanyi has said, science has been conflated with laws, and natural law is no longer a question of ethics but what each man does universally. This precedes Malthus and Ricardo and takes place in Medieval Europe. Aquinas avoids it in Summa Theologica to a degree of success where he distinguishes between the eternal law (the law of God that always has governs people) which is a form of natural law insofar as man is cognizant of such; and there are dictates of divine law which are commands ordained by God and thus outside the realm of cognizance or deduction. Aquinas as a whole was not interested in the Scientific Law. But the Thomistic notion of natural law is transformed by Bodin, Althusius, Grotius, Hobbes, Spinoza, Locke and Pufendorf, whereas the scientism with respect to the laws of nature are developed from Da Vinci to Copernicus, Kepler, Galileo, Descartes and Newton. It is Newton who treats scientific fact as established by God but interpreted by humans.

The ethical notions of natural law are transformed from ought to must with the notions of natural right and the state of nature which seemingly describe an objective tendency within man. Bodin and Althusius begin this tendency with Six Livres de La Republique and Politica methodice digesta atque exemplis sacris et profanis, however the idea was enforced by Grotius in De jure belli ac Pacis. The state of nature in their views contains God-given natural law until men enter a social contract and political law takes precedence. Nevertheless according to Grotius nations in the state of nature should abide by natural law. It is Hobbes and Spinoza who begins to truly conflate the natural and moral law and put forth “deterministic” and “anti-humanistic” overtones; Hobbes writes that mathematics governs “figure and motion”, conflates irresistible might in the state of nature with right, and also says that his sociological laws are the “laws of nature” per natural reason, moral laws and divine laws. Polanyi says Hobbes was being metaphorical but there is little evidence to suggest such.

“The laws mentioned in the former chapters, as they are called the laws of nature, for they are the dictates of natural reason; and also moral laws, because they concern man’s manners and conversations one towards another; so are they also divine laws in respect to the author thereof, God Almighty...”

- Hobbes, Elements of Law 18.1.

Spinoza although less subtle about the matter proposes the same thing, more or less. The entirety of the universe and by extension man is subject to predetermined universal fixed laws; and ergo we can determine the actions of man with regularity in that they are “conditioned by nature” and live and act in a determinable fashion. This is not too dissimilar from what, say, Townsend or Malthus does.

“… I freely admit that all things are predetermined by universal natural laws to exist and operate in a given, fixed, and definite manner …

By the right and ordinance of nature, I merely mean those natural laws of every individual wherewith we conceive every individual to be conditioned by nature, so as to live and act in a given way.”

Tractatus theologico-politicus, pp. 17, 18, 27.

Now at this point a divulsion is made into the social sciences. Pufendorf refutes the anti-humanistic notions of Hobbes and Spinoza and Locke uses his theory extensively to transform the law of nature into a moralistic one once again. Locke also, however, transferred the Newtonian notion of scientific law into the social order, and says:

“Whence has it [the mind] all the materials of reason and knowledge? To this I answer in one word, From Experience; in that all our knowledge is founded, and from that it ultimately derives itself. Our observation, employed either about external sensible objects, or about the internal operations of our minds, perceived and reflected on by ourselves, is that which supplies our understandings with all the materials of thinking.”

-Locke, Essay Concerning Human Understanding.

He would use this to apply the scientific method into theology, sociology, and the like. But Locke did maintain in a sense the image of the humanistic man and the economy as a particular institution within society; though he conflates the moral natural law with scientific law nonetheless. It is also Smith that begins to separate homo oeconomicus from the broader aspects of society and thus Smith who begins the tendency towards biologicalism.

David Hume, Locke’s successor in some form, sought to dissolve the distinction between philosophy and science by subjecting philosophical analysis to empirical analysis. Hutcheson and Hume, mentors of Smith also conflate individual feeling with ethical principle and breaches the line between science and philosophy de novo. The Encyclopedies, the naturalists and rationalists in the form of Diderot, Montesquieu and Voltaire, and the Physiocrats, from Quesnay to Turgot also tremendously influenced Smith with their theory of “rule by nature”. The emphasis on economics being guided by nature (for instance, the price of a good being based on the quality of soil) also tremendously influenced Smith.

As for Smith himself, his theory of the natural commodity and factor price which all goods must gravtitate towards as a law, the reductionism of labour, the universal and objective sense of “use-value” he exhibits etc. are all quite “dehumanising” in substance and abstracted away from true society. His main point of contention against the Physiocrats were also that they proposed mercantilist-esque regulations for the field of agriculture, and were thus being hypocritical when they said “Let Nature Rule”. The biologicalist biases of Malthus and Townsend are thus in a way, not from nowhere but derived by the mistakes of a great agglomeration of previous philosophers and political economists.

III. Conclusion.

I must admit a deficiency when I did not talk about every aspect of Polanyi’s theory. I for instance do not evaluate here the claim that Fascism was a result of the unique developments of liberalism, that the capitalistic market in the 1870s fell victim to a wide variety of regulations and social programmes, his discussion of the Belle Epoque and the Great Peace, and I skip over Polanyi’s discussion of social policies like the Peel Bank Act of 1846, the “Six Acts” of 1819, some primitive economies like the Potlach System and I skip over the last chapter where Polanyi advocates for more intervention and more bureaucracy and the rejection of individualism, mostly because I do not find his reification of “society” and the State there to be extensively worth addressing. I feel that had I written a book and not an article specifically evaluating the historicity and logicality of Polanyi’s claims that I could address each treatment in painstaking detail as I did to the Poor Laws and Speenhamland; but really, going through the major logic in his methodology is sufficient at least for now.

I wish to reiterate that Polanyi’s philosophy is not altogether hopeless. It holds some great insights even today. For one, we cannot naturally presuppose each primitive society to just have an idealised version of market/barter economy out of the gate; for that presupposition limits and confuses our understanding greatly. Polanyi points this out, and it is quite helpful, even if he takes the opposite extreme. For another, the perfectly competitive or Arrow-Debreu market is a myth; each form of market takes the form of social/cultural values and can vary in form, and always has some institution that is not merely the price mechanism guide and inform participation in it. For instance, if a fraudulent contract is made, contract law must step in and analyse the terms of stipulation. This is mostly, however, a worthwhile critique for the “New Economic School”, the so-called mainstream, who believe that individual actors can just be abstracted, their expectations made homogeneous and assume away certain “imperfections” of the market in their attempt to create a “scientific model” of human action. Although Mises disagreed significantly with Polanyi, particularly regarding economic calculation, I do not think he would disagree.

Polanyi is also correct when he says that markets do not simply form ex nihilo; they form in response to certain social developments. And he is finally, perhaps tangentially, correct that when the market intermingles with Statist policies that it becomes another apparatus with the State. Hence despite his crippling historical and logical flaws, as well as his poor exposition in areas, I partially forgive him. Polanyi raised up certain good points that would challenge the simplistic thinking of the Liberal economists and to an extent the Mainstream School of today. And where he made errors, it was largely because he tried to craft a universal theory of history, anthropology, economics, sociology etc. within a single text, which almost certainly invites spurious generalisations.

That being said, the errors he made are too significant for us to treat The Great Transformation as a watershed work in Economics, in the lines of a foundationally correct treatise in the sense of Newtonian Physics or Kelvin’s synthesis of the thermodynamic sciences. Gain and profit-seeking has existed significantly in primitive societies, prices regulated by “supply and demand” far eclipsed administrative prices even in certain great empires like Sumeria, the theory of barter as well as the division of labour has not been significantly challenged, the capitalist system cannot be reduced to a specific set of political decisions and cannot thus be considered aberration, and the Industrial Revolution arose out of the gradual transformation of prior phenomena not planned at the behest of the State, rather than being an invention of such. And, in spite of all the particular social movements Polanyi identified as the reaction to the “self-regulating market” suffocating the market (the “double transformation” phenomena as he called it) and the premises he crowned as near and dear to liberalism collapsing during the Great War… liberal mentality is more resilient than it was before.

In short, a great deal of of what Polanyi posited in terms of society and economy was reductionist or invalidated with better understanding. But he tried to be Smith and Marx and transform the field of economic thought forever. He tried and failed, but most economists don’t even try. They lack the ambition, dedication and polymath nature of Polanyi.

And that is why, in the end, The Great Transformation is a text very much worth reading, even if it is filled with errors. It represents as rich and as provocative of a heterodox breach towards conventional economical thought as Marx’s Das Kapital, Lord Keynes’s General Theory or Mises’s Human Action does. It deserves nothing short of respect.

Fin.

IV. Notes.

(Notes that didn’t make it into the final criticism because of space, importance or because I deemed them poorly written)

It seems as if Polanyi deems Bentham’s utilitarianism and the notion of biologicalism incorrect, but he does not expound upon his reasoning. He takes it as obvious that they are false and as such does not invite much room for refutation…

Polanyi has a poor habit of citing an abundance of historical events without explaining much about their significance. He talks about Kett’s Rebellion, the Tudors and Stuarts, The Lords of the Realm, the laity and Strafford and Laud on pg. 20 but only as examples of the struggles of Enclosure and not what they entailed…

It seems like Polanyi treats society as a mechanistic entity, as in an “individual” with thoughts and preferences when he says that “society” has the tendency to rebel against the so-called self-regulating market. Which parts of society lobbied for, say, public health reform? Which parts have a tendency to accept and reject reform? This is what Mises would aptly call “hypostatisation”…

Not through the entire period of the Great Peace were wholly liberal institutions in power..

Labour unions, the Owenites, the Anarchists, the social democrats and the First International would seemingly refute Polanyi’s theory about an all-encompassing liberal conspiracy or overarching liberal ideology…

V. Bibliography.

Primary Source

Polanyi, Karl. The Great Transformation: The Political and Economic Origins of Our Time. Farrar & Rinehart, 1944. [pp. 2, 14, 20, 22, 23, 24, 28, 29, 31, 34, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 50, 63, 65, 67, 74, 75, 78, 79, 81, 104, 115, 160, 280]

Section I.

Coolidge, Calvin. “Fourth Annual Message to Congress.” Messages and Papers of the Presidents: Coolidge 1925–29. Sixty-Ninth Congress, Second Session, p. 9629.

Cummings, Attorney General et al. v. Deutsche Bank und Discontogesellschaft. United States Supreme Court Reports, p. 122.

Trading with the Enemy Act of 1917. 65th Congress, Sess. I, Ch. 106. Article I.

MacHovec, Frank J. Perfect Competition and the Transformation of Economics. Greenwood Press, p. 63.

Irwin, Douglas A. “Dismantling the License Raj: The Long Road to India’s 1991 Trade Reforms.” National Bureau of Economic Research, Working Paper.

Section II:

Malinowski, Bronislaw. Crime and Custom in Savage Society. Harcourt, Brace & Co., 1926. [pp. 29, 30, 31, 55–56, 74, 180, 186]

Malinowski, Bronislaw. Argonauts of the Western Pacific: An Account of Native Enterprise and Adventure in the Archipelagos of Melanesian New Guinea. George Routledge & Sons, 1922. [pp. 68, 72, 73, 74, 99, 145–46, 280, 281]

Sievers, Allen M. Has Market Capitalism Collapsed? A Critique of Karl Polanyi’s New Economics. Columbia University Press, 1949. [pp. 119, 126, 127, 129]

Heichelheim, F. M. Review of Trade and Market in the Early Empires, by Karl Polanyi, Conrad M. Arensberg, and Harry W. Pearson. p. 109.

Pritchett, W. Kendrick, and D.A. Amyx. “The Attic Stelai, Part II.” Hesperia: The Journal of the American School of Classical Studies at Athens, p. 205.

Hejeebu, Santhi, and Deirdre McCloskey. “The Reproving of Karl Polanyi.” Critical Review, vol. 13, no. 3–4, 1999, p. 289.

Keister, Sharon. “Commercial Record-Keeping in Ancient Mesopotamia.” Journal of Accounting Research, p. 374.

Dougherty, Raymond Philip. Archives from Erech: Time of Nebuchadnezzar and Nabonidus. Yale University Press, 1923. [p. 25]

Curtin, Philip D. Cross-Cultural Trade in World History. Cambridge University Press, 1984. [pp. 58–59, 67, 67n16, 70]

Sidrys, Raymond. “Supply and Demand Among the Classic Maya.” Current Anthropology, vol. 19, no. 3, 1978. [pp. 594–96]

Snell, Daniel C. “Marketless Trading in Our Time.” Journal of the Economic and Social History of the Orient, vol. 34, no. 3, 1991. [pp. 132–34]

Chaudhuri, K. N. Trade and Civilisation in the Indian Ocean: An Economic History from the Rise of Islam to 1750. Cambridge University Press, 1985. [p. 223]

Veenhof, Klaas R. Aspects of Old Assyrian Trade and Its Terminology. Brill, 1972. [pp. 349–50]

Braudel, Fernand. Civilization and Capitalism, 15th–18th Century, Vol. 2: The Wheels of Commerce. Translated by Siân Reynolds, Harper & Row, 1982. [pp. 225–27]

Polanyi, Karl, ed. The Livelihood of Man. Academic Press, 1977. [pp. LII–LIII]

Section III.

Mokyr, Joel. “Editor’s Introduction: The New Economic History and the Industrial Revolution.” The British Industrial Revolution: An Economic Perspective, edited by Joel Mokyr, Westview Press, 1993. [pp. 33–37]

Chapman, Stanley D. “The Robinson Mills: Proto-Industrial Precedents.” The Early Factory Masters: The Transition to the Factory System in the Midlands Textile Industry. David & Charles, 1967. [pp. 59–61]

Chapman, Stanley D. “Enterprise and Innovation in the British Hosiery Industry, 1750–1850.” Textile History, vol. 5, 1974. [p. 21]

Mantoux, Paul. The Industrial Revolution in the Eighteenth Century: An Outline of the Beginnings of the Modern Factory System in England. Translated by Marjorie Vernon, Jonathan Cape, 1928. [pp. 464–65]

Ashton, T. S. The Industrial Revolution 1760–1830. Oxford University Press, 1948.

Postan, M. M. “Medieval Agrarian Society in Its Prime: England.” Cambridge Economic History of Europe, Vol. 1, edited by M. M. Postan, Cambridge University Press, 1966. [pp. 567–68, 605, 631]

Dyer, Christopher. Making a Living in the Middle Ages: The People of Britain 850–1520. Yale University Press, 2002. [pp. 30, 35, 76, 175–76]

Court, W. H. B. A Concise Economic History of Britain from 1750 to Recent Times. Cambridge University Press, 1954. [pp. 39–40]

Chambers, J. D. “Enclosure and Labour Supply in the Industrial Revolution.” Economic History Review, vol. 5, no. 3, 1953.

McCloskey, Deirdre N. “The Economics of Enclosure: A Market Analysis.” European Peasants and Their Markets, edited by William N. Parker and Eric L. Jones, Princeton University Press, 1975. [pp. 146–50]

Boyer, George R. An Economic History of the English Poor Law, 1750–1850. Cambridge University Press, 1990. [pp. 116, 452]

Blaug, Mark. “The Myth of the Old Poor Law and the Making of the New.” Journal of Economic History, vol. 23, no. 2, 1963. [pp. 159, 165, 168–70, 176]

De Vries, Jan. “The Industrial Revolution and the Industrious Revolution.” Journal of Economic History, vol. 54, no. 2, 1994.

Brown, John C. “The Condition of England and the Standard of Living: Cotton Textiles in the Northwest, 1806–1850.” Journal of Economic History, vol. 50, no. 3, 1990.

Solar, Peter M. “Poor Relief and English Economic Development before the Industrial Revolution.” Economic History Review, vol. 48, no. 1, 1995.

Dunkley, Peter. “The ‘Hungry Forties’ and the New Poor Law: A Case Study.” Historical Journal, vol. 17, no. 2, 1974.

Roberts, David. “How Cruel Was the Victorian Poor Law?” Historical Journal, vol. 6, no. 1, 1963. [p. 109]

Section IV:

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell, 1776. [pp. 13, 54, 638]

Smith, Adam. The Theory of Moral Sentiments. A. Millar, 1759. [pp. 638–39]

Menger, Carl. Geld [”Money”]. In The Collected Works of Carl Menger, Vol. IV. London School of Economics, 1936. [Referencing Vol. I: “The Origin of Generally Used Intermediaries for Exchange”]

Section V:

Sievers, Allen M. Has Market Capitalism Collapsed? A Critique of Karl Polanyi’s New Economics. (Primary source)

Townsend, Joseph. A Dissertation on the Poor Laws, by a Well-Wisher to Mankind. C. Dilly, 1786. [Cited in Polanyi, pp. 65]

Smith, Adam. The Wealth of Nations. W. Strahan and T. Cadell, 1776. [p. 54]

Bellers, John. Proposals for Raising a Colledge of Industry. T. Sowle, 1696. [p. 37]

Hobbes, Thomas. The Elements of Law, Natural and Politic. Edited by Ferdinand Tönnies, Simpkin, Marshall, 1889 [written c. 1640]. [18.1]

Spinoza, Baruch. Tractatus Theologico-Politicus. Jan Rieuwertsz, 1670. [pp. 17, 18, 27]

Locke, John. An Essay Concerning Human Understanding. Thomas Bassett, 1689.

Aquinas, Thomas. Summa Theologica [Summa Theologiae]. 1265–1274.

Bodin, Jean. Les Six Livres de la République [Six Books of the Commonwealth]. Jacques Du Puys, 1576.

Grotius, Hugo. De Jure Belli ac Pacis [On the Law of War and Peace]. Buon, 1625.

Newton, Isaac. Philosophiæ Naturalis Principia Mathematica. Royal Society, 1687.

I. The pre-Bautista Sugarcane-based “One Trick-Pony” Economy

To understand the Cuban economy and direction of the 1950s and beyond, one must begin roughly in the 1920s. The model of sugarcane dependence would be what future leaders sought to both avoid and invoke. A slogan of the era¹ put it plainly: Sin azucar no hay pais. There is no country (Cuba) without sugar. This was certainly not merely rhetorical. Half of all land in Cuba was dedicated to the cultivation of sugarcane.

Figure 1: Sugarcane as a percentage of Land Area², visualised.

When President Prio approved a production target of 5,900,000 tonnes of sugarcane prior to Batista’s 1952 coup, actual output exceeded that figure by 20 percent, reaching 7,300,000 tonnes in total.³ Sugarcane accounted for 90 percent of Cuba’s exports and reached 31 percent of Cuban national income by 1949.⁴ In economic terms, Cuba had become precisely what development economists warn against: a monocultural economy, and an aging one at that.

How did this reliance come about? Cuba’s sugar orientation intensified following the Seven Years’ War, when Britain briefly seized Havana, removed Spanish tariffs, and exported enslaved people en masse to the island. Sugarcane production became entrenched and expanded rapidly in the early twentieth century, particularly between 1903 and 1925, when American capital funded investment in infrastructure and large-scale sugar complexes known as Los Colosos. Investment poured into provinces like Camagüey and Oriente, where production boomed.⁵ By the late 1920s, however, investors began withdrawing, fearing overproduction. Cuba had essentially experienced a sugar bubble. By the time Batista took power, many of the colosos still in operation were decades old and practically inoperable.⁶ Yet political capitalists perceived them as necessary in furthering their profits.

Essentially, the political economy of sugar compounded the structural problem. Large sugarcane producers operating within the latifundia (lit. “spacious estate”) land system lobbied successfully for government subsidies and production quotas⁷, with prices fixed and barriers to entry kept high to retain a closed-off oligopolistic competition model. This arrangement explained the industry’s entrenchment but also its relative inefficiency. American tariffs on beet and cane products that began in the 1930s to preserve American beet and sugarcane interests⁸ further restricted Cuban trade options. This was the economic difficulty Batista faced upon seizing power.

II. The Batista Era: a most neo-Keynesian failure

Intent

Batista took power undemocratically in 1952 and moved quickly to launch an economic stimulus programme funded in great part by foreign loans. His stated ambitions were substantial: to address a lack of innovation, low economic diversification, seasonal unemployment, inefficient land use, volatile prices, corruption and the patronage system, and underdeveloped human capital and resource utilisation.¹ The approach was very much dirigiste (state-capitalist) in character, Keynesian in method, and reliant on the National Bank and instruments of state planning.

Figure 2: A summary of the multiple credentialed institutions and Economic ideologies Batista used in his Economic Plans. ²

Batista deemed two immediate reforms were necessary. First, central banking reform was necessary because politically connected banks had historically refused to lend to non-sugar industries, creating severe sectoral disparity. Second, Batista viewed the dissolution of the sugar unions as essential, arguing they blocked agricultural modernisation and lobbied for wage controls that depressed efficiency.³

Batista the Pragmatist

In practice, Batista was forced to be considerably more pragmatic than his rhetoric suggested. Rather than confronting the sugar lobby or curtailing production, he agreed to maintain the status quo, cooperating with the sugar mill owners he had promised to reform. He increased wages and union meeting rights, and cooperated with organised labour elements including gangsterismo networks, in order to maintain stability and suppress political unrest.

Batista also chose to personally negotiate sugar prices with the industry’s dominant figures, and engaged in speculation by withholding a portion of sugar output before releasing it onto the international market. In this he had put a great deal of responsibility onto himself.

Trade Liberalisation and Foreign Investment

Where Batista showed somewhat more conviction was in international trade. He negotiated with European nations including England, France, and West Germany, and Austria; for instance, France agreed to increase Cuban tobacco exports. He also secured reduced markups and consumption taxes from Spain, reverting the outdated Protectionist Cuba-Spain treaty of 1927⁴, and reached agreements with Latin American partners like Mexico, Costa Rica, Venezuela and El Salvador. Notably, he struck a deal with ranchers in Uruguay and Texas to import meat and expand cattle populations in Camagüey, addressing a chronic meat shortage. He also lowered import duties on rice to alleviate food supply constraints.

To attract foreign direct investment, Batista eliminated taxes on profit remittances abroad, pledged not to tax outbound profits, and introduced a labour arbitration system as a further compromise between capital and organised labour.

Public Works and the Programa Economico Minimo

Public works are of course a common occurrence of Keynesianism⁵ and thus another central pillar of the Batista approach. Despite Cuba’s limited national budget, tens of millions of dollars were spent on tunnels, waterworks, roads, buildings, and factory assistance by 1953.⁶ A million dollars alone went to banana and coconut plantations around Baracoa in Oriente province.⁷ Agricultural diversification, however, remained a persistent issue that was difficult to solve.

The most substantive institutional contribution came from Gustavo Gutierrez, president of the National Economy Board and drafter of the Cuban constitution of 1940, who had remained in his post despite his opposition to the coup after Batista offered him concessions. Gutierrez’s influence was significant. He recommended the creation of a new railway company that would receive tax breaks and subsidies without being directly state-owned⁸, which successfully revived the insolvent railway sector in western Cuba.

He also drafted the Programa economico minimo, a plan calling for targeted loans, stimulus spending, tax incentives, and free capital allocation to strategic non-sugar industries. The programme increased investment in research and development, established public finance agencies, and proposed tax incentives and payment extensions for landholders, as well as substantial public investment in rural housing. A 415,000 peso government loan to landholders in Camagüey to increase affordable housing supply was one such example of this new Keynesian orientation in practice.

BANFAIC and Sectoral Credit

Batista also expanded the budget of BANFAIC, the Agricultural and Industrial Development Bank. Credits were extended to pharmaceuticals, milk pasteurisation, and sausage manufacturing, among other industries.⁸ BANFAIC issued loans at 35 pesos per quintal for washed coffee, and Batista negotiated with Spain to lower trade barriers on coffee exports in exchange for Spanish commodities. Loans for rice constituted a third of the bank’s portfolio⁹, and rice production rose by over 150 percent¹⁰. Potatoes, beans, and other staples were similarly subsidised.

Batista also pursued more unconventional diversification strategies, including inviting Truman-era social workers to train Cuban farmers in growing kenaf, and hiring agriculturalists and industrialists as advisors. The ambition was clear. The results, however, were not.

Assessment

Figure 3: What the Cuban State expended money towards, public-works wise¹⁰

Net national product stagnated. The reason was simple: a large portion of Batista’s public works programme was designed to create employment rather than to increase productive capacity. In other words, Batista had fallen to the broken-window fallacy, where he payed people to work unproductive jobs for the sake of “stimulating the economy”. Public expenditures on works, education, health, sanitation, and defence were high. Budget deficits were high, reaching -26827 (thousand C$) by 1952-53.¹¹ Unemployment remained high at 8,4% by 1953, and a low labour force participation of 53,7%.¹² Batista had hoped to use central planning and state-stimulated private sector activity to his political and economic advantage. Unfortunately for him, neither objective was achieved. His regime, and the economic model it represented, was swept aside by revolution.

III. The Castro Revolution and Early Economic Policy (1958–1963)

The intellectual framework of the Cuban revolutionaries offered a sharp critique of what had preceded them. They were supposed Marxist-Leninists, and thus offered an analysis using that methodology. As revolutionary Che Guevara argued: “under these conditions a BOURGEOISIE dependent on imports came into being and grew to be one of the greatest obstacles to the industrialisation of the Country… only in later years did the the bourgeoisie ally itself with American manufacturing interests… American equipment, raw materials, technology and a cheap labour force…”¹ the fundamental factor that had gone wrong in Batista’s attempts to industrialise was a bourgeois class that had created a labour aristocracy and entrenched Cuba’s economic dependence on the West and particularly American corporations or banks. Laissez-faire capitalism was therefore ruled out, (somewhat obviously) but so, in Guevara’s view, was Keynesianism.

Roads and public works programmes, the onerous state-capitalism, he contended, did not generate genuine economic utility. (Perhaps he secretly read Bastiat?) The prescription was the opposite of Batista’s approach: prioritise sugar production, enact comprehensive land reform, monopolise foreign trade, and pursue Marxist-Leninist economic organisation. The last point is vague but soon you shall see what I mean.

Nationalisation and the failed Early Reforms

In the early years of the revolution, from 1958 to 1962, the new government moved swiftly. Between 45 and 50 percent of land was nationalised without compensation,² with a maximum of 400 hectares left under community or group ownership³, effectively ending the latifundia property system. Rent controls, wage controls, the abolition of land rents, reduced rates for public utilities, the elimination of certain taxes, and universal free education followed in rapid succession.⁴

An ambitious industrialisation programme was launched alongside these reforms but floundered quickly. Resources were already stretched across public goods commitments, demand for capital goods exceeded supply, technical specialisation was lacking, and sugar production stagnated.⁵ The structural constraints that had frustrated Batista remained very much in place, meaning despite Che’s lofty goals, little had changed.

IV. The Soviet Alliance and the Turn to Sugar Monoculture (1962–1989)

Soviet Economic Assistance

The Soviet Union had been entering the picture as early as 1960, when it agreed to purchase Cuban sugar at the world market price of three cents per pound and extended one hundred million dollars in credit for equipment, machinery, materials, and technical assistance.¹ A multilateral trade deal was also concluded with Eastern Europe and Mongolia at this time.

Soviet support escalated substantially in the following years. Between 1959 and 1963, Soviet exports to Cuba, comprising largely machinery, fuel, mineral raw materials, metals, and foodstuffs, made up 75 percent of all Soviet exports to the island.² The USSR stepped in to purchase sugar that the United States, following President Kennedy’s embargo, no longer bought. In 1964, the Soviets agreed to purchase 24 million tonnes of sugar spread across the years 1965 to 1970, at a stable below-market price of six cents per pound. Economic assistance over the five years from 1959 to 1964 totalled between 559 and 609 million dollars.³

Prior to that agreement, the USSR had also constructed two thermal power plants, extended a further one hundred million dollars in credit for nickel and cobalt mining, built nitrogen and superphosphate plants,⁴ and sent Soviet mechanics to train Cuban workers. By 1972, Cuba had formally joined COMECON.

La Zafra de los Diez Milliones and Its Failure

In 1963, Cuba abandoned its import substitution industrialisation programme and set an ambitious target of ten million tonnes of sugarcane for the 1970 harvest, known as La zafra de los Diez Milliones. The campaign failed badly. The USSR cultivated beet sugar rather than cane, rendering much of Soviet agricultural expertise inapplicable. Many experienced cane workers had fled the country during the 1960s, and Cuba turneered a more nuanced picture. A record 8.5 million tonnes were harvested, with cane yields reaching 22 metric tons per acre, the highest ever recorded, likely owing to good rainfall and a third of the cane being newly planted stock. Labour supply was strong because workers were recruited from schools and workplaces, and harvesting was extended over an entire year rather than the traditional half-year period.

Figure 5: The CIA report in question. ⁵

The yield gains, however, did not translate into broad material improvement. The harvest campaign disrupted other sectors of the economy by redirecting approximately four percent of the labour force, diverted transportation resources, and caused a contraction in manufacturing.⁶ The parameters of the target were not met, and the exercise confirmed the dangers of over-investing in a single productive campaign at the expense of economic balance.

By 1968, Cuba had effectively given up on diversification and committed to sugar as monoculture. It was by this point deeply in debt to the USSR, at a rate of approximately one million US dollars per day.⁷ The USSR charged interest on credit, levied significant fees for maintaining Soviet advisors, and was reportedly overcharging on exported goods. In 1970, Soviet planning specialists arrived to assist Cuba in developing nickel production, irrigation systems, and power generation, and to help establish a GOSPLAN-style central planning apparatus. By 1974, the USSR accounted for 48 percent of Cuba’s imports.⁸ Cuba eventually negotiated to service its debts interest-free from 1986.

Economic Planning and Its Mechanics

Cuba used the material product system to compute national income, as was common across Soviet bloc nations. This methodology measured gross social product, which excluded so-called nonproductive services. Said services included the arts, government, housing, healthcare, education, and much of the service sector broadly. Combined with double-counting inherent in measuring gross value at each stage of production, this makes Cuban economic statistics from the 1970s and 1980s difficult to interpret with confidence.⁹

During this time, the State Price Committee set prices for most products. Some, like old perishable consumer goods were set by market prices, however. Over 250,000 prices were set in an old room; with a wholesale and retail price. 15,000 prices changed per year; more changed with comprehensive price reforms. The committee would set prices based on average costs of production submitted by producers, to which a sector-specific markup was applied. In practice, the retail price were rarely final: black markets routinely charged higher prices, luxury goods were taxed at extreme rates, hard currency dollar shops catered exclusively to foreigners at dollar-denominated prices, and retailers frequently disregarded mandated prices altogether, despite the legal penalties for doing so.¹⁰

Performance of the Five-Year Plans

The results of Cuba’s economic planning were decidedly mixed. As economist Carmelo Mesa-Lago documented, the first five-year plan of 1975 to 1980 performed disastrously. Plan targets proved unrealistically optimistic, export values declined, sugarcane capacity lagged, nickel and fishing industries stagnated, and consumer shortages were widespread.¹¹ Global social product and labour productivity fell sharply, as did exports, housing construction, and childcare provision. GDP growth, while nominally positive in some years followed a volatile pattern of rapid expansion and contraction that reflected the instability of the underlying model.

The second five-year plan from 1980 to 1985 was more focused on industrial consolidation, calling for the expansion and modernisation of sugar mills, increased agricultural machinery, and the development of the steel and fishing sectors. This produced more tangible results. Capital goods output grew significantly, with the nonelectrical machinery sector expanding fourfold between 1975 and 1985.¹² The value-added share of national output rose from 37.3 to 48.9 percent,¹³ with particularly strong gains in electronics, which also recorded high productivity growth.

There were, in other words, genuine achievements during this period. Cuba grew impressively in certain dimensions, experienced sectoral expansion, and achieved real productivity gains in some industries. But structural inflexibility persisted. A large proportion of critical inputs, including oil and sugarcane harvesters, were imported from the USSR. That dependency would soon prove catastrophic to mechanised chopper harvesters that workers could not properly maintain.

V. Achievements and Their Costs

It should be acknowledged that under Castro’s government, Cuba did achieve notable social outcomes. The literacy rate was raised to 90 percent, infant mortality was substantially reduced.¹, and life expectancy increased meaningfully². These were quite tangible improvements in human welfare. They were, as we have seen however, predominantly financed by Soviet subsidies, which raises a difficult counterfactual: what might Cuba have achieved with those same resources under a different economic structure? The sustainability of those achievements but general failure of the economy without the Soviet financial backstop would become apparent soon enough.

It is also worth noting the peculiarity of the bilateral trade relationship. The USSR was already the world’s largest producer of beet sugar and a major nickel producer. Cuba’s role as a supplier of both to its principal benefactor was, from a pure economic logic standpoint redundant. The relationship had more to do with geopolitical alliance than Ricardian advantage.

VI. The Special Period: Collapse and Survival (1991–2000)

In 1991, COMECON collapsed, roughly six months before the Soviet Union itself ceased to exist. The writing had been on the wall for some time: Hungary, Czechoslovakia, and Bulgaria had already condemned Cuba¹ and declined to renew trade agreements, citing ideological feuds and Cuba’s mounting debts. But the dissolution of the USSR was of a different magnitude entirely. Cuba’s principal benefactor simply vanished.

The consequences were immediate and severe. GDP declined by 34.8 percent between 1990 and 1993. Imports fell by 75 percent.² The money supply ballooned to 66 percent of GDP as the government printed currency to cover expenditure gaps.³ Investment and productivity collapsed. Cuba entered what the government euphemistically called the Special Period in Time of Peace.

Castro was under considerable external pressure to adopt market reforms and liberalise the economy. He refused. Profit-seeking activity was not permitted, financial markets were not opened, and privatisation did not occur. The regime survived through the 1990s, though not without significant social hardship and political discontent. GDP recovered to pre-crisis levels only by 2004⁴, and even then, real wages remained depressed and both agricultural and industrial productivity were very low. In one emblematic adaptation, Cuba turned to organopónicos, community-based urban farming plots, as a substitute for state-directed agricultural production, reflecting how profoundly the formal economic system had failed.

VII. Recovery and New Dependencies: Venezuela, Russia, and China

Cuba’s economic fortunes began to shift somewhat in the 2000s, largely through the cultivation of new bilateral relationships. Fidel Castro had long sought preferential access to Venezuelan oil, and he successfully established a close alliance with Hugo Chavez. Under agreements signed by the two countries, Venezuela sold up to 53,000 barrels of oil per day to Cuba at a controlled price through its state-owned oil company⁵. In exchange, Cuba provided thousands of doctors, optometrists, nurses, and other health professionals to staff Venezuelan social programmes.⁶

Venezuelan support has, however, waned considerably since Chavez’s death and the subsequent deterioration of the Venezuelan oil economy. More recently, Cuba has been cultivating relationships with Russia, granting property rights to Russian businesses and reducing duties and agricultural import tariffs to attract investment⁷, and with China, which has financed wind power and photovoltaic solar projects as part of a broader renewable energy plan intended to reduce Cuba’s carbon footprint⁸. Whether these partnerships will provide the economic foundation that Soviet support once did remains to be seen, but I must admit that I am not too hopeful.

VIII. Cuba Today and Cuba in the Past

The contemporary Cuban economy is in poor condition by almost any measure. Fuel is scarce¹, machinery is outdated², technology is limited, and wages are low. Cuba’s sugarcane harvests, once among the highest in the world, are now among the lowest.³ Rum exports appear to be following a similar trajectory. The nickel and cobalt infrastructure, once a promising source of export revenue, is aging and underinvested. Close to 90 percent of the population live in conditions of extreme poverty.⁴ Emigration, particularly to the United States, has accelerated significantly.⁵

The Cuban government blames the embargo imposed by America. To be clear, embargoes are economically inefficient and should be lifted whenever possible. But how can you blame an embargo for your woes when you use a rationing and price system that’s been obsolete for decades? How can you point fingers at America when you can’t even fix issues at home? When you’re permanently stuck in the 20th century?

State planning failed in Cuba in the early 20th century, when Batista followed Keynesian investment to a T. It failed in the late 20th century, when Castro, Bettelheim and the entirety of the Soviet Politburo maintaining relations with Cuba decided a pretty unsustainable, monocultural economic model. And it is failing in the 21st.

Conclusion

The structural lesson is very consistent across all three phases: planning that is insulated from price signals, that suppresses competition, and that prioritises political stability over productive efficiency tends to reproduce the very problems it claims to solve. Cuba has remained a one-trick pony not because of geographical determinism or because the “Cuban People” value social planning, but because successive governments, for different reasons and with different planning-friendly ideological frameworks, chose structures that entrenched that dependency.

One can only hope that Cubans eventually find their way to an economic settlement that allows the genuine potential of the island and its people to be realised. The history reviewed here suggests that this will require something more than a new benefactor or a new bilateral deal. It will require an ideology that has not yet been tried. What that ideology is, only time will tell.

Bibliography.

I. The pre-Bautista Sugarcane-based “One Trick-Pony” Economy

^{1 -} Roberto Álvarez Quiñones, "Se cumplió en Cuba la frase 'sin azúcar no hay país,'" Observatorio Cubano de Conflictos, July 28, 2022, https://observatoriocubano.com/2022/07/28/se-cumplio-en-cuba-la-frase-sin-azucar-no-hay-pais/.

^2- Ministerio de Agricultura, Memoria del Censo Agrícola Nacional, 1946, Havana, 1951.

^3- Diss. McGuigan, Michael P., "Fulgencio Batista's Economic Policies, 1952 - 1958" (2012). Open Access Dissertations. Paper 834., pg. 5

^4- ibid. pg. 6

^5- Pollitt, Brian., (2004). The Rise and Fall of the Cuban Sugar Economy. Journal of Latin American Studies. 36. pg. 321-22 10.1017/S0022216X04007448.

^6- ibid.

^7- Mary Speck, “Let There Be Candy For Everyone: Reform, Regulation, and Rent-seeking in the Republic of Cuba, 1902-1952” Cuba in Transition: Papers and Proceedings of the Twelfth Annual Meeting of the Association for the Study of the Cuban Economy (ASCE) (UT Lanic, 2003).

^8- Pollitt, Brian, Supra note 5, 321.

II. The Batista Era: a most Keynesian failure

^1.- McGuigan, Michael P., Supra note 5 (of Sec.I), introduction sec. VI

^2.- ibid.

^3.- ibid. pg. 40.

^4.- U.S. Embassy Havana, Telegram 397, September 15, 1952

^{5- “Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production. The central controls necessary to ensure full employment will, of course, involve a large extension of the traditional functions of government. Furthermore, the modern classical theory has itself called attention to various conditions in which the free play of economic forces may need to be curbed or guided. But there will still remain a wide field for the exercise of private initiative and responsibility…”} J.M. Keynes, The General Theory of Employment, Interest, and Money Ch. 24 (Concluding Notes on the Social Philosophy towards which the General Theory might Lead)

^6.- McGuigan, Michael P., Supra note 5, pg. 292

^7.- ibid. pg. 107

^{8. -} El Mundo, June 2, 1952.

^9.- Banco Nacional de Cuba, Memoria, 1957-1958

^10.- McGuigan, Michael P., Supra note 5, pg. 143

^11.- ibid. pg. 142

^12.- ibid. pg. 141

III. The Castro Revolution and Early Economic Policy (1958–1963)

^1.- Guevara, Ernesto Che. “The Cuban Economy: Its Past, and Its Present Importance.” International Affairs (Royal Institute of International Affairs 1944-) 40, no. 4 (1964): 591. https://doi.org/10.2307/2611726.

^2.- O’Connor, James. “On Cuban Political Economy.” Political Science Quarterly 79, no. 2 (1964): 233–47. https://doi.org/10.2307/2146064. (Note: O’Connor was an ecological Marxist.)

^3.- Wiesel, I. “CUBAN ECONOMY AFTER THE REVOLUTION.” Acta Oeconomica 3, no. 2 (1968): 206. http://www.jstor.org/stable/40727812.

^4.- ibid.

^5.- ibid. pg. 208

IV. The Soviet Alliance and the Turn to Sugar Monoculture (1962–1989)

^1.- Walters, Robert S. “Soviet Economic Aid to Cuba: 1959-1964.” International Affairs (Royal Institute of International Affairs 1944-) 42, no. 1 (1966): 74. https://doi.org/10.2307/2612437.

^2.- ibid. pg. 77

^3.- ibid. pg.81

^4.- The New York Times (June 3, 1961), pg. 20 and ibid. pg.80.

^5.- Central Intelligence Agency, Cuba: The 1970 Sugar Harvest And Its Economic Implications.

^6.- ibid.

^7.- Tsokhas, Kosmas. “The Political Economy of Cuban Dependence on the Soviet Union.” Theory and Society 9, no. 2 (1980): 327. http://www.jstor.org/stable/656859.

^8.- ibid., pg. 330.

^9.- Zimbalist, Andrew. The Cuban economy: measurement and analysis of socialist performance. Ch 2, Pg. 9.

^10.- ibid., pg. 14-15.

^11.- Mesa-Lago, Carmelo. The economy of socialist Cuba : a two-decade appraisal. Ch. 3, pg. 36.

^12.- Zimbalist, Andrew. Supra note 9, Ch.3, Pg. 83-86.

^13.- ibid., pg.97.

^{V. Achievements and Their Costs}

^1.- C. William Keck and Gail A. Reed: The Curious Case of Cuba American Journal of Public Health 102, e13_e22, https://doi.org/10.2105/AJPH.2012.300822

^2.- ibid.

^3.-

VI. The Special Period: Collapse and Survival (1991–2000)

^1.- Radoslav Yordanov; The Long Misunderstanding: Cuba's Economic Ties with the Soviet Bloc. Journal of Cold War Studies 2023; 25 (4): 24–52. doi: https://doi.org/10.1162/jcws_a_01169

^2.- Rodríguez, José Luis, and Margot Olavarria. “The Frontier of Change in the Cuban Economy.” Latin American Perspectives 41, no. 4 (2014): 66. http://www.jstor.org/stable/24573999.

^3.- ibid.

^4.- ibid., 67.

^5.- New York Times, Oct. 31, 2000.

^6.- de Albornoz SC. On a mission: how Cuba uses its doctors abroad. BMJ. 2006 Sep 2;333(7566):464. doi: 10.1136/bmj.333.7566.464. Erratum in: BMJ. 2006 Sep 30;333(7570):678. PMID: 16946334; PMCID: PMC1557950.

^{7.- https://www.miamiherald.com/news/nation-world/world/americas/cuba/article275601486.html}

^{8.- https://www.globaltimes.cn/page/202112/1243371.shtml}

^{VIII. Cuba Today and Cuba in the Past}

^{1.- https://www.theguardian.com/news/ng-interactive/2026/feb/15/cuba-crisis-oil-shortage-venezuela-donald-trump-havana}

^{2.- https://en.cibercuba.com/noticias/2025-10-05-u1-e208574-s27061-nid312340-innovacion-crisis-premian-cubanos-hacen-milagros}

^3.- https://www.reuters.com/markets/commodities/cuban-sugar-industry-demise-mirrors-food-crisis-2024-11-27/

4.- https://observacuba.org/8th-study-social-rights-cubans-live-extreme-poverty-plan-emigrate/

^{5.- https://www.weareceda.org/ceda-publications/cuban-migration-timeline}

By contrast Socrates argues that justice must be considered in all interactions, not just when the power dynamic is equal, making justice an intrinsic, not an instrumental good. Pragmatically speaking, Socrates argues that justice ought to be practised even when one has overwhelming power because the strong cannot merely do whatever they want with the weak. In fact, when they are unjust, they cannot act appropriately. This is because, to paraphrase, injustice makes the strong “incapable of working with itself” because it causes them to “not be of one mind”, which leads to “faction and falling-out”, ultimately culminating in them being “unable to do anything in concert with one another, as well as making them “its enemy and everything that is opposite to it.” (trans. Rowe, 352a, 352c). Acting just, by contrast, brings about “like-mindedness and friendship”, which makes him “wiser, better, and more capable of action.” (trans. Rowe, 351d, 352c). To illustrate what Socrates believes about injustice, I will return to the King/Peasant example once more. If the King is unjust towards the peasant, he is likely also unjust towards his guards, courtiers, and so on. Indeed, Socrates says a variant of this explicitly: “And if injustice occurs in one individual, my fine friend, surely it will not lose that capacity it has, or have it to any lesser degree?” (trans. Rowe, 351e). This is detrimental to his plans to expropriate half the peasants’ harvest, as he cannot do so himself. He needs to coordinate with the people he is being unjust to. However, his guards may then mutiny, make mistakes, or even fight among themselves, undermining the King’s ability to enforce top-down commands. If he makes a habit of being unjust, it becomes likely that the “faction and falling-out” makes him incapable of enforcing anything, essentially undermining his authority. Socrates also makes a normative appeal that the Athenians lack to the element of justice, namely that justice is suitable for the individual beyond his actions because it makes him happy. He starts with the premise that humans have a “soul,” a conscience of sorts, and that a “soul” can only serve its function correctly if it is in a good state. This is abstract, so an example I would give to illustrate this is biking gears. Gears have a specific function: to set the cycling cadence. If it is in a “bad state”, that is, if it is rusty or broken, it cannot do so. That seems to be how Socrates views the “soul”. The “bad state” for Socrates is when the “soul” plans and does things poorly, which he proved was acting in an unjust manner in his earlier pragmatic argument. Socrates concludes (paraphrased) that an unjust person is “miserable” and a just person “happy” (trans. Rowe, 354a), meaning that even if someone accrues material benefits from acting unjustly, they will still be worse off because their actions are soul-destroying.

I think that Socrates and intrinsic justice have the upper hand over strict realism. That is because the best argument against the Athenian notion of justice and in favour of Socrates’ is ironically, what happened to the Athenians themselves. The Athenians were unjust to the Melians, and they were unjust in turn to the Sicilians. Their injustice, as Socrates would say, led to “poor ruling and planning” of the city-state and its foreign policy. (trans. Rowe, 353e) It led them to underestimate the might of Syracuse and Sparta and falsely assume that citizens would easily acquiesce to Athenian ideas. It also led to poor coordination and infighting; for instance, Alcibiades, a prominent Athenian general is exiled for supposed sacrilege and serves Sparta instead, and his replacement, Nicias, was overly superstitious and made a series of poor decisions, such as postponing an Athenian retreat because of a solar eclipse. Their “lack of like-mindedness and friendship” (trans. Rowe 351d) as Socrates would say, leads them unable to achieve anything, and indeed, ultimately leads to their downfall. Also to paraphrase Socrates, they could achieve more if they were just with each other. (trans. Rowe, 351d). I also believe that Thucydides, the author of the Melian Dialogue (I say “author” because the dialogue is what he believed was said) intentionally tried to show the shortcomings of the Athenian theory. To substantiate this, Thucydides uses juxtaposition quite often; for instance, he juxtaposes the Periclean dialogue with the Athenian plague to contrast Pericles’s idealism with Athenian reality. In the same manner, he juxtaposes the Melian Dialogue immediately thereafter with the Sicilian Expedition, to show a consistency in the application of the Athenian theory and how it led to disastrous consequences. Secondly, Thucydides includes a particularly strong argument from the Melians foreshadowing the consequences, that being (paraphrased) if the Athenians demonstrate cruelty to Melos, then they will have set a precedent for cruelty that other powers will inflict on them. (trans. Mynott 380). And with the Thirty Tyrants gaining control of Athens the war and purging their opponents, this is exactly what happens. It just vindicates Socrates’s view that injustice makes the perpetrator its own enemy and the enemy of everyone else, which is self-destructive.

There is also something to be said about Socrates’s moral argument about justice, that being the idea that justice makes one happy, and injustice is soul-destroying no matter the material wealth one may accrue in doing so. First of all, it makes intuitive sense; as many people feel internal guilt or a lack of satisfaction when they achieve things through unethical means, such as cheating on a test. Second of all, there are real-world examples that prove Socrates right; consider the case of Joseph Stalin. Stalin had statues and hymns dedicated to him, had luxurious wine and food, and absolute control over the USSR. He had obtained this through brutal force, for instance wide-spread collectivisation, the Great Purges within the Communist Party, and sending dissenters to Gulag prisons. But he was, as Socrates would say, (paraphrased) “the opposite of blessed and happy” (trans. Rowe, 354a), because injustice brought (paraphrased) “factions, hatred and fighting” amongst himself (trans. Rowe 351d), rendering his soul in a bad state. He lived his final years in terror, keeping a revolver in his room, purging more aides, and even forbidding doctors from touching him; which ultimately led to his untimely demise. Stalin is perhaps the best example of someone having everything—fame, power, riches—except for a soul in a “good state”, as he lived and died in misery.

Sources:

Thucydides: The War of the Peloponnesians and the Athenians, Cambridge University Press, translated by Joshua Mynott

Plato, The Republic, trans. Christopher Rowe (New York: Penguin Classics), 2012.

All while its neighbour, the South, has one of the highest GDP/Capita in the world [4], is one of the most industrialized nations [5], has a world-famous high-tech industry and automotive sector, and giant conglomerates like LG and Lotte that are global competitors.

But it wasn’t always this way. In fact, during the 50s to 70s, the narrative was entirely reversed. In 1972, Harrison Salisbury called North Korea “A tremendous technical and industrial achievement” [6], and claimed it was “on a per Capita basis, the most intensively industrialized country in Asia, with the exception of Japan”. Hotels were up-to-date and retro [7], GDP exceeded the South 33-fold, and the economy even surpassed Maoist China’s, a nation thousands of times larger.

In contrast, Rhee and Park’s South was predicted by USAID specialists to become nothing more than a subsistence agriculture-based, low-tech, impoverished economy producing and selling traditional goods. [8[ That is also why at many times the US was far less of a patron than the Soviets and Chinese-they didn’t see any path forward for South Korea.

So what changed? Just what caused such a reversal of the fates? We know it can’t just be authoritarianism, as the South was also authoritarian. [9] We know it can’t be US sanctions, as the North had access to the entire West AND COMINTERN countries. [10] We know it can’t be the Korean War, because bumper harvests and economic growth happened directly after the war. [11] So what?

Historian Victor Cha posits that this problem is simultaneously endogenous and exogenous. In so that North Korea had massive structural issues that translated to bad policy, and that the events of donors like the Soviets exacerbated such issues... but before that, we need to look briefly at the Korean War and North Korea’s economic journey holistically.

II. Kim Il-Sung and the nascent, pre-war DPRK

August 1945, a portly man in his 30s, clad in full Soviet uniform, arrives in Wonsan. His name, you might recognize; Kim Il Sung, Commander of the 1st Korean Battallion of the 88th independent brigade of the Soviet Army.

Kim was set to be the supreme leader of the North Korean State, but he had spent most of his life outside Pyong’yang. He was born in a peasant family in Mangyungdae, but his parents fled due to the Japanese invasion, causing him to spend most of his childhood in present-day Jilin. [12]

He grew up a devout Christian but renounced it later in life. He joined Communist forces in China not because he necessarily agreed with Marx but rather because they had anti-Japanese colonial sentiments. In terms of fighting, he was fairly good, commanding guerilla forces against the Japanese to the point of having a bounty placed upon him, but the Japanese cracked down. Some Communists chose to fight in the Civil War, others fled to the USSR. Kim chose the latter. [13]

Skipping the specifics, Kim later got a prestigious title, and was kept in the Soviet Union along with his past guerilla comrades to prepare for a final battle against Japan along with other members of the Soviet Army. However, Japan’s defeat happened so quickly such a battle never happened. Therefore, most guerillas were sent home [14], but Kim was hand-picked by Stalin to head the nascent Soviet-backed government in the Northern demarcation line along the 38th parallel created through US-Soviet negotiations.

Why he was chosen, we may never know, but one must suspect that his actual military achievements, high-school education (pretty uncommon in Korea at the time), and camaraderie gained through serving played a major role. Of course, there are other hypotheses, like the idea that Stalin did it because he had no other option. Whatever the case, Kim was hardly under control of North Korea from 1945-48, as most operations were laser-guided by the Soviets. Soviet advisors, not Kim, drafted the land reform laws, the military police arrested all dissidents, and speeches were pre-read and approved. [15]

As a more extreme example, the Soviet generals discussed that the North Korean parliament would consist of exactly 231 members. [16] They also decided the exact distribution of seats and even ethnic composition. Such guidelines are still followed decades after the USSR’s collapsed. In the 1940s, land reform was pursued, par for the course. [17] Christians and religious individuals were persecuted and fled in a mass exodus, industries were nationalized, progressive taxes were established, councils and cooperatives were formed... [18] nothing too unusual if one would care to look at every other Marxist-Leninist state.

III. The War Itself

By 1948 8/15, the ROK was established in Seoul, and on 9/9, the DPRK in Pyongyang. Both nations considered themselves the true Korea. Both nations also talked about invading the other two to reunify. However, Seoul mostly preoccupied itself on spouting aggressive rhetoric as their ROK army was very poor, lacking tanks, heavy machinery, etc. [19] while the North, armed to the teeth with t-34’s and Soviet weaponry, were already meeting with Stalin.

Stalin at first was unenthusiastic-he didn’t want to confront the US directly. However, with Communists winning the civil war, and with the US being generally poor equipped, poor patrons and not extremely interested, Stalin became more receptive. In April 1950, Kim declared the plans for swift victory and two months later, things were ready. Kim began an offensive slightly earlier than Stalin or Mao anticipated-in June 25. The complacency of the Southern forces showed to be near-fatal; The South was steamrolled again and again, and were pushed to a tiny enclave in Pusan. [20]

The Americans, however began a massive intervention with the UN, and defeated the KPA at Pusan, and went on to counterattack by advancing thru Incheon in an amphibious war. They won the city, and proceeded to retake Seoul in a separate bloody conflict, causing the war to shift in the South’s favor. Within weeks, the North Korean forces were taken prisoner, killed, or fled to the Chinese border, causing China themselves to intervene-beginning a counterstrike. [21] From then on, brutal fighting remained for three years before in 1953 the new demarcation line was set (the DMZ), which was almost exactly identical to the prior one.

As BBC puts it [22]: The losses experienced by Britain (1,078) and the United States (37,000) are dwarfed by China’s and North Korea’s military fatalities, which number perhaps 1.5 million. Civilian and military losses in South Korea also exceeded one million. The deaths were severe, the consequences dire-but now, it is time to analyse the consequent economic period.

IV. Reform

Before the war, North Korea had a major advantage over South Korea. Japanese forces industrialized the region because of its strategic proximity to Manchuria [22.5] (editing error) . Thus, mines and processing plants of coal, iron, magnesium and zinc were built, nitrogen fertiliser plants were built [23]-hence why by 1945 the North possessed 80% of heavy industry capacity and 92% Electricity-generating capabilities.

So when the North nationalized industries, they had a better deal. In 1945, a power plant in Korea had lines run to the south, allowing the North to just cut off power. Unfortunately for the North, the war had changed that dynamic. For one, the separation meant the North’s market for semifinished goods were cut off-as was their market for food. Japanese personnel also fled through Kim’s redistributions as did entrepreneurs in general, creating brain drain [24]. Also, the industrial base was blown to bits in the war. Therefore, the focus was on the economy. And focus they did.

Kim had very generous patrons in Moscow and Beijing dedicated to his cause. As an example, in 1949, Kim went to Moscow and told Stalin a laundry list of his needs, that being:

machines, equipment, spare parts for industry, communications, transport, technical specialists, irrigation structures, hydroelectricity plants, metallurgical plants, steam engines, electric locomotives, textile machinery,

spare parts, a fifty-eight-kilometer (36-mi) railroad track, transport planes, pilots, teachers, Russian language instructors, automobiles, oil, and $50 million in credits. [25]

To all this Stalin simply said “fine”. And so it was done.

But the aid persisted post-war. In the years following the Cold War, Maoist China and the Soviet Union were practically North Korea’s only trade partners. in September of 1953 the USSR granted North Korea $250 million in aid, half to be used for the military, a quarter for light industry, and the final quarter for heavy industry. [26]

In December 1953 the Soviets cancelled all of North Korea’s war debt and eased the terms of repayment for pre–Korean War loans. China also chipped in, giving ~45 percent of North Korea’s total trade in the 1950s with an annual value of about $100 million. And it was estimated the North got ~500M loan credits from China. All in all total revenue from trade amassed to $1,65B. [27] All of this set the stage for temporal success.

V. The 1950s, 60s and early 70s

The 50s and 60s were the period North Korea experienced the most growth. It is no wonder then, that North Korea still seeks to emulate that bygone era today. In Pyongyang you can witness clean thoroughfares, hotels, public spaces, and towers/statues dedicated to Kim Il-Sung.

However, the style is oftentimes not modern and instead resembles that of the Soviet Union-giving it a distinctly “retro” look like a Soviet Bloc country stuck in the 60s. This is not accidental-it is a simulacrum of better times, back when the North and not the South was one of the more envied developing nations in Asia.

It’s not difficult to see why. Amongst the package the Soviet government gave (aside from aid money), the North Koreans received heavy industrial equipment, power plants, hydroelectric dams, electrified railroads, and irrigation systems from Soviet benefactors. [28]

They also imported currency by exporting gold, zinc, steel and rare earth materials to their benefactors. They focused tremendously on heavy industry (also to be discussed later) as demonstrated by names like the “ Hŭich’ŏn, Nagwŏn, and Pukch’ang Machine Factories’, or the Sŏngch’ŏn Lead Mine, Hŭngnam Chemical Fertilizer Plant”, etc. [29]

This industrialization was extremely fast and led to tremendous growth:

Until the 1960s, North Korea’s economy grew much faster than South Korea’s. Although Pyongyang was behind in total national output, it was ahead of Seoul in per capita national output, because of its smaller population relative to South Korea.

For example, in 1960 North Korea’s population was slightly over 10 million persons, while South Korea’s population was almost 25 million persons. Phenomenal annual economic growth rates of 30 percent and 21 percent during the Three-Year Plan of 1954-56 and the Five-Year Plan of 1957-60, respectively, were reported.

After claiming early fulfillment of the Five-Year Plan in 1959, North Korea officially designated 1960 a “buffer year”--a year of adjustment to restore balances among sectors before the next plan became effective in 1961.

Not surprisingly the same phenomenon recurred in subsequent plans. Because the Five-Year Plan was fulfilled early, it became a de facto four-year plan.”

-Andres Matlas Savada. [30]

In addition, it led to the increase in material conditions for the average citizen: it’s hard to believe but the North was extremely electrified, leagues ahead of the South once. In 1963, the country had reached 71 percent electrification, and by 1970 all households and villages were covered, wherein the South was barely starting to industrialize. [31]

In 1971, energy consumption in the North (1,326 kW)
was more than twice that of the South (521 kW) on a per capita basis, and this would persist to 1988. North Korea also had superior agriculture: They planned a modernization program of its irrigation, rural electrification, agricultural mechanization, and chemical fertilization programs. They also built hundreds of pumping stations for irrigation, and furthermore developed 1,700 reservoirs running water through a 40,000-kilometer (24,855 mi) irrigation network to feed 1.4 million hectares of cropland. The average calorie intake of North Koreans (3,000 calories/day) was higher than that of South Korea.

Rural electrification went from just 47 percent in 1953 up to 92 percent of all towns and villages in 1961. [32]

The DPRK also used high-quality fertilizer and attained bumper harvests, oftentimes for consecutive years while the South Koreans were stuck to traditional agricultural methods. In addition to an abundant load of poultry, pigs and livestock that provided millions of tons of eggs, North Korea also expanded its fisheries industry, going from
465,000 tons of fisheries equipment in 1960 to 1.14 million just a decade later.

In the 1970s North Korea exported locomotives to the Soviet Union, synthetics to China, machine tools to Europe, farm machinery and chemical fertilizers to Africa and Latin America. Much of the country’s industry was centered around the Hamhung, an extremely economically diverse area. [33] It also traded with the Soviet Bloc iron and steel, cement, minerals such as gold and magnesite, and textiles and clothing, and imported foodstuffs, energy, light machinery and equipment, and electronic goods. It also traded with plenty of non-Marxist-Leninist nations, such that in 1974 Communist Bloc nations only made up 51% of total trade.

North Korea was trading more with the West and the OECD, as well as Japan. This allowed them to import more hospital equipment, more goods for department stores, and better factory equipment.

This made North Korea one of the most prosperous post-war economies at the time, ahead of Hong Kong, China, South Korea, and Singapore and behind Japan and Soviet Russia, whom industrialized much earlier.

V. The South in that timeframe

It must be reiterated that the South was not as good as it could be in that time. As late as 1965, per capita income was only $88 a year (no, that is not a typo).

Syngman Rhee was a strongman in every sense of the word possible, executing dissidents and consolidating power to the point where student demonstrations happened frequently. [34] A fourth election won by him (when the maximum was two terms, and the election was obviously rigged) led to a violent series of protests that resulted in Rhee being exiled to Hawaii.

The new leader Chang Myǒn really wasn’t much better, not meeting the demands of the students or the unionists enough, and causing double-digit inflation. That combined with increased demands for negotiations with Pyongyang, a reunification sentiment (in the favor of the North) and US Soldiers pushing out led to a incredibly unfortunate combination of events. 13 months later, Park Chung-Hee, a military general violently overthrew the government for the second time in little more than a year. He inherited a pretty ragtag economy:

much of South Korean GNP was from the US, $12.6B total, estimated to be around half total of GDP, and most aid was for post-war reconstruction and sector growth, unlike the DPRK.

This is not to mention that 1.) Rhee’s government misallocated and procured much of the funds for political purposes, and 2.) refused to trade with Japan in rice and seaweed reserves because of anti-Japanese sentiment, and instead procured intensive import-substitution industrialization, which was not successful. [35]

Though urbanization and infrastructure increased South Korea was in a poor spot. Park Chung-Hee was sorely aware of this when advisor Yi Hu-rak traveled to North Korea for the first time in 1972 and was thoroughly impressed by Pyongyang’s at-the-time modern roads, infrastructure and monuments. He told Park Chung-Hee, drawing the worry of both. This was as Marxist-Leninism remained popular in the South, being seen as anti-imperialist, and many Koreans-in-exile who returned to the country after 1945 joined the Korean Communist Party in the South. [36]

In general communism was seen as a means to uplift an oppressed minority and provide better material conditions.

It seemed to Park that this was what was happening which discomforted him, to say the least.

VI: The Decline in the 80s-90s

Of course, this trend reversed in the mid 1970s. The specific reasons for the failure will be discussed much more thoroughly in the “five mistakes” section. But what’s important to note is that the North Korean semblance of progress eventually halted.

North Korea ended up defaulting with multiple countries, such as France, Britain, Czechia and its second seven-year plan (1978-84) was a failure:

“From all indications, the Second Seven-Year Plan was not successful. North Korea generally downplayed the accomplishments of the plan, and no other plan received less official fanfare.

It was officially claimed that the economy had grown at an annual rate of 8.8 percent during the plan, somewhat below the planned rate of 9.6 percent.

During the plan, the target annual output of 10 million tons of grains (cereals and pulses) was attained. However, by official admission, the targets of only five other commodities were fulfilled.” [37]

The South Korean government’s estimate placed North Korea’s GNP in 1991 at US$22.9 billion, or US$1,038 per capita. [38] This estimate of economic accomplishment pales next to South Korea’s GNP of US$237.9 billion with a per capita income of US$5,569 that same year.

North Korea’s GNP in 1991 showed a 5.2 percent decline over 1989, and preliminary indications were that the decline would continue. [39] In contrast, South Korea’s GNP grew by 9.3 percent and 8.4 percent, respectively, in 1990 and 1991. In addition to the general domestic and international decline, food rations generally declined, electric power shortages ran rampant, consumer goods frequently ran short, productivity ran short, Japanese machines were now decades old and thus depreciating,

Soviet-built factories were poorly maintained (more on that later), all the while heavy industry allocation was exorbitantly high. Meanwhile, the South was thriving at astronomically high rates. Through a guided policy of infant industry protection, strategic nationalization of banks and monetary institutions, and an export-targeted economy, combined with an emphasis on free trade and giant conglomerates responsible for electronics (LG), technology (Samsung), consumer goods (Lotte), and automobiles (Hyundai).... [40]

The South grew like never before. GDP growth reached 8,6%, which was twice as large as Japan and three times the United States, child mortality dropped 59%, and exports grew 312X from 1960 to 1977. Industries like shipbuilding became the second-largest in the world by the 80s, and steel production increased 14X from 1972 to 1982. The North, of course was painfully aware.

The North, unfortunately, resorted to terrorism and warmongering. In August 1976, North Korean soldiers bludgeoned to death with axes a team of American and Korean soldiers trimming poplar trees on the “Bridge of No Return” on the demarcation line.
Lt. Pak Choel of the DPRK came abruptly to a group of soldiers doing routine pruning, demanded they stop, which caused a fight, ultimately causing North Korean soldiers to outnumber the Americans, and used the axes the soldiers dropped to bludgeon them to death. [41] This sparked a brief international conflict.

Other incidents or near-incidents included an assassination attempt on Park’s successor, Chun Doo-hwan twice: one in Gabon, 1982 that was aborted last-minute and a bombing in Rangoon in 1983 that missed because his car was delayed in traffic but killed 21 more, and a bombing of Korean Air 858 over the Andaman Islands that killed 115 en route to Seoul. [42] North Korea also increased mass proliferation of nuclear weapons: As Victor Cha explains, In 1985, the North signed the Nuclear Non- proliferation Treaty (NPT) to gain access to more Soviet nuclear know-how.

In addition, Kim Jong-il inspected the Yongbyon nuclear facility and gave scientists and workers gifts, such as Japanese TV sets, as rewards. Two larger reactors—a fifty-megawatt and two-hundred-megawatt facility—were also under construction during this period. This diminished North Korea’s international reputation, and in addition, the Olympics were also hosted at Seoul. This was disastrous because it gave the South added geopolitical reputation. In 1990, South Korea normalized relationships with the Soviet Union, dealing the final crushing blow to the North Korean economy.

VII: The Arduous March

The North Korean planned a modicum of economic reforms in the 1980s, such as establishing pseudo-China-style Special Economic Zones in Unggi, Chongjin, and Najin, and encouraged minor entrepreneurship by only taxing businessmen 50% of their returns, so to encourage capital investment. [43]

The August Third People’s Consumer Goods Production Movement, named after the time where Kim Il-Sung visited a light industry factory, emphasized the necessity to invest more in consumer goods, and to increase small private farmholds and garden plots. [44] These schemes, unlike China’s liberalisation, were not followed up because they seemed to be political ploys. And they could not mitigate the disaster about to happen.

In the late 1980s, the USSR began to cut state aid to the DPRK, and with it, fertilizer, fuel and herbicide imports. This, along with depreciating technology, led to declining agricultural productivity, which also affected the public distribution system. [45]

The PDS in North Korea has fifty-one distinct categories of person, each with its own certain right to entitlements based on age, occupation, family background, regime loyalty, and the like. [46] But although not terrible in theory, distribution numbers fluctuated with reducing agricultural output. In the 1960s, for instance, white-collar workers were supposedly entitled to and received 700 grams (1.54 pounds) of food per day through the system. But this number gradually decreased to 608 grams (1.34
pounds) by 1973 and to 547 grams (1.2 pounds) by 1987. [47]

In 1992, the government initiated a “Let’s Eat Two Meals per Day” campaign to help deal with the food shortages that were crippling the PDS. It didn’t work. Private markets and illegal mutual aid networks sprang throughout the country, food riots were rampant, kkotjebi (the homeless) scavenged for any leftover food [48], the defector rate to China soared, and a group of people fled to Pyongyang, whom had to send a good deal back because it was dealing with shortages of its own.

By 1997 the PDS, was estimated to be supplying just 6 percent of the population, and by 1998 it wasn’t supplying anyone for large portions of the year. The decline was also exacerbated by horrible weather:

On a particular day in North Hwanghae Province, 877 mm (34.5 inches) of precipitation was recorded in just seven hours, and the flooding was followed by periods of severe drought in 1996 and 1997, and a typhoon in August 1997. [49]

This not only wiped out existing crops but also destroyed an estimated 85 percent of the country’s hydroelectric capacity and ravaged its coal-power capabilities. Also, the regime trying to keep up with demand by overusing fertilizers and chemicals, and by continuous cropping, eroded the little arable land it had, and also abused arable land further by massively importing goats to graze.

Whatever the cause, hundreds of thousands of North Koreans starved to death in less than a decade...which surely prognosticated worse things to come.

The End

Bibliography:

[1] - Talmadge, Eric (17 November 2014). “china’s $350m bridge gets scant North Korean welcome”. Associated Press – via Aiken Standard.

[2] - “285K North Korean children suffer stunted growth due to malnutrition: Report.” NK News, 15 Nov. 2023, www.nknews.org/2023/05/285k-north-korean-children-suffer-stunted-growth-due-to-malnutrition-report/.

[3] - “North Korea plagued by one of world’s highest tuberculosis rates: WHO data.” NK News, 15 Nov. 2025, www.nknews.org/2024/10/north-korea-plagued-by-one-of-worlds-highest-tuberculosis-rates-who-data/.

[4] - “South Korea (PRK) | The Observatory of Economic Complexity.” Harvard Growth Lab, n.d., atlas.hks.harvard.edu/countries/410/None.

[5] - “United States Department of Commerce. “South Korea - Market Overview.” International Trade Administration, U.S. Department of Commerce, n.d., www.trade.gov/country-commercial-guides/south-korea-market-overview.”
[6] - Harrison E. Salisbury, To Peking and Beyond—A Report on the New Asia (New York: Pedigree, 1973), p. 175.
[7]- https://www.hotelsofnorthkorea.com/

[8]- Seth, Michael J. “An Unpromising Recovery: South Korea’s Post-Korean War Economic Development: 1953-1961.” Education About Asia, Association for Asian Studies, www.asianstudies.org/publications/eaa/archives/an-unpromising-recovery-south-koreas-post-korean-war-economic-development-1953-1961/.

[9]- Quee-Young Kim, From Protest to Change of Regime: The 4–19 Revolt and The Fall of the Rhee Regime in South Korea, Social Forces, Volume 74, Issue 4, June 1996, Pages 1179–1208, https://doi.org/10.1093/sf/74.4.1179

[10]- Chŏng Kyusŏp, Puk Han wegyoŭi ŏje wa onŭl [North Korea Foreign Relations Yesterday and Today] (Seoul: Ilsinsa, 1977), p. 121.

[11]- Joseph S. Chung, “The Economy,” in Andrea Matles Savada, ed., North Korea: A Country Study (Washington, D.C.: Library of Congress, 1994).

[12] - Cha, Victor D. The Impossible State: North Korea, Past and Future. New York: PublicAffairs, 2012 (Ch. 3)

[13]- ibid.

[14]- ibid.

[15[ - Lankov, A. (2013). The Real North Korea: Life and Politics in the Failed Stalinist Utopia. Oxford University Press., pg. 7

[16] - ibid.

[17] - ibid., also pg. 6 and 241

[18] - ibid.

[19] - Ohn, Chang-Il. “The South Korean Military and the Korean War.” International Journal of Korean Studies, vol. 5, no. 1, Spring/Summer 2001, pp. 35-54.

[20] - Appleman, Roy E. (1998). South to the Naktong, North to the Yalu: United States Army in the Korean War. Washington, D.C.: Department of the Army. ISBN 978-0-16-001918-0.

[21] - Chen, Jian. “Revolutionary Commitments and Security Concerns: New China Faces the World.” China’s Road to the Korean War: The Making of the Sino-American Confrontation, Columbia University Press, 1994, ciaotest.cc.columbia.edu/book/chen/chen01.html.

[22]- https://www.bbc.co.uk/history/worldwars/coldwar/korea_hickey_01.shtml

[22.5] - https://www.jstor.org/stable/43295690

[23] - ibid.

[24] - Kongdan Oh and Ralph C. Hassig, North Korea: Through the Looking Glass (Washington, D.C.: Brookings Institution Press, 2000), p. 48.

[25] - “Stalin’s Meeting with Kim Il Sung,” March 5, 1949, Archive of the Foreign Policy of the Russian Federation, fond 059a, opis 5a, delo 3, papka 11, listy 10–20. Cold War International History Project, Woodrow Wilson Center.

[26] - Cha, Victor D. The Impossible State: North Korea, Past and Future. New York: PublicAffairs, 2012 (Ch. 4)

[27]- Eui Gak Hwang, The Korean Economies: A Comparison of North and South (New York: Oxford University Press, 1993), p. 204.

[28]- Cha, Victor D. The Impossible State: North Korea, Past and Future. New York: PublicAffairs, 2012 (Ch. 3)

[29]- ibid. (Ch. 4)

[30]- North Korea; A country study. Andrea Matles Savada, Library of Congress, 1993

[31]- Energy consumption is measured as primary energy use (before transformation to other end-use fuels) in kilograms of oil equivalent, per capita. “World Development Indicators,” Worldbank.org (2011), http://data.worldbank.org/data-catalog/world-development-indicators

[32]- Joseph S. Chung, “The Economy,” in Andrea Matles Savada, ed., North Korea: A Country Study (Washington, D.C.: Library of Congress, 1994).

[33] https://factsanddetails.com/korea/North_Korea/Economics_and_Agriculture_2/entry-7421.html

[34] - https://guides.loc.gov/south-korean-democratization-movement/april-19-revolution

[35] - Choi, Sang-oh“, Foreign Aid and Import-substitution Industrialization,”in Dae-geun Lee (ed.), New Korean Economic History: From the Late Joseon Period to the High-growth Period of the 20th Century, Na-nam, 2005, pp.349-375 (in Korean).

[36] - The real North Korea life and politics in the failed Stalinist utopia / Andrei Lankov. Description: Oxford : Oxford University Press, [2013], pg.8

[37] - North Korea; A country study. Andrea Matles Savada, Library of Congress, 1993

[38] - “North Korea - ECONOMIC DEVELOPMENT.” Country Studies, Federal Research Division, Library of Congress, n.d., countrystudies.us/north-korea/46.htm.

[39] - ibid.

[40]- https://doi.org/10.1016/j.jmoneco.2025.103779

[41] - Cha, Victor D. The Impossible State: North Korea, Past and Future. New York: PublicAffairs, 2012 (Ch. 2)

[42]- https://en.wikipedia.org/wiki/Korean_Air_Flight_858

[43] - https://factsanddetails.com/korea/North_Korea/Economics_and_Agriculture_2/entry-7421.html#chapter-8

[44] - North Korea; A country study. Andrea Matles Savada, Library of Congress, 1993

[45]- “Let them eat rice: North Korea’s public distribution system.” NK News, 15 Nov. 2015, www.nknews.org/2015/10/let-them-eat-rice-north-koreas-public-distribution-system/.

[46] -Haggard and Noland, Famine in North Korea, p. 55.

[47] -Cha, Victor D. The Impossible State: North Korea, Past and Future. New York: PublicAffairs, 2012 (Ch. 4)

[48] - https://www.tandfonline.com/doi/full/10.1080/03068374.2014.951564

[49] - Hazel Smith, Hungry for Peace, p. 67.

The State is a monopoly on violence. But this begs of the questions of how the State attained such a monopoly, the mediums it gamified to do so, and opposition as well as pre-statal forms of social organization.

Here, I analyze the history of beekeeping, particularly beekeeping structures and use its progressive simplification and planned order to posit that State control was intensified through reducing societal structures to pre-planned forms of organization more advantageous for the State to plan and consequently exploit.

I demonstrate such a real-world example using measurements in France; how they perpetually varied before being standardized under the French Revolution.

Although this is the material of the foreword and the first chapter of James Scott's Seeing Like A State, it is not a direct copy: far more information about beekeeping is added, personal comments are made, and background information is added for a more comprehensive view.

Beekeeping; an (abridged) history

Premodern forms of honey collecting were tremendously inefficient and violent. The hive was crudely broken into, the entire colony had to be driven off, and honeycombs once broken into were torn and smashed with eggs, larvae, and pupae inside.

They were then either eaten as-is or honey would be separated through a sieve or basket.

This was incredibly disgusting, but also necessary-the building patterns of wild bees were irregular, intricate and variant-making any systemic extraction method impossible. Therefore, honey in the past wasn’t widely available as it was today.

As a demonstration of its scarcity, Honey was oftentimes used as barter between tribes and societies like Ancient Malta used honey as currency.The Promised Land in the Bible is described as the land of “milk and honey”. In Genesis 43:11 Honey is described as a gift as well as myrrh, balm, nuts and almonds. The examples go on and on.

Systemization advanced in the Medieval Ages, when the "skep" form of beehive-the stereotypical circular honeycomb-took prominence.

Still, it was not orderly enough-the bees were constricted and thus a certain method could be implemented, but it was still inefficient. The beekeeper had to burn sulfur to kill off the bees, and getting honey and wax required destroying the hive-even if the quality managed to stay unchanged.

Some advancements over the straw hive were made-"Count de la Bourdonnaye’s hives are made of ftraw, divided into two parts, which are placed one over the other. Each of thefe parts is twelve Paris inches* in diameter in the infide, and eleven inches high; fo that, when joined, they make an hive twenty-two inches in height..."

- Thomas Wildman... but bee science and by extension beekeeping was systemized a great deal with the work of François Huber.

Huber's "book hive" allowed individuals to funnel through each comb, contained in frames like pages of a book. This way, bees could be monitored and had sufficient liberty to associate.

Reverend Langstroth, a Pennsylvanian native learned about Huber’s method and bought a leaf hive himself. The major issue was that such frames were rigid and so it was still hard to obtain honey without being intrusive. Also, bees would seal frames together with wax or propolis, making matters worse.

So, Langstroth innovated upon the idea. He deducted that when his bees had 1/4 < x in < 3/8 in to move around they would not build burr comb nor propolis and they could freely move around in the hive. This is called “bee space”.

Thus he created the Langstroth hive, composed of the bottom board (where bees enter and exit), an entrance reducer which controls ventilation, deep-hive bodies (boxes of comb) wherein the lower deep is the brood chamber where larvae are stored and upper deep the food chamber, where food is stored.

Frames were also removable and movable so honey can be extracted without damaging hives, and allow for inspection of a particular aspect—I.e. the queen’s health. With Petro Prokopovych’s invention of the queen excluder, the brood chambers and honey are separated, allowing the queen to lay eggs in a certain aspect.

All of this is very good for the modern beekeeper. Wax cells being arranged neatly in vertical frames allow for simple, non intrusive extraction of honey, wax and propolis and also make hives legible and orderly such that the beekeeper can inspect the condition of the queen, judge honey production, enlarge or contract the hive, move it, and extract surpluses or just-sufficient moments for new harvests.

Measurements and how they came to be

Now you might be wondering, “this is a very good history of beekeeping. But what does it have to do with the state?” Well, think of it like this. What were beehives like before beekeepers standardized it? Sporadic, intricate, and most importantly difficult to expropriate. Technique that works for one pattern does not work for another.

Thus, there was all-around an overarching trend towards planning simplification. Designs were planned to be comprehensible and universal so expropriation would be easier and honeybee’s would act in a matter that would repeatedly facilitate such expropriation.

This is where we begin to see parallels with the State. My description in detail of beekeeping advances is not random information—they are to show an analogy. The jagged hives in the beginning could not lead to a standard extraction method, so circular skeps were designed. Skeps were inefficient in the long-run because they were too invasive, so leaf hives were designed. And so on and so forth.

Convenience enables control. Would you have an easier time baking a cake if the ingredients were scattered around in different areas and heights or if they were arranged simply in a misé en place? I think you would say the latter. As such, the State has, like every beekeeper, worked high and low to bring society to its ultimate ideal-uniformity.

Measurements are the example we will primarily discuss, particularly that in French society. Let us start with a fact-a bushel of corn equals 56 pounds. You might notice that no matter where it is, that is true. If you take the bushel to France, it equals 56 pounds. If you take it to China, it equals 56 pounds. Etc, etc. So if the State wanted to tax a bushel of corn, there would be no dispute. They would take 56 pounds of corn.

This is not accidental. Just like the modern-day rectangular beehive is a result of centuries of planning for simplicity, so were measurements. Early measurements were based on body parts, so they lacked specificity. You hear phrases like "within earshot", or "cartload", "basketload", etc.

What is an earshot? Someone's unaided voice. A cartload? A full cart. A basketload? You get the idea. A cart, basket, etc. varied between each region though so they were temporal and geographically variant. Even units fixed by the crown were subject to regional disputes.

For example, La pinte Du Roi (not equivalent to the English pint) was fixed to 48 French cubic inches (0,931 litres) but in Seine-en-Montagne was 1,99 litres and also varied on commodity.

The aune, used for measuring the length of cloth was dependent on the material used, even though it was fixed at 46,24 inches and was meant to be the national form of the English cubit (ell). Measurements were also oftentimes fixed to local knowledge and relational.

If you ask an individual today, "how long is it to point X"? They may say "10 minutes". But if you asked someone back then-presuming bus stops were existent-they could say "the time it takes to salt a chicken".

Everyone within the village would know how long the local chicken would be salted-and adjust their query to that. And best of all, they were extremely local-the method Place A and Place B use to create chicken more often than not varied.

The particularity of medieval measurements could best be shown in cultivating farmland. To say to a farmer he is leasing XYZ acres of land serves hardly any purpose to him. It gives him no idea on how much toil he has to expedite, the conditions of the land, what he has to do to it, etc.

Therefore, a unit of land would in the medieval days be described by the area able to be ploughed by a horse or ox- (morgen) which of course would vary by the terrain, soil quality, commodities and availability of technology.

This consequently also affected the type of work needed which were also delineated in units (homée, bechée, fauchée).

(Bechée refers to the amount of land that could be dug by a spade in one day, and fauchée the amount of meadow-land "mowable" in a day; notice these were very much area-dependent).

The amount of maps created based on all of these units would be immense and non-comparable. One would also have to delineate the landscape according to units of work and yield, type of soil, accessibility, and ability to provide subsistence, all of which are specific, variant, and contextual.

They would also vary by each place and even change over time, as say, a unit needed for tilling land would change as technology progressed. This would make it impossible or at least, extremely difficult for the State to aggregate it into a clear statistical form that could make policy decisions.

Measurements as a means to an end were not predicated upon achieving accuracy, though. A good amount were marked distinctly by power relations.

As James Scott writes about in Seeing Like A State, a major example was in feudal rents. I typically don't quote long passages but I feel like Scott's section is paramount in understanding this relationship and can sum it up better than I.

Noble and clerical claimants often found it difficult to increase feudal dues directly; the levels set for various charges were the result of long struggle, and even a small increase above the custom ary level was viewed as a threatening breach of tradition.

Adjusting the measure, however, represented a roundabout way of achieving the same end. The local lord might, for example, lend grain to peasants in sm aller baskets and insist on repayment in larger baskets.

He might surreptitiously or even boldly enlarge the size of the grain sacks accepted for milling (a monopoly of the domain lord) and reduce the size of the sacks used for measuring out flour; he might also collect feudal dues in larger baskets and pay wages in kind in smaller baskets. (Scott, 27-28).

Even when units like the bushel were agreed upon, things were 'messy'. There was discussion upon the size of the basket, how baskets could be trimmed, the ideal material, etc... all in the context of feudal rents. Local standards were sometimes literally set in stone and/or kept in town halls.

How grain was poured, what grain was stored in, the duration of storage, etc. were bitter political controversies. Some grain was said to require storage in a "heap" (a large pile), whilst others levelling (a stable, circular top), and this had importance in that feudal lords could increase taxes for specific forms (i.e. a mark-up for heaped grain). Additional conflicts could happen if it was customary to present 'struck' grain and heaped grain was taxed.

The necessity of Standardization

Because standards were tied to local and particular needs, because they represented particularities within agricultural technology and geography, and because they were the result of inter-dynamic class struggles, it presented a giant issue for State standardization.

As aforementioned, attempts to standardize units like the pinte and aune ended up in failure because regions just adjusted from necessity. To successfully standardize, the monarchy had to comprehend the customs of each local area and make adjustments when said customs changed: which was unannounced and random.

This was not good for the State and its maintenance of social relations. In a world where many things were perpetually in shortfall, food was the most egregious. Food shortages meant social upheaval-and they still do today, see countries like Venezuela, Cuba and South Africa.

However, the State had to grope in the dark in determining a 'shortage' or the lack thereof, because without universal measurements, they could not compare commodity prices, monitor markets or regulate food.

It was also difficult determining taxation, the main revenue for the State, or military supplies, as mentioned above the breach of customs would cause political conflict. Non-politically, economic policy was also a nightmare because production was not standardized, so extreme under or overproduction had to happen.

The "beekeepers" (State) had to collect honey (revenue) so it could survive. The issue is the "beehives" (society) they were dealing with were overly complex, jagged-shaped. Attempts to structuralize them led to gross inefficiencies. They thus had to engineer the "beehive" for convenience.

Just like the advancements made in beehives, though, such a form of "engineering" was cumbersome and long. Aristocrats and clergymen were unwilling to surrender any form of power, and people were unwilling to give up their traditions. The continuous particularity in the face of centralization was a hard proof of that.

The process of standardizing

There are three things commonly attributed to the "metric revolution" as a result; 1. Market exchange, 2. Enlightenment Philosophy favouring certain measures, and 3. Napoleonic State-building creating a rigid and strict societal hierarchy.

The profusion of capitalist exchange in society meant that "market exchange" no longer meant barter in-kind in a localized area. It meant mass-production through long chains of production and distribution between buyers and sellers who did not know each other. In short, personalization was killed off.

(When you buy a good at a Walmart, for instance, do you think: oh wow, John Q and Robert S. produced this good at New Mexico? Chances are, you do not.)

This made it far easier, and far more practical when recording ledgers and transactions, to use universal, agreed-upon units. As goods became produced in larger volume, and were shipped in increasingly long-distance markets, it became more and more practical to use such units.

State circumstance also played a major role. A good deal of feudal owners earned profits through manipulating units (as described above) and thus when it came to the Estates General, a good deal of the Third Estate called for equal measures. To no one's surprise, the nobility did not object.

The metre to France was thus as important to the nation as say, creating an official language. Just like Catalan, Basque, Flemish, Occitan etc. were subsumed for a "pure" French with a distinct identity, "basketful's", "handful's", etc. were subsumed for a "pure" meter with national identity and commercial applicability.

Such measures were said to be better in facilitating the grain trade between France and foreign nations, systemize a tax code (which shouldn't be surprising) and systemizing a standard for land productivity. Of course, it was also for nationalistic purposes, seeking to create a rational unit for commerce.

If you've been keeping up with the theme, you can probably guess the following section: the attempt to universalize measurements was but another attempt to universalize French identity. Legal systems, culture, customs, etc. were different towards each local sphere.

This meant that "equality before the law" did not exist. People could not be categorized, nor abstracted-their identity was contingent on a very particular area they lived in. This was an obstacle to those who believed in the pure, ideal citizen: Enlightenment-era thinkers.

Enlightenment-era thinkers wanted a uniform law, measure, culture and belief. They wanted to standardize not just measures, but also institutions, market regulations, inheritances, taxation, etc. They were eliminating spontaneous forms of social organization and replaced it with designed, pre-thought versions.

Thus the ideal of a gigantic collection of small communities died-and with it, the idea of relative autonomy. There would be one French citizen with similar struggles and conditions. A simpler individual to control, to influence, to inflict policy on, etc. with a particular method in propaganda and education.

Statesmen themselves acknowledged this:

"The uniformity of customs, viewpoints, and principles of action will, inevitably, lead to a greater community of habits and predispositions."

What followed is the neat, orderly format of French society we see today. It is due to the generalizations made in that era that one can envision an uniform "French" image of berets, baguettes, the Eiffel Tower, and etc. And that French people learn "French" and not Basque, Catalan etc. and use the meter and not other localized form of exchange.

Simply put, any identity "French"men had in the past-any affinity to clergymen, any unique religious practise, any special form of governance-was lost, lost to the clean, simple and manufactured "French" identity.

Conclusion

State control has been a near-omniscient force upon society for nearly the entirety of mankind. However, as Scott posits in Against the Grain, it was not a very welcome invention, for as early as the Agricultural Revolution, people were forced from individual, self-associating communities to bureaucratic, rigidly hierarchical and exploitative States.

It is also true that State control has not existed as a constancy within history, however-the amount of State control varies within region and time period. In unbounded areas like Zomia where free-flowing disenchanted workers, farmers, indigenous individuals etc. live there is no State intervention, but in areas like, say, North Korea, people are all bounded to the will of the State.

Thus, it is imperative to analyze how certain areas went from little State intervention to total control-not just as a historical point of interest, but also as a sociological tool, to essentially figure out how to reduce the power of State influence.

The former is what this post has done, analyze the means of gamification the State has taken-the latter is for theory and for analyzing the counter-examples, where State power has not prevailed. Those are for another post, and are not entirely 'historical' in so that they induce value judgements.

Until then, à bientôt.

Bibliography

1. Nouvelles observations sur les abeilles, Huber, François.

2. Apis Mellifica - Or, The Poison Of The Honey-Bee, C.W. Wolf,

3. perfectbee.com/beekeeping-art… 5 December 2016.

4. Langstroth, L.L. A Practical Treatise on the Hive and Honey-Bee, 1878

5. worldhistory.org/article/684/fo…

6. blog.geohoney.com/ancient-connec…

7. Exodus 3:17- The Bible.

8. Genesis 43:11- The Bible.

9. A Treatise on the Management of Bees, Thomas Wildman

10.beekeeping.com.ua/html_en/prokop…

11.ia801301.us.archive.org/29/items/cu319… Langstroth, L.L. On the Honey-Bee. 1919

12. etymonline.com/word/handful

13.en.wikipedia.org/wiki/Tradition…

14.Witold Kula, Measures and Men, trans. R. Szreter (Princeton: Princeton

University Press, 1986).

15. J. L. Heilbron, "The Measure of Enlightenment,"

16. Emmanuel LeRoi Ladurie and Joseph Gay, Tithe and Agrarian H story from the Fourteenth Century to the Nineteenth Century: An Essay in Comparative History, trans.

Susan Burke (Cambridge: Cambridge University Press, 1982),

17. Ken Alder, "A Revolution Made to Measure: The Political Economy of the Metric System in France,”

18.Gianfranco Poggi, The Development of the Modem State: A Sociological Introduction.

19. Seeing Like A State, James Scott.

20. Against the Grain, James Scott.

21. Debt, the first 5000 years, David Graeber.

22. The Art of Not Being Governed, James Scott.