Monday, June 4, 2018

Evolution of the market economy



First page of The Wealth of Nations (1776) (Wikicommons). Adam Smith mainly wished to understand why the market economy worked in his time, not why it didn't work in earlier times.



In his newly published book, Cognitive Capitalism, Heiner Rindermann argues that the market economy requires a population that thinks and behaves in certain ways. Without these mental and behavioral qualities, the production and exchange of wealth is handicapped. This factor, argues Rindermann, best explains why some countries are poor and others rich ... even when both share the same economic and legal system.

This argument would have seemed self-evident half a century ago. Since then, however, the trend on both the left and the right has been to treat humans as entities who can be freely substituted for each other. 

Yet this was not the view of Adam Smith, the founder of economics. In The Theory of Moral Sentiments, he noted that people do differ mentally and behaviorally, particularly in two key qualities:

The qualities most useful to ourselves are, first of all, superior reason and understanding, by which we are capable of discerning the remote consequences of all our actions, and of foreseeing the advantage or detriment which is likely to result from them: and secondly, self-command, by which we are enabled to abstain from present pleasure or to endure present pain, in order to obtain a greater pleasure or to avoid a greater pain in some future time. In the union of those two qualities consists the virtue of prudence, of all the virtues that which is most useful to the individual. The Theory of Moral Sentiments, Part IV, Chapter I

Today, these two qualities are called "intelligence" and "time preference." A third one, mentioned in The Wealth of Nations (1776), is the willingness to refrain from using violence as a means to gain wealth or status:

In those unfortunate countries, indeed, where men are continually afraid of the violence of their superiors, they frequently bury and conceal a great part of their stock, in order to have it always at hand to carry with them to some place of safety, in case of their being threatened with any of those disasters to which they consider themselves as at all times exposed. This is said to be a common practice in Turkey, in Indostan, and, I believe, in most other governments of Asia. It seems to have been a common practice among our ancestors during the violence of the feudal government. The Wealth of Nations, Book I, Chapter I

When the German and Scythian nations overran the western provinces of the Roman empire, the confusions which followed so great a revolution lasted for several centuries. The rapine and violence which the barbarians exercised against the ancient inhabitants interrupted the commerce between the towns and the country. The towns were deserted, and the country was left uncultivated, and the western provinces of Europe, which had enjoyed a considerable degree of opulence under the Roman empire, sunk into the lowest state of poverty and barbarism. The Wealth of Nations, Book III, Chapter II

This theme runs through The Wealth of Nations, albeit peripherally. The author repeatedly uses the terms "savage" (18 times), "barbarous" (36 times), and "civilized" (58 times). This theme also comes up in his private correspondence when he discusses Western Europe in an earlier and more barbarous age. The threat to life and property had a chilling effect on trade:

Travelling, from the disorders of the Country, must have been extremely dangerous, and consequently very rare. Few people, therefor, could propose to live by entertaining travellers; and consequently there would be few or no inns. Travellers would have be obliged to have recourse to the hospitality of private families: in the same manner as in all other barbarous Countries. The Correspondence of Adam Smith, p. 142

Adam Smith studied the workings of a market economy in its full flowering. Centuries earlier it had been much more rudimentary, and elsewhere it was still nonexistent. He knew this but failed to mention these constraints in his model of a self-generating, self-regulating market. Nor did he explain the long and painful evolution of a peaceful society where people understand the future consequences of their actions and prefer long-term gain even at the price of short-term pain.

Why this oversight? One reason is that he mainly wished to understand why the market economy worked in his time, not why it didn't in earlier times. A second reason was more ideological. He believed that this kind of economy had taken so long to develop in his country and was still nonexistent elsewhere because of ignorance: most people misunderstood how markets work and their benefits. If only they could be made to understand …

In reality, people had understood markets and their benefits since the dawn of history, even to the point of protecting them with walls and armed guards. Nonetheless, these islands of economic activity remained limited in space and time; there were plenty of markets but no market economy. Most economic activity was non-monetized and done within the family or for the local lord. The average person simply didn’t think and behave in a way that would let the market mechanism encompass the production and exchange of all wealth.

Adam Smith understood that certain qualities of mind and behavior had kept the market economy from developing, especially low foresight, high time preference, and high propensity for violence. But he attributed these qualities to lack of education. Like other Enlightenment thinkers, he believed that education would level all differences:

The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education. The Wealth of Nations, Book I, Chapter II

Adam Smith lived in a society where the lower classes largely failed to reproduce and were steadily replaced, generation after generation, by the downwardly mobile cast-offs of the middle and upper classes (Clark 2007). The result was a shift toward middle-class values: thrift, foresight, and a rational mindset. By his time, most of the people he met were either middle class or impoverished descendants of the middle class.

This demographic shift may have caused the Enlightenment itself, which was not so much a time of new ideas as one of existing ideas being understood and appreciated by more people, as if the "smart fraction" of society had increased. Such an increase is possible even with a modest increase in mean IQ because the relationship between the two is nonlinear: "constant increments in mean IQ will not produce constant increments in the smart fraction" (La Griffe du Lion 2002). If mean IQ increases, the smart fraction will initially increase at a faster pace. If the level defining the smart fraction remains the same, this trend will reverse once mean IQ reaches a certain level. The same increase in mean IQ will then produce a smaller increase in the smart fraction.

The most intelligent members of society have a disproportionate impact on its development. Rindermann and Thompson (2011) summarize the literature on this subject, including their own research. Patent rates, GDP, and average annual GDP growth correlate much more with the smart fraction of a population than with the mean IQ of a population. "In concrete numbers, an increase of 1 IQ point in the intellectual class raises the average GDP by $468 U.S., whereas an increase of 1 IQ point in the cognitive ability of the mean raises average GDP by $229 U.S."

The Enlightenment may thus have been the most visible sign of a less dramatic change in the general population. Using soft data and Jean Piaget's theory of cognitive development, Rindermann (2018) argues that mean IQ was steadily rising in Western Europe throughout late medieval and post-medieval times. Previously, the average person had never developed beyond the preoperational mental stage, i.e., good ability to learn language and norms but limited ability to reason because of cognitive egocentrism, anthropomorphism, finalism, and animism (Rindermann 2018, p. 49). From the sixteenth century onward, more and more people reached the stage of operational thinking, i.e., the average person was better able to understand probability, cause and effect, and the perspective of another person, whether real or hypothetical (Rindermann 2018, pp. 86-87).

This cognitive shift seems to have been driven by the nascent middle class, essentially artisans who produced for a growing and increasingly dynamic market. A similar but stronger trend may also explain the rise in Ashkenazi intelligence during the same period (Frost 2007)


Conclusion

Adam Smith lived in a society where most people, whatever their station in life, had more or less the same genetic potential because they shared the same origins of ethnicity and class. He could be forgiven for thinking that a philosopher and a common street porter had the same inborn talents. But what's our excuse?

Heiner Rindermann has picked up where Adam Smith left off by seeking to describe the market economy as more than a mathematical model. It is in fact a radically new way of organizing society that has largely replaced the older one of family, kinfolk, and community. Going from one to the other required profound changes to mind and behavior:

Wealth in modern times is the result of cognitive capitalism. Cognitive capitalism refers to the idea that the cognitive ability of society as a whole, and of its cognitive elite in particular, is the prerequisite for the development of technological progress, for the historic development of modern society with its increasing cognitive demands and complexity, and for the wealth-furthering norms and institutions that form the core of the capitalist system (economic freedom, free markets, rule of law, property rights). (Rindermann and Thompson 2011)


References

Clark, G. (2007). A Farewell to Alms. A Brief Economic History of the World, Princeton University Press, Princeton and Oxford.

Frost, P. (2007). Natural selection in proto-industrial Europe. Evo and Proud, November 16

La Griffe du Lion. (2002). The Smart Fraction Theory of IQ and the Wealth of Nations, March, 4(1)
http://www.lagriffedulion.f2s.com/sft.htm  

Rindermann, H. (2018). Cognitive Capitalism. Human Capital and the Wellbeing of Nations. Cambridge University Press.

Rindermann, H. and J. Thompson. (2011). Cognitive Capitalism: The Effect of Cognitive Ability on Wealth, as Mediated Through Scientific Achievement and Economic Freedom, Psychological Science 22(6) 754 -763.
http://alphanmanas.com/wp-content/uploads/alphanmanas_post_1863_754.full.pdf

Smith, A. (1759). The Theory of Moral Sentiments.

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.
https://en.wikipedia.org/wiki/The_Theory_of_Moral_Sentiments

Smith, A. (1987). The Correspondence of Adam Smith, edited by E.C. Mossner and I.S. Ross, Oxford: Clarendon Press
https://books.google.ca/books?id=NFoubpls2NIC&dq=adam+smith+critics&lr=&source=gbs_navlinks_s

23 comments:

Luke Lea said...

I have a quibble with Rinderman's piece. He suggests that a society benefits from a high smart fraction because smarter people create more patentable inventions. However, most modern technological inventions benefit people all around the world irrespective of the country in which the inventor lived. So the emphasis should be on the non-exportable things smart people do, which has more to be with their intelligent behavior I would imagine than the things they invent.

Luke Lea said...

BTW, Rinderman's thesis provides a strong argument against encouraging the immigration of highly talented people into the United States from poor countries overseas: it retards their development.

sean said...

Intelligent workers tend to organise. American manufacturing was plagued with industrial disputes before the owners began the importation of foreign labour, which was what made the factory system really profitable. I wonder if blockchain and surveillance technology can make low trust societies more viable.

Wanda said...

Sean wrote:

American manufacturing was plagued with industrial disputes before the owners began the importation of foreign labour

Is that really true? The violent labor unrest from the 1870s through the 1890s seems to have been fueled by immigrant labor, in particular Irish (the Molly McGuires, for example) and very especially German. Germans were high profile in the so-called 8-hour strikes of 1872 and the great labor uprising of 1886 (Haymarket Square, in particular), as well as the 1894 Pullman strike.
Illinois governor John Peter Altgeld, a German-born immigrant, elected in 1894 thanks in large part to widespread support among newly naturalized German-Americans, saw his political career collapse after he pardoned the three surviving men convicted of crimes in the Haymarket riots (Fielden, Neebe, and Schwab -- note those surnames!) in 1893, and interceded on behalf of striking workers at the Pullman factory in 1894. His political opponents rallied native-born Americans against him as a foreign labor radical and subversive.
Then later we have the role of immigrant Jews and Italians in labor unrest, anarchism and communism.

http://www.eiu.edu/past_tracker/images/IndustryLabor_1886MeetingFlyer2p135.jpg

Wanda said...

I wrote:

Illinois governor John Peter Altgeld, a German-born immigrant, elected in 1894

Correction: 1892

Sean said...

Britain had the first industrial disputes in world history.Peter had a post in which he talked about the how better health care for the working class led to multi generational communites with a sense of having interests opposed to the employers, the result was cohesive labour organisation. Business has a horror of unions, and anything that might lead to unions. When Production went Mass. I suppose the change from family based workshops to factories of indigenous workers still left the basis for community and thus cohesion in organised labour. With the working class not dying off as quick, foreign workers were useful inasmuch they acted as a wedge to fragment the workforce.

Peter Frost said...

"Rinderman ... suggests that a society benefits from a high smart fraction because smarter people create more patentable inventions."

Not exactly. He was using the number of patentable inventions as a yardstick for measuring the creativity of a society. We benefit from creative people in a large number of ways, most of which are hard to quantify.

"Rinderman's thesis provides a strong argument against encouraging the immigration of highly talented people into the United States from poor countries overseas: it retards their development."

He calls this the "paradox" of international migration: it leads, on average, to IQ declines both in sending countries and in receiving countries. This is because emigrants tend to be more intelligent, on average, than other people of their home countries while being less intelligent, on average, than other people of their host countries.

"American manufacturing was plagued with industrial disputes before the owners began the importation of foreign labour."

Initially, foreign labour tends to be more compliant, but things change very quickly. If you import low-wage workers into a high-cost society, those workers will soon become very unhappy. I've seen this with my own eyes. Here, in Canada, employers will talk about how "awesome" immigrants are because they will put up with wages and working conditions that most Canadians wouldn't tolerate. When I talk with immigrant workers, I hear another story: they put up with those terrible conditions in the expectation that they will eventually move up and get their piece of the Canadian dream, i.e., a nice home in a nice neighborhood with nice amenities. Increasingly, that isn't happening ... even though we're in a period of low unemployment (which normally should produce higher wages).

"Peter had a post in which he talked about the how better health care for the working class led to multi generational communites with a sense of having interests opposed to the employers"

As I remember it (I don't have that post at hand), I was talking about the paternalistic capitalism of the late 19th and early 20th centuries. Employers would try to make employees feel as if they were part of a family, with company baseball teams and social activities. This was when employers began offering their employees medical insurance (which was later taken over by the State). In many ways this paternalistic capitalism heralded the welfare state.

Sean said...

Some people don't pay their debts, and move from place to place and partner to partner. Economic migrants are pursuing a defector or freeride strategy when they leave their own country, I would not expect them to suddenly alter when they get to a better situation, however intelligent they are. Business likes people who do not care about the wider community, they are a reserve army of labour and political support. Maybe more one day.


Adam Ferguson, who with his idea about the division of labour is more the father of modern economic theory than his contemporary Smith (Ferguson (also an influence on Marx) thought technological advance was the engine of growth rather than capital accumulation. Given that many occupation not done by immigrants are on the way out (Robots will eliminate 6% of all US jobs by 2021, report says
Employees in fields such as customer service and transportation face a ‘disruptive tidal wave’ of automation in the not-too-distant future
) one wonders what the popular reaction will be. There will be growth and better welfare for the surplus population, but will they accept their new station in life relative to an overclass. Ferguson said that capitalism makes men "dastardly" though.

Roy Barzilai said...

https://testosteronecivilization.com/sex-wars/

Testosterone structures society in dominance hierarchies, driving groups to unite in common goals for territorial ambitions: to form nation states with secure borders, to establish law and order under the banner of individual rights and liberty, which the West has experienced since the Enlightenment. However, its collapse propels group conflict and tribal warfare for global conquest and submission under communist or fascist ideologies, such as the Dark Age religious doctrines of Islamic jihad, driven by sexual repression, depression, and aggression.

Anonymous said...

I regret seeing you more towards IQ in your posts. Did you ever respond to Chanda Chisala's posts about West African intelligence? He rebutted your Igbo explanation pretty thoroughly and I don't think you responded since:

http://www.unz.com/article/closing-the-black-white-iq-gap-debate-part-3/

Peter Frost said...

For the most part, Chanda was demolishing a straw man. I didn't argue that the Igbo were the only sub-Saharan group that has high or relatively high IQ:

"Why assume that sub-Saharan Africa is a monolith whose diverse populations have evolved in exactly the same way? We know that human genetic evolution didn’t slow down with the coming of culture. It actually sped up (Hawks et al., 2007). For the most part, we humans have diversified genetically in response to differences in cultural environment and not to differences in natural environment. It is therefore plausible that the different cultures of Africa have had different effects on the gene pools of their respective populations.
I can hear the answer to my question: “You guys are the ones who think all blacks are alike!” Well, that isn’t what I think."

http://www.unz.com/pfrost/the-jews-of-west-africa/

Similarly, Chanda concedes that the Igbo stand out in terms of intellectual excellence:

"The Igbo are quite a dominant group on many measures of intellectual achievement in Nigeria, as Frost correctly noted and as many other scholars, including Thomas Sowell, have stated, so how can they have a much smaller population than the Yoruba in the UK if the immigration system is highly selective? Their dominance in Nigeria is especially conspicuous at the very top levels of intellectual performance, the most selective levels. I did my own research on this question by simply looking at the names of the students who represented Nigeria at the (extremely selective) 2014 International Math Olympiads.

Chigozie Henry Aniobi – Igbo
Oluwasanya Oluwafemi Awe – Yoruba
Mmesomachi Nwachukwu – Igbo
Chilolum Christopher Uzoma Nwigwe – Ibibio
Princewill Chukwuemeka – Igbo
Okoroafor Akanimoh – Igbo
Boniface Udombeh – Igbo

This is an astonishing over-representation of Igbos, as they are only 18 percent of the Nigerian population, which is smaller than the Yoruba. (We will not be surprised if the Nigerian government begins to regulate tribal composition in future math Olympiads since they are quite obsessed with tribal affirmative action.)

Secondly, one anonymous commenter on James Thompson’s first response article looked at the list of the twelve richest Nigerians and observed that Igbo names represent 50% of the list!
There is also some data that shows that within Nigeria, the Igbo acceptance rate into Nigerian universities is much higher than every other group including the Yoruba."

http://www.unz.com/article/closing-the-black-white-iq-gap-debate-part-3/

So the question becomes: if we use Igbo students as a benchmark, why do Yoruba students do better in UK schools than they do in Nigerian schools? One reason is selection effects. Another reason is that contemporary UK schools give marks not only for success on tests but also for less IQ-loaded measures of excellence, i.e., attendance in class, completion of assignments on time, etc.

Peter Frost said...

Chanda goes on to "refute" arguments I have never made, i.e., like the curious idea that intelligence correlates with moral behavior, however one defines that term:

"Frost’s belief in the genetic uniqueness of the Igbos, whom he apparently believes are intellectually like Whites or better, meant that he also had to whitewash their cultural behavior. Thus he also grants a moral superiority to the Igbos, above the other lesser tribes who are supposedly responsible for the corruption of Nigeria. The real picture is more complex than that, of course. The most educated tribes (both Igbos and Yorubas) in fact feature prominently in reports of high level fraud and corruption within and outside Nigeria."

He may be referring to this statement I made:

"Independence came to Nigeria in 1960, and with it growing disillusionment among many Igbo, particularly with the perceived instability and corruption of the political process."

But I also wrote:

"Today, there is growing recognition in Nigeria that the Igbo can and should be given more political and economic power, but there is still a fear that they will use such power selfishly and not for the good of all Nigerians."

http://www.unz.com/pfrost/the-jews-of-west-africa/

For the record: I don't believe that high IQ individuals are necessarily moral and high-minded. It's possible to be very intelligent while also being selfish, predatory, and even sociopathic. I'm not Piagetian in a cross-cultural sense.

Anonymous said...

BTW, Rinderman's thesis provides a strong argument against encouraging the immigration of highly talented people into the United States from poor countries overseas: it retards their development.

According to many economists today, the development of countries is not an end in itself, but a means of maximizing utility, so if labor mobility promotes global utility more than attempts to develop semi-autarkic countries does, then labor mobility is preferred.

Peter Frost said...

Labor productivity is not due solely to a worker’s ability to do a job. Nor is it due solely to an employer’s ability to organize and manage that job. It is also due to the mental and behavioral environment in which the work is done and in which the resulting goods or services are sold. Productivity is many times greater in a high-trust society than in a low-trust one. You don’t have to check and double-check to make sure the work is done properly. Nor do you have to make sure the good or service is what it claims to be.
Therefore, when workers are transferred from a low-trust society to a high-trust one, their productivity is greatly increased. This is the main argument for labor mobility. The same job can be done better in a First World society than in a Third World one. It’s not because of the soil in the First World. It’s because of the mental and behavioral characteristics of the people who live there.

So why not let Third World workers move to the First World? Their productivity will increase, employers will benefit from cheaper labor, and the global economy as a whole will benefit. It’s a win-win, isn’t it?

Well, no. If you fill up a high-trust society with people from low-trust societies, you’ll end up with …. yet another low-trust society. You’ll kill the goose that laid the golden egg. A society is merely the sum total of the people within it.

Sean said...

Paul Collier says that you cannot get life insurance in Nigeria because corrupt doctors will write a fake death certificate. Chanda might asks himself why Nigeria has not developed more productive capacity. Paul Samuelson's theory is currently received wisdom, and he says that if a country has sufficient capital and labour, but does not manufacture advanced products, then that is only because relatively speaking it does not pay the country to make those things. The idea that some countries are technologically and organizationally incapable of advanced production is foreign to Western ideology. What about Russian IQ?; Russia's economy has not increased in real terms since the 90's while China's has quadrupled in the same period.

Anonymous said...

So why not let Third World workers move to the First World? Their productivity will increase, employers will benefit from cheaper labor, and the global economy as a whole will benefit. It’s a win-win, isn’t it?

Well, no. If you fill up a high-trust society with people from low-trust societies, you’ll end up with …. yet another low-trust society. You’ll kill the goose that laid the golden egg. A society is merely the sum total of the people within it.


According to many economists today, utility is what they want to maximize, and utility is subject to diminishing marginal returns. That is, the utility derived from an additional dollar unit declines as you have more dollars. The gain in utility or marginal utility is much greater for someone who has very few dollars. So even if labor productivity decreased, utility could increase because of diminishing marginal utility. The same argument is used to justify redistributive progressive taxation.

Peter Frost said...

"So even if labor productivity decreased, utility could increase because of diminishing marginal utility."

This argument holds true only in the short run. Mass immigration will reduce productivity in Western societies, and thus their standard of living, but this reduction will be more than offset by the sharp rise in productivity and standard of living of the migrants.

In the long term, however, even that benefit will evaporate. The ability of the West to produce wealth will collapse because this wealth-producing ability is due not to a natural resource (like oil in the case of many countries) but to a human resource, namely a pacified high-trust social environment. When that goes, the wealth likewise will go. At that point, migrants will stop coming because conditions in the West will approximate those of their home countries.

If I may add, the term "many economists" doesn't impress me. Very few economists are self-employed. They generally work for organizations that wish to promote a certain economic/political agenda.

Anonymous said...

In the long term, however, even that benefit will evaporate. The ability of the West to produce wealth will collapse because this wealth-producing ability is due not to a natural resource (like oil in the case of many countries) but to a human resource, namely a pacified high-trust social environment. When that goes, the wealth likewise will go. At that point, migrants will stop coming because conditions in the West will approximate those of their home countries.

Economists call this "factor price equalization", which raises global utility. Thus from their perspective, it's not a problem.

The point of citing economists in general isn't to impress, but to show that trying to argue for certain political and social policies in the economists' own terms is a fool's errand. Moreover, ultimately it's not economics that drives people to oppose immigration and the like.

Peter Frost said...

"Factor price equalization" refers to the leveling downwards of prices (in this case, the price of labor in Western countries) when all factors of production are allowed to circulate freely. That is something else entirely.

I'm talking here about the transformation of a high-trust culture into a low-trust culture, and the resulting increase in transaction costs. If you really want to use obscure economic jargon, you can use the term "cultural externalities." Plain English is still better.

You shouldn't try to win an argument by misusing obscure terminology and hoping no one will notice. Yes, economists do it all the time, but that's no excuse.

Anonymous said...

I used "factor price equalization" because that's what economists use and it's a more specific term. "Cultural externalities" and "high trust" and "low trust" are more vague and used to mean different things by different people.

Factor price equalization is what you're describing when you write, "At that point, migrants will stop coming because conditions in the West will approximate those of their home countries."

I disagree with the economists' views I'm presenting here. I don't think their views can be countered by accepting the premises of mainstream economics, however.

Peter Frost said...

Yes, economists use that term, but it refers to a different scenario, i.e., in a fully open global economy, wages will tend to equalize throughout the world (as well as other factors of production). For Western economies, there will be levelling downwards of wages. The corollary will be a levelling upwards of wages in the rest of the world. Since Western workers are fewer in number, there will be a lot more levelling downwards than levelling upwards.

An argument can be made for that scenario in the sense that the average person will be (somewhat) better off. In the scenario that I describe, everyone will be worse off, since much of the production in this world is done in high-trust societies. If those societies are liquidated, everyone will be worse off.

No moral argument can be made for the second scenario, either in terms of raising global utility or in terms of improving the wellbeing of Western societies.

Anonymous said...

Economists already make the argument for open borders that destroy high trust societies. It's the same argument they make for redistributive taxation and it's based on the diminishing marginal utility.

Sean said...

The Italians have gone populist and democratically signaled they not going to take any more migrants in return for Germany financially supporting them (and the French banks who made bad loans to Italy). Macron complained about Italy's “cynicism and irresponsibility”. In a democratic system the people just will not stand for having these sacrifices imposed on them by their own elite in the name of economic rationality. Brits had poles in their country not only suppressing wages but claiming full British welfare for their family back in Poland, hence Brexit. The nation state perspective is essential for understanding, but few seem to understand it.