Open Questions: Creative Destruction

Notice: Today's post is about economics and political science, two subjects I have no extensive formal training in.

I read a lot of books, both fiction and non-fiction.  Although sometimes that means I read about topics that don't relate to each other at all, other times the topics relate to each other in surprising ways.  Today I want to pull some ideas from the following books, and tie them all to ideas about political economy:

  • Gang Leader for a Day by Sudhir Venkatesh
  • The World Until Yesterday by Jared Diamond
  • Once Upon a Time in Russia by Ben Mezrich

At first glance it may not seem these three books have much in common.  The plight of the inner-city poor, development of primitive human societies, and the reign of the Russian Oligarchs are pretty disparate topics.  But there's an idea running through all of them, as I read the books, that comes across clearly: societies organize themselves in response to their environment.

In the book The World Until Yesterday, I got the distinct impression that some of the societal structures we now think of as primitive were themselves a vast improvement on the prior social norms.  In some cases, a new form of government would come along and displace other, more brutal, ways of solving a problem.  For example, in many small bands it was common to seek vengeance by getting your family together and going after the offending party.  If that didn't work, because the accused fled, you went after their family or extended family.  This could all spiral out of control into multiple rounds of revenge killings being traded back and forth between feuding people.

These structures may seem emergent, but over time they become formalized into something the people can reliably navigate.  In the book there was a great example of this when a man accidentally ran over a little boy and killed him.  The boy ran out into the middle of the street from behind a delivery truck, right in front of the oncoming vehicle.  The drive had no time to react and felt horrible about what happened next.

The boy's family understood and didn't dispute any of the details of the accident.  Even so, the driver basically had to go into hiding, work through an intermediary, and negotiate a gift of 'sorry money' to appease the extended family who might hunt him down and kill him or a member of his family over the event.  If this all sounds crazy to you, I recommend reading the book.  It helps you understand how you have to order society when you don't have a reliable police force and rule of law, or even any form of centralized monopoly on violence.

The book describes how many of the people who accepted rule by a state government - when it came along - did so happily because it stopped the killing.  In other words, we might see something like a dictatorship as inherently evil, but even that is a vast improvement over vigilante justice in a pseudo-anarchical system of government.  Although I don't have time to go over all types of government that have existed, I suspect something similar may have happened in other cases as well.  Where hindsight tells us some ancient form of government was 'inherently bad', a more situational understanding might change our perspective.  Something may be worse than what we enjoy today, but maybe the only time we should call it 'bad' or 'evil' is when there was a clear choice between two systems of governance and the worse option was chosen for nefarious ends.  Society can't be expected to implement a system of government that hasn't been invented yet.

This is the same as scoffing at old episodes of Saved by the Bell, where Zack pulls out a huge brick of a cell phone, extending the antenna an extra three feet in order to make a call.  Audiences at the time saw it as a really cool gadget for him to have.  Now it feels like satire.  And while it's clearly dumb for anyone today to carry around a phone heavier than a laptop, we would never consider that people who used such phones in the past were dumb.  Obviously, they didn't use better phones because they didn't have anything better.  They could certainly imagine smaller phones, but being able to imagine something is not the same as having it.  And if you brought back a fancy new smartphone to the 1980's, it wouldn't work on their networks anyway, because the infrastructure required to make it work wasn't in place yet.  From the cell towers to the internet, none of them could handle the demands a smartphone requires in order to communicate with the outside world.  That nice new phone would be worse at being able to actually communicate with other people than the old technology.

If we take that analogy and apply it to economic and political systems, the story of Once Upon a Time in Russia becomes very relevant.  After the Berlin Wall fell in the late '80's, Russia acquiesced to the rest of the world and decided to 'try capitalism'.  When they asked the experts for advice about how to implement this 'capitalism' thing, they were told to stop trying to control markets.  Let them be free and market forces would work the problems out on their own.

The result was the rise of the Russian Oligarchs.  These were men who became billionaires by exploiting loopholes in the system.  Since capitalism meant non-intervention, if a private businessman wanted to control the market by leveraging his wealth to destroy his competition, or collude with competitors to set prices, they could do so.  It didn't produce anything like the prosperity capitalism had created in other countries, and actively led to massive resentment of the rich by the poor.

This resentment is different from "I'm mad because you have more money than I do and there's a vague story I can tell about how maybe your riches might come at my expense."  This is direct: "I'm mad because your company requires me to get on a wait list to buy a car - from you because you quashed imports and competitors - while your friends get discount prices on their second car because they 'know a guy'.  I'm poorer because of your corruption, which actively makes you rich at my expense."  It was this kind of blatant corruption that led to the rise of Putin.  One of Putin's enduring appeals to Russians was how he started by putting the oligarchs in their place, restricting their power, and bringing a sense that a fair system could be built over the rubble of the 90's economic disaster.

I think it was the host of the EconTalk podcast who once described an experience he had in Russia in the 90's.  After landing in Russia, he went to his hotel to check in.

Hotel: We don't have any rooms available.
Patron: Oh, actually I made a reservation in advance.  You should have a room for me.
Hotel: We gave your room away.
Patron: Why?  I had a reservation!  You're supposed to reserve my room.
Hotel: Yes, you had a reservation.  But someone else came who had money.  He paid us and we gave him our last open room.

I found the Russian situation fascinating, as it shows how capitalism isn't just the idea of free markets.  To work well, capitalism requires cultural, legal, and governmental institutions to work.  It requires a sense of reputational currency, where every transaction has a potential reputational cost or benefit.  More importantly, it requires things like the Rule of Law (where laws apply to everyone, and are not negotiable by appealing to discretionary decision-makers), an independent judiciary, and respect for private property.  Without these institutions, you don't get capitalism.  You get the Russian system from the 90's, which is often described as a kleptocracy.

Like the smartphone brought back to the 80's, Russian capitalism couldn't connect if the infrastructure wasn't there.  It didn't work as well as less 'economically advanced' solutions.  If you went back to the 80's and wanted to make a call, you'd use their phones instead of the smartphone in your pocket.  In the same way, a society without the institutions required for capitalism to work will likewise quickly turn to a more functional system.

Does Communism Actually Work?

I want to say a word here about communism, and not just because we've been talking about Russia.  I'll warn you in advance that whatever your position on communism this will probably be an uncomfortable aside.  I think it'll be worth it, but it won't solve any kind of debate about whether communism is good/bad, inevitable/doomed, etc.  If I'm successful, at most it will shift the debate to arguing about different terms.

Many opponents of communism look back at the experiments of the 20th century and say, "Of course it didn't work; communism is fundamentally opposed to basic human nature."  I used to believe that way, and I'm not sure there's any way to disprove that hypothesis other than by establishing a stable and prosperous communist state.  Of course, since we've never done so, it's impossible to disprove that statement, such that anyone who attempts to establish a communist state could very well be dooming society to relive the tragedies of so many failed states in the past.

Most proponents of communism I talk to insist that the failed systems of the past were implemented incorrectly.  When I press them for what was done incorrectly, and what needs to be changed to make it successful I'm usually told the problem was with the personalities involved.  This has always been unsatisfying to me, as it suggests nothing was really learned from the last disaster other than, "when people are perfect we'll get this to work," which isn't a glowing endorsement of the idea.

But what if there's another way to look at it?  If it's true that any system of government requires specific institutions to be successful, we should apply this same understanding to communism.  Certainly the Russian experience demonstrated that capitalism requires certain institutions or it won't work well.  We might look back to attempts at establishing communism through this lens and say, "Of course it didn't work, they didn't have the institutions required for making it work."

As I said above, this doesn't solve the debate, but maybe it changes it a little.  I imagine a conversation continuing along these lines:

Anti: I oppose instituting a communist system of government because we clearly don't have the institutions in place to make it work.
Pro: Okay, so let's try some of these systems out and get it working.  If it's just a mater of building institutions then let's roll up our sleeves and start building.
Anti:  We don't even know what those might be!  And if we're wrong, we risk destroying the perfectly-good system we already have.
Pro: That system is flawed as well.  We should be building a better system.
Anti: We don't know if the system you're considering is better, though.  Especially since we don't know what kind of society we'll have to build to make it work.
Pro: Agreed, we don't know.  I want to find out.
Anti: I don't.

The debate, once again, boils down to the open question of whether it's actually possible to create a communist form of government.  However, hopefully this lens changes the calculus a bit even if it gets us to roughly the same place.  This lens offers an additional possible explanation for why communism hasn't been successful in the past: we didn't have certain unknown supporting institutions in place.  Without those institutions we'll never get there, and there's no way to know in advance what they might be or if we've built them all.

On the anti-communism side, the argument that communism should just be forgotten because 'we tried it and it didn't work' is insufficient.  This lens offers the possibility that the communists were right all along in that 'we just didn't do it the right way', even if it rejects their standard definition of how failure was achieved under former systems.  We may not know what the Secret Sauce is, but if we did manage to figure it out the future might well be defined by communism, not capitalism.

The Specialization Paradox

And what's wrong with capitalism?  My libertarian friends tell a story of immense human prosperity that was created by capitalism over the past 200+ years.  And they're not wrong.  If we compare capitalism to all the systems that came before it, we should celebrate this major achievement.  But can we do better?  Can we at least look at the massive cell phone in our hand and imagine something smaller?

One of the fundamental tenets of capitalism is also one of its major flaws.  Adam Smith talked about specialization and trade as essential elements to creating a society that has a greater cornucopia of goods and services than any one person could produce on their own just by shifting their focus from one task to another.  Specialization means one person deciding to make brooms only brooms.  They then realize that by doing nothing else they can spend the time to get the right, durable fibers and the best branches.  Eventually specialization leads some people to manufacture just the broom handle, then just the grip, then just the calibration on the machine that produces parts for another machine that glues the grip on the handle of the broom.  Trade means that person can still feed their family and take advantage of all the other great things people are making, because they don't have to barter only with people who might need their calibration services.

Proponents of the free market rightly point out the amazing benefits society gets, not just from specialization, but from allowing people to reap the benefits of increasing that specialization.  Say I can figure out a way to automatically manufacture hamburgers at a rate of 10,000 burgers/hr., and my new machine makes sure the pickles are evenly distributed on the sandwich (and it never forgets to hold the mustard, but add extra mayo).  I've not only given society higher-quality burgers they don't have to reassemble after they get them, I've given us all back a couple minutes of time we used to spend waiting around for our burgers.  It may seem small on an individual scale, but it adds up to huge benefits in the aggregate; especially when other innovations layer on top of mine.

This sounds like the path to utopia, where eventually we have machines making everything we could ever need, and the only problem we face is how to distribute it all.  But there's a problem created by specialization, and it's a problem that has plagued capitalism from the very beginning.  What happens to the people who are displaced by specialization?  In the case of a burger machine, the answer is usually, "they'll find another job doing something else."  Maybe this is a bit heartless, but since it's an entry-level job that doesn't require a lot of skill it's often dismissed as an inevitable cost of the system.  What's worse: an entry-level burger-flipping job disappearing, or the cessation of the economic miracle that has lifted billions of people out of subsistence-level poverty?

But the next round of specialization doesn't care how much work you've put into training yourself for the last round of specialization.  Let's look at radiology as an example.  This is a highly specialized profession, where you look at CT, MRI, and other medical scans to determine things like whether a patient has cancer or not.  If you want to become a radiologist today you'll need to complete high school, a 4-5 year undergraduate degree (40% of Americans), a 4-year medical degree (<1% of Americans), and a 4-year residency in radiology.  You worked hard to prove yourself over your peers, borrowed a lot of money, and it all paid off.  You now make $300,000 or more a year.  You've specialized much more than your fellow countrymen, with more than a decade of extra education and training.

But the next round of specialization marches on.  Some researchers have used machine-learning techniques to help read radiology scans.  They're much more accurate than radiologists, and take a fraction of a second to read each scan.  They're consistent in a way humans aren't, allowing better comparisons scan-to-scan so oncologists have a better idea of whether a therapy is working.  Finally, there's no chance of biased results.

Maybe the future isn't that radiologists will all disappear, but it's likely this new technique will allow a single radiologist to read more scans, much more quickly and accurately, than a team of radiologists used to.  Very soon, we'll need far fewer radiologists, but get better results.

What happens to the 45 year-old radiologist who is no longer needed?  He's in the middle of his career.  He can't start over.  He has at least 20 years to go before he retires, except now specialization has put him out of work entirely.  This same story has been told throughout the centuries, with career after career eliminated, leaving the people inside them in an unexpected lurch.  Yesterday it was coopers and wheelwrights, then it was dockworkers, then typists, and tomorrow it will be radiologists and long-haul truckers.  This will continue, because it's part of the system.  It's both a feature and a bug.  And nobody has ever figured out a good answer to the question, "What do you do with someone whose livelihood you just eliminated?"

None of the standard answers are satisfying.  You could keep the employee, or stop the next round of specialization, but given that this is exactly how the riches of modern society were produced to begin with this is a command to condemn future generations in exchange for avoiding temporary pain today.  We would say we'll pay out benefits to those who are displaced, but we can't afford to pay them what they used to produce since that's the whole point of replacing them.  And besides, getting a paycheck because you're not useful anymore isn't the same thing as getting paid for the contributions society used to value.  What we do instead is ignore the problem, hoping we'll just muddle through as always.  And we probably will muddle through, but remember that all those displaced people can vote.  They will vote.

So capitalism has a fundamental problem.  Specialization, which makes capitalism possible, also creates a class of people with a natural incentive to oppose future specialization.  This is, fundamentally, an unsolved problem in political economy.  One that some people are trying to solve by implementing communism - itself an unsolved problem.  The thing about unsolved problems is that there's no promise you'll ever find a solution, because there's no promise that a solution exists.

If capitalism has this built-in instability, how do we explain its current dominance and long-term survival?  I say long-term, because although it's clearly not as old as other economic systems it hasn't collapsed under its own weight.  Here's where I'd like to bring in the last book I mentioned above, Gang Leader for a Day. 

The book chronicles what life was like in the Chicago projects in the 1990's.  There is lots of great detail in the book, which is at times unintentionally humorous as you get a sociologist's dispassionate perspective of life in the 'hood.  One element of the book that stood out to me was how whenever regular institutions failed the local citizenry would improvise a new pseudo-system of governance.  For example, since they couldn't rely on police protection, many local businesses would pay 'protection money' to local gang leaders.  This was partly extortion money (failure to pay their premiums risked extralegal action from the same person they were paying to keep them safe), but it was also partly a transaction.  If someone attacked the store, the owner could challenge the protection he was getting from the gang leader.  The gang leader would then need to pursue vigilante justice for the store owner in order to restore confidence.  The relationship is complicated, but if you squint a little it starts to look similar to the gang leader providing police protection and charging taxes directly for his services.  (Or maybe it's a shadow of the old Roman Patronage system hitting the streets again.)

This same type of emergent order resurfaced in a dozen places throughout the book.  The society the people built wasn't the same kind of republican democracy we enjoy in most of the US, but it managed to cobble together many basic services, and occasionally cable TV in one apartment that everyone would cram into.  Although they couldn't enforce laws against prostitution, the residents who wished to discourage the practice would instruct their sons to go pee in the stairwells use of the structures as a place of 'business'.

The impression I got from the book was that these inner-city neighborhoods weren't poor because of citizen negligence.  They were poor because they could no longer rely on institutions required to promote a more prosperous civil order (not all, just those like the ones in the book).  In essence, they represented a nested warlord system of governance.  They were enclaves of feudalism embedded inside our republic.

I'm not making any claims about what caused those institutions to collapse, nor am I saying that modern capitalist societies will also collapse.  I'm saying that people will tend to build using the resources at their disposal.  The system of government they're able to rise to is as much a product of the institutions they build and maintain together as it is the product of a clever theory of economics.


  1. I did not find your aside about communism "uncomfortable" at all. Rather that's a very interesting idea. I'm reasonably sure that the world is doomed (in the sense that the relative peace and prosperity we've enjoyed since WWII will suffer a major interruption) but I do give some chance (may 20%?) that Pinker is correct and things are just going to continue to get more awesome. Your point about communism filled in one missing puzzle piece for how that *might* happen. Bravo.

    1. I remember reading some old French and/or Russian novels from the 1800's, where the rational main characters sometimes lament something about "kids these days" and how they think everything is figured out through the new age of Reason. Meanwhile the experienced older generation knows that the good old way of things is more important and the only stable way to order society.

      I think this dynamic is fairly stable. The old guard has a lot invested in status quo and wants it to continue. The young upstarts have no investments at all, and want to break into the established order even if it means breaking things.

      This leads to one overly optimistic group that's prone to predicting that we're on the verge of Utopia, if only we have the courage to get out there and grab it.

      They're opposed by the pessimistic group who are constantly predicting doomsday. In some sense, both groups can point to developments and say they're right. If you keep predicting an earthquake every day for decades eventually you'll be right. Same with if you keep predicting the next big company to make it big.

      I think there's some benefit to both approaches, locked in their long run steady-state conflict. But I think there's also a benefit to the competition between these two viewpoints. One helps propel us into the future, while the other keeps us prepared as we do so.


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