Friday, October 31, 2008

Byways and Tribal Capitalism

I have been indulging in leisure again. For nine days I backpacked along the ancient Ridgeway, the superhighway of Neolithic Britain and a trade route into the modern era. Starting about 6,000 years ago, (roughly the time Sarah Palin imagines Adam and Eve holding hands in a newly wrought Eden) the Britons occupying the plains either side of the Ridgeway were settling the river valleys to raise crops and herd animals. As the crops and herds increased, and the Iron Age and Bronze Age opened trading opportunities in new technologies, these Britons took strides that set them and their heirs on the road to market capitalism.

The road they followed is the road I walked – the Ridgeway Trail.

The Ridgeway is a geographic feature of Jurassic and Corallian limestone, an 87 mile long spine of rocky downs running through Southern England from Ivinghoe Beacon in Buckinghamshire to Overton Hill, near Avebury in Wiltshire. It was linked by other routes to ports in the South and on the Channel. The Ridgeway was admirably suited as a commercial highway in early times because the limestone was porous, draining rain away from the high pathway to the plains below. When the tracks below were impassable mires of mud for man and beast, the Ridgeway remained a quick and easy road from one region to another. Being high, with excellent views down the slopes and over the plains, it was also possible to detect and defend against brigands who might beset unwary travellers, with ring forts provided to secure travellers and goods along the route.

Neolithic Britons were secure enough to form large agrarian tribes, planting and harvesting grains and herding sheep. They were prosperous enough to have excess grain and sheep to trade for iron and bronze tools and gold jewellery and other valuable trade goods. They were economically advanced enough to have specialisation, with certain tribes and regions known for their skill in producing iron or bronze or pottery. They were politically advanced enough to have organised militias, with a ‘warrior aristocracy’. They were wise enough to promote collective security and agree byways for safe passage with neighbouring tribes to enable commerce along the Ridgeway.

The Ridgeway reminded me every day we walked along that it is infrastructure, transparency and mutually-enforced rules which secure and grow markets for productive capitalism. Infrastructure provides a common framework for trade to take place. Transparency allows those trading in markets to evaluate each other’s wares and defend against brigands who might wish to ambush the unwary. Rules of safe conduct and fair dealing promote the confidence which encourages those with excess production to bring it to market to trade for their present and future needs. Mutual enforcement ensures that the temptation of any tribe to loot its neighbours is curbed by the risk of finding itself precluded from the trade routes and from access to markets.

I imagine that like many small, agrarian, tribal states, England of the pre-Roman period was organised into settlements relying on militias with only small dedicated military elites. This arrangement, as exists in modern Switzerland, allows the civilian militia to contribute most of its energies under secure conditions to increasing production, growing the surplus which sustains collective prosperity. Although a professional military or ‘warrior aristocracy’ can be useful in providing skilled leadership, if that military gets too large, or the aristocrats too greedy, the incentive to produce a surplus is removed and tribes tend to weaken, grow poor and fail. Prosperity and security require a delicate balance in the social contract.

The Ridgeway also reminded me that prosperity invites looting by aggressors. By the Roman era, England was producing a large enough surplus to be exporting across the Channel, with trade goods from as far afield as the Mediterranean. This has been substantiated by findings of pottery, jewellery, coins and other goods in early Celtic settlements.

It was the prosperity of England as a grain exporter that led Julius Ceasar to covet it for the Roman Empire.

A professional military demands a large production surplus from the civilian population to sustain it. The state expropriates the surplus production and provides it to the military. If the military can secure more resources and more production to the state, the expropriation can increase prosperity of its tribe – or at least the elite that commands it. But if the military fails to secure more resources, then the expropriation from those producing a surplus will gradually erode the incentive to produce a surplus – leading to decline and increasing poverty and political strife.

Ceasar understood that securing the large agricultural surplus of England to finance and feed his armies would help underpin the military strength of the Roman Empire. Naturally, the Romans secured and settled the most prosperous agricultural regions. As a result, there are Roman traces along the Ridgeway – improvements to the roads, the forts, and the commercial links to market towns and ports on the coasts. We walked Roman roads last week too - straight, raised and solid even 2,000 years later.

Following the Romans, the Danes, the Angles, the Saxons and the Normans invaded and occupied the same lands. Throughout the changing political and ethnic mix of tribes and elites, the Ridgeway continued to function as a trade route through prosperous middle England.

Modern markets could usefully reflect on the durable Ridgeway model of market infrastructure. Transparency of assets – whether sheep or shares or CDOs – is critical to the effective function of markets for price discovery and investment. Those who have secured a surplus are unlikely to risk taking their wealth to a market where assets are not open to inspection and proper valuation. Security of trade routes and market towns for merchants and traders is essential to encourage those with a surplus to bring it forward, promoting effective allocation of assets and underpinning growth in production. Mutually-enforced rules of conduct, fair dealing and safe passage are key to building a reputation that attracts both buyers and sellers and ensures a sustained market prosperity.

The modern ‘warrior aristocracy’ could usefully reflect on the fate of societies that deplete the incentives to surplus production and fail to secure commensurate returns from a costly military. Whether a Neolithic tribe, a Celtic settlement, the mighty Roman Empire or the Soviet Union, history proves that a tendency to excess expropriation by the state undermines any incentive to investment and surplus production. Excess expropriation will ultimately weaken the economy supporting the elites and the professional military that secures their privileges and interests.

As the global elites meet in the coming weeks to address the current economic crisis, they could do worse than contemplate the lessons I gleaned from the Ridgeway. Those who provided poor transparency, promoted dishonest market practices, looked the other way or collaborated in the robbing of passing merchants and investors, and otherwise violated the precepts embodied in the Ridgeway model should be held accountable for their failings. The global model going forward must return to the principles embodied in the ancient stone backbone of English commerce.


The Ridgeway (Wikipedia)

The Ridgeway National Trail

Neolithic, Iron Age and Bronze Age Britain (BBC)


Congratulations to Rich H (Miss America) who was to cover for me last Friday and instead secured his own position in the RGE blogroll.

Friday, October 17, 2008

We had to burn the village to save it

The title of this diary is a quote from the Vietnam era that sums up for many the arrogance and pointlessness of American aggression in Asia two generations ago. It keeps coming to mind each time I read President Bush’s (paraphrased) statement this week: We had to nationalise the banks “to preserve the free market.”

There is no free market when the government owns the actors and sets the terms of transactions. There is no village once it has been burned to the ground.

The collapse of the financial sector is unacceptable. It is unacceptable to bankers who have vested careers, status and equity wealth in the disproportionate expansion of the financial sector. It is unacceptable to politicians who have risen to high office doing the bidding of the financial sector in ceding progressively more generous taxpayer subsidy and regulatory forbearance to its chieftains.

And so in the US, UK and EU we have politicians appropriating more petrol to hand to the arsonists who started the conflagration which is consuming our economic and political fabric. The regulators whose forbearance is a root cause of the current conflagration are handing the arsonists fresh zippo lighters. The policies adopted in these debtor nations will fail, must fail, because they destroy what remained of market economies. In the meanwhile, however, the bankers and the politicians and the regulators cannot conceive of failure and so insist on more of the same – ordering hundreds of billions in more incendiaries to fuel the blaze. The same tax breaks. The same housing subsidies. The same regulatory forbearance. The same ill-transparent, off balance sheet, accounting sleight of hand. The same eradication of market incentives to productive, disciplined saving, investment and labour.

Those who would prudently save will be punished with negative real interest rates and asset deflation. Those who would prudently invest in productive industry will be starved of scarce capital and forced into liquidation. Those who would prudently labour for a decent wage will be slowly robbed by inflation and kept docile by the threat of unemployment.

There can be no more iniquitous alliance than to have the politicians at the service of the bankers, unless perhaps it is to have the military at the service of the bankers too. The US seems to have committed itself to this worst of all possible combinations, with Congressmen threatened by the imposition of martial law if they failed to acquiesce to the Paulson Plan. Thankfully the British and EU militaries are too small and ineffective to be leveraged into a similar threat to global or domestic peace and security.

Subsidised banking seems a faster method of going bust than military adventurism, but the two together will see the US bust even more certainly. The $700 billion appropriated for the Paulson Plan and the $840 billion extended in parallel by the Federal Reserve last month are together more than three times the expenditure on US wars for the past five years. The federal borrowing requirement for 2008 is now in excess of $1.02 trillion, and for 2009 is now estimated between $1.5 and $2 trillion.

Such hyperbolic growth in the fiscal deficit and debt is unsustainable, even with such very tolerant creditors as the Japanese, Gulf Arabs, Russians and Chinese. They can see that each dollar added to the Fed’s balance sheet is tinder for burning those already held or denominated in their reserves. They can project the curve forward. At some point, they must react and restrain further debasement of their reserves and investments, either by collectively raising the prices charged for the resources and products they export, the interest charged on existing and future debt, or the forced exchange of debt for equity ownership of real economic assets.

Or all three.

The cycle of debt deflation is just getting rolling. The banks were only the first bailout and already the federal deficits are ballooning unsustainably. What will be the recourse when municipalities and states face default through catastrophic tax and revenue shortfalls? What will be the recourse when large commercial employers, industries and infrastructure confront failure from collapsing consumption expenditure? What will be the consequence when unemployment, homelessness, political disaffection and crime are resurgent and threaten the political fabric?

We are at the end of the beginning. Hank Paulson has played a clever game for the past decade of exporting dodgy paper to the US creditors abroad while forcing a middle class subsidy of the tax exempt corporatists at home. Now he plays a clever game of devaluing all currency and paper assets, exporting the pain to foreign taxpayers and investors. But this is not a game that America can win without the debasement of everything America once represented as holding value in its formerly prosperous market economy.

In my experience, there is nothing so permanent as a temporary expedient. It is hard to see how partially nationlised banks will ever be more than the means of political redistribution of wealth and power, and so corrupt both the economy and political system.

We had to burn the village to save it.

Perhaps someday we will hear a remorseful Mr Paulson or Mr Brown echo Robert McNamara, early architect and aggressive propagator of the Vietnam War: “We were wrong, terribly wrong.”


I will be out of touch for most of the next nine days, but will check in as and when I can. There may be a guest blogger here next Friday who I'm confident will be enthusiastically received, if he accepts.