Category: economics

Schumpeter on Marx as Prophet and Sociologist

Continuing to read Schumpeter’s Capitalism, Socialism, and Democracy (1942) As I mentioned in a previous post, I was surprised to find that, in a book I thought would tell me about the currently prevailing theory of platform monopoly and competition, Schumpeter’s first few chapters are devoted entirely to a consideration of Karl Marx.

Schumpeter’s treatment of Marx is the epitome of respectful disagreement. Each chapter in his treatment, “Marx the Prophet”, “Marx the Sociologist”, “Marx the Economist”, and “Marx the Teacher”, is brimming with praise and reverence for the intellectual accomplishments of Marx. Schumpeter is particularly sensitive to the value of Marx’s contributions in their historical context: they exceeded what came before it and introduced many critical new ideas and questions.

Contextualizing it thus, Schumpeter then engages in a deep intellectual critique of Marx, pointing out many inconsistencies and omissions of the doctrine and of the contemporary Marxist or Marxian tendencies of his time.

“Marx the Prophet”

Schumpeter’s first chapter on Marx addresses the question of why Marx has such a devoted following, one that exceeds that of any other social scientist or economist. He does not find it plausible that Marx has been so attractive because of his purely intellectual analysis. The popular following of Marx far exceeds those who have engaged deeply with Marx’s work. So Schumpeter’s analysis is about the emotional power of Marxian thought. This is a humanistic discussion foremost. It is a discussion, quite literally and unmetaphorically, of religion.

In one important sense, Marxism is a religion. To the believer it presents, first, a system of ultimate ends that embody the meaning of life and are absolute standards by which to judge events and actions; and, secondly, a guide to those ends which implies a plan to salvation and the indication of the evil from which mankind, or a chosen section of mankind, is to be saved. We may specify further: Marxist socialism also belongs to that subgroup which promises paradise on this side of the grave.

Schumpeter believes that Marxism is successful because at some necessary points Marx sacrificed logical integrity for what was in effect good marketing to a audience that had an emotional need for his message.

This need came about in part because, with the success of bourgeois capitalism, other religions had begun to wane in influence. “Faith in any real sense was rapidly falling away from all classes of society”, leaving “the workman” literally hopeless. “Now, to millions of human hearts the Marxian message of the terrestrial paradise of socialism meant a new ray of light and a new meaning of life.” This acknowledgement of the emotional power of Marxism is not meant to be dismissive; on the contrary, what made it successful was that “the message was framed and conveyed in such a way as to be acceptable to the positivistic mind of its time.” He “formulat[ed] with unsurpassed force that feeling of being thwarted and ill treated which is the auto-therapeutic attitude of the unsuccessful many, and, on the other hand, by proclaiming that socialistic deliverance from these ills was a certainty amenable to rational proof.”

Marxism offered certainty of one’s course of action for people who were otherwise despairing, all in a form that seemed consistent with dominant rationalist and scientific modes of thought.

The religious quality of Marxism also explains the characteristic attitude of the orthodox Marxist towards opponents. To him, as any believer in a Faith, the opponent is not merely in error but in sin. Dissent is disapproved of not only intellectually but also morally. There cannot be any excuse for it once the Message has been revealed.

Schumpeter does find an intellectual weakness in Marxism here. He argues that Marxism excites individual feelings and attempts to direct them towards class consciousmess, an idea that depends on theoretical assumptions about the logic of social evolution. Schumpeter is doubtful about this logic of class formation. He writes that “the true psychology of the workman… centers in the wish to become a small bourgeois and to be helped to that status by political force.” This question of the structure of social classes is addressed in the next chapter.

Discussion:

Religion is a difficult topic for mainstream research and scholarship today, especially in the United States. For applications for University lecturer positions in the United Kingdom, there is commonly a section devoted to the applicant’s experience with “pastoral care”. The history of universities in the UK is tied up with religious history, and this resonates through the expectation that part of the role of a professor is to tend to the spiritual needs, in the broadest possible sense, of the students.

The equivalent section in applications in the United States is a section asking the applicant to discuss their experiences fostering or representing diversity, equity, and inclusion. These terms have had many meanings, but it requires a special amount of mental density to not read this as relating to the representation and treatment of minorities. This is a striking indication that the prevailing “religion” of education institutions in the U.S. is indeed a form of political progressivism.

There is a wide variance of opinion how much contemporary progressive ideals are aligned with or indebted to Marxian ones. I’m not sure I can add to that debate. Here, I am simply noting that both Marxism and progressivism have some of these religious traits in common, including perhaps the promise of a new material world order and a certain amount of epistemic closure.

Naturally there are more and less intellectual approaches to both Marxism and contemporary progressivism. There are priests and lay people of every good religion. Schumpeter’s analysis proceeds as intellectual critique.

Marx the Sociologist”

Schumpeter next addresses the sociological content of Marx. He argues that though Marx was a neo-Hegelian and that these philosophical themes permeate his work, they do not dominate it. “Nowhere did he betray positive science to metaphysics.” He brought an powerful comprehensive of contemporary social facts to his work, and used the persuasively in his arguments in a way that raised the standard of empiricism in the scholarship of his time. And the result of this empiricism is Marx’s Economic Intepretation of History, according to which economic conditions shape and account for the rise and fall of the world of ideas: religions, metaphysics, schools of art, political volitions, etc. Ideas and values “had in the social engine the role of transmission belts.” This is as opposed to a vulgar interpretation that would assume all individual motives can be reduced to individual economic motivates; this is a misrepresentation.

Schumpeter views the term “materialism”, as applied to Marx, as meaningless, and mentions in a footnote his encounters with Catholic radicals who “declared themselves Marxists in everything except in matters related to their faith” with perfect consistency.

Schumpeter instead condenses Marx’s view of history into two statements:

• “The forms or conditions of production are the fundamental determinant of social structures. “[T]he “hand mill” creates feudal, and the “steam-mill,” capitalist societies. Technology thus becomes a driving factor of social change, though technology is understood in its fullness as situated sociotechnical process.
• The forms of production have a logic of their own. The hand-mill and steam-mill each create social orders which ultimately outgrow their own frame and lead to the practical necessity of the next technological advance.

This smacks of “technological determinism” which is full-throatedly rejected by more contemporary sociological and anthropological scholars. And Schumpeter points out this weakness as well, in a particular operational form: he notes that many social structures are quite durable, persisting past the technological context of their origins. This is a weakness of Marx’s work. There are historical facts, such as the emergence of feudal landlordism in the sixth century, which run counter to Marx’s analysis. The implication is that _unless_ one is taking Marx _religiously_, one would take his arguments seriously enough to engage them as positive science, and then refine one’s views in light of contradictory evidence. This all can be done with ample respect for Marx’s work. Schumpeter is warning against a fundamentalist use of Marx.

This is a buildup to his analysis of the next major sociological theme of Marx, the Theory of Social Classes. Schumpeter credits Marx with the introduction of the important idea of social class. The important claim made by Marx is that a social class is not simple a set of individuals that have something in common. Rather, they are theorized as a social form, “live entities that exist as such”, emergent beings with their own causal force. Marxism rejects methodological individualism.

Once we understand social classes to be social forms in themselves, it becomes sensible to discuss “class struggle”, an important Marxist idea. Schumpeter seems to believe that the strongest form of the idea of class struggle is incorrect, but a weaker version, “the proposition that historical events may often be interpreted in terms of class interests and class attitudes and that existing class structures are always an important factor in historical interpretation”, is a valuable contribution.

“Clearly, success on the line of advance opened up by the principle of class struggle depends upon the validity of the particular theory of classes we make our own. Our picture of history and all our interpretations of cultural patterns and the mechanism of social change will differ according to whether we choose, for instance, the racial theory of classes and like Gobineau reduce human history to the history of the struggle of races or, say, the division of labor theory of classes in the fashion of Schmoller or of Durkheim and resolve class antagonisms into antagonisms between the interests of vocational groups. Nor is the range of possible differences in analysis confined to the problem of the nature of classes. Whatever view we may hold about it, different interpretations will result from different definitions of class interest and from different opinions about how class action manifests itself. The subject is a hotbed of prejudice to this day, and as yet hardly in its scientific stage.”

Schumpeter sees Marx’s own theory of the nature and action of social classes as incomplete and under-specified. “The theory of his chief associate, Engels, was of the division of labor type and essentially un-Marxian in its implications.” Finding Marx’s true theory of social classes is, in Schumpeter’s view, a delicate task of piecing together disjoint parts of Das Kapital.

“The basic idea is clear enough, however. The stratifying principle consists in the ownership, or exclusion from ownership, of means of production such as factory buildings, machinery, raw materials and the consumers’ goods that enter in the workman’s budget. We have thus, fundamentally, two and only two classes, those owners, the capitalists, and those have-nots, who are compelled to sell their labor, the laboring class or proletariat. The existence of intermediate groups, such as are formed by farmers or artisans who employ labor but also do manual work, by clerks and by the professions is of course not denied; but they are treated as anomalies which tend to disappear in the course of the capitalist process.”

This sets up the most fundamental antagonism as that over the private control over the means to produce. The very nature of this relation is strife, or class war.

The crucial question raised by this framing is the question of primitive accumulation, “that is to say, how capitalists came to be capitalists in the first instance.” Here, Schumpeter calls shenanigans on Marx. For while Marx rejects wholesale the idea that some people became capitalists rather than others due to superior intelligence, work ethic, and saving. Schumpeter believes this ‘children’s tale’, “whale far from telling the whole truth, yet tells a good deal of it’. Schumpeter is a believer in entrepreneurial wit, energy, and frugality as the accounting for “the founding of industrial positions in nine cases out of ten.” And yet, he agrees that saving alone, as perhaps implied by classical economics predating Marx, does not account for capital accumulation.

Here, Schumpeter begins to work with some economics facts. Some people save. But saving does not in general turn one into a capitalist. Rather, typically an enterprise is begun by borrowing other people’s savings. Banks arise as the intermediary between household savings and entrepreneurial capital investments.

Schumpeter attributes to Marx a bad faith or at least simplistic rejection of this theory–a popularly applauded “guffaw”–that paves the way for an alternative theory: that primitive accumulation was the result of force or robbery. This is a popular theory. But Schumpeter argues that is begs the question. For how is it that “some people acquire the power to subjugate and rob”? Marx’s answer to this is a historical argument: feudalism was a classist regime of force. Feudal inequality gave way to capitalist inequality. This core logic of this idea is considered, skeptically, in several footnotes. For example, in one, Schumpeter asks whether it is more likely that control over cannons gives one power, or if power gives one control over cannons.

Schumpeter remains incredulous, as he sees Marx’s theory of primative accumulation as avoidant of the main phenomenon that it undertakes to explain. He points to the phenomenon of medium-sized owner-managed firms. Where do they come from? Class positions, he argues, are more often the cause of economic conditions than the other way around, as “business achievement is obviously not everywhere the only avenue to social eminence and only where it is can ownership of means of production causally determine group’s position in the social structure.” Schumpeter also questions the implied hereditary nature of Marx’s theory of social class, as he sees class mobility (both upward and downward) as a historical fact. For Schumpeter, the empirical counterarguments to Marx here are all “obvious”.

Schumpeter then places the value of Marxist theory instead in the propagandist joining of the Economic Theory of History and his theory of Social Classes, which together have more tightly deterministic implications than either do individually. Here Schumpeter makes all kinds of heretical points. For example, socialism, “which in reality has nothing to do with the presence or absence of social classes”, became, for Marx, the only possible kind of classless society. Why? It is so by virtue of the tautology given the definitions Marxist theory provides. But this begins to crumble once the strict binary of social classes is eroded into something more realistic. Schumpeter argues that, contra Marx, in normal times, the relationship between labor and capital is “primarily one of cooperation and that any theory to the contrary must draw largely on pathological cases for verification.” You wouldn’t have the grounds for antagonism at all, he points out, if you didn’t have some much cooperation to work with; indeed, in Schumpeter’s view the two are inseperable.

Ultimately, Schumpeter believes Marx’s theory of social classes depends on this economic theory, grounded in economic facts. The sociological theory of social classes is compelling to many in its own right, but does not hold up to scrutiny in itself. “Marx the Economist” is the subject of the next chapter.

Discussion:

Schumpeter is treating Marx dialectically, attempting to lay out the scope of his argument in its popularly understood, schematic form and showing how, while tautological in its structure, it depends ultimately on some more nuanced theories of economics which will no doubt be questioned in the next chapter.

Comparing Schumpeter’s analysis of Marx with the contemporary economy, we see all sorts of confusions that seem to violate that Marxian class binary. There are multiple social classes, many of whom seem to have a far more ambiguous relationship to capital than either the proletariat or capitalists. The relatively modern idea that one’s savings, however they are earned, should be invested directly into the stock market (a market for ownership over capital) rather than into a bank that then lends to companies has, it’s been said, given “everyone” with substantial savings a stake in the capitalist economy. What does this mean for Marx?

Economic sociology, such as that of Bourdieu, has since developed a far more nuanced analysis of social classes. It is an empirical question, truly, what sociological theory of social classes is most valid; it is unlikely to be anything simple, given how richly textured the social field is in fact. On the other hand, there is much to be learned from a theory of history that gives weight to economic forces, especially economic forces broadly construed. Schumpeter is asking us to try a little harder to understand what actually happens historically, including the plurality of explanations for a large aggregate social fact, rather than fall for the emotional potency and simplistic tautology Marx provides.

I’ve started reading Schumpeter’s Capitalism, Socialism, and Democracy (1942).

Why? Because of the Big Tech anti-trust hearings. I’ve heard that:

(a) U.S. anti-trust policy is based on a theory of monopoly pricing which is not bearing out with todays Big Tech monopolies,

(b) possibly those monopolies are justified on the basis of Schumpeterian “creative destruction” competition, wherein one monopoly gets upended by another in sequence, rather than having many firms competing all at once on the market,

(c) one of the major shots taken at Amazon in the hearings is that it would acquire companies that it saw as a threat, indicating a strategic understanding of Schumpeterian competition on the part of e.g. Bezos, and also how one can maintain a monopolistic position despite that competition,

(d) this idea of capitalism and entrepreneurship seems both fundamentally correct, still somehow formally undertheorized, and tractable with some of the simulation methods I’ve been learning recently with Econ-ARK and NYU’s ABM Lab

All good signs. But who was Schumpeter and what did he think? I can’t really say I know. So I’m returning to my somewhat antiquated method/habit/hobby of Actually Reading the Book.

A few striking things about the book based entirely on its Prefaces (1942, and the later one from 1946):

• Schumpeter is quite consciously trying to make accurate descriptive claims without normative policy implications, and his kind of annoyed by readers who think he’s doing anything but objective analysis. His enemy is ideology. He apparently gets misunderstood a lot as a result. I think I can hang with this dude.
• The first section of this book is dedicated to a long treatment of the work of Karl Marx. This opens with the idea that Karl Marx is a great theorist not so much because he’s right or wrong, but because his ideas survive from generation to generation. This view of theoretical greatness prefigures, I think, his view of economic greatness; as an evolutionary battle of competing beings whose success is defined by their Darwinian survival. Schumpeter takes on Marx with great respect. I expect him to be involved in a dismantling of him, though he agrees with Marx that capitalism ends up destroying itself with its accomplishments. He says this as a pro-capitalist, which is interesting.
• He points out, somewhat amusingly, that Marx is popular (at the time of his writing, the 1940’s) in Russia, where it has been misinterpreted by the Bolsheviks, and for some reason that mystifies him in the United States, but not in the place most deeply familiar with Marx, which is Germany. German socialists, he notes, reason just like economist everywhere else. Since I find that in academic circles Marxist ideas are still fashionable, but other forms of economics, let alone socialist economics, are less so, I have to see Schumpeter as making yet another enduring point here.
• In the 1946 preface, he mentions an objection by professional economists to his work, which is the objection that while Schumpeter predicts that profits in capitalism will fall over time, this view is critiqued since this does not apparently take into account the return on salesmanship or something like that. Schumpeter then says something interesting: sales is considered as the wages of management. What he’s talking about is the profitability of new goods, new productions methods, new processes, etc: i.e., the sort of stuff that would be actually valuable, directly or indirectly, to consumers. This is interesting. Because given a Herbet Simon view of organizations, management process are precisely what have been changing so dramatically with the “tech economy”–all this AI stuff is really just about streamlining management processes, sales, etc. SO: what does it mean if Schumpeterian competition winds up being nullified by monopolies of managerial power, as opposed to monopolies of something more substantive? This whole complex of information technology and management being produced and marketed as commodities or securities or something else, what we might in a very extended sense call capital markets, is just the sort of thing that neither Marx nor most early economists would get and what actual dominates the economy now. So, let us proceed.

from morality to economics: some stuff about Marx for Tapan Parikh

I work on a toolkit for heterogeneous agent structural modeling in Economics, Econ-ARK. In this capacity, I work with the project’s creators, who are economists Chris Carroll and Matt White. I think this project has a lot of promise and am each day more excited about its potential.

I am also often in academic circles where it’s considered normal to just insult the entire project of economics out of hand. I hear some empty, shallow snarking economists about once every two weeks. I find this kind of professional politics boring and distracting. It’d also often ignorant. I wanted to connect a few dots to try to remedy the situation, while also noting some substantive points that I think fill out some historical context.

Tracking back to this discussion of morality in the Western philosophical tradition and what challenges it today, the focal character there was Immanuel Kant, who for the sake of argument espoused a model of morality based on universal properties of a moral agent.

Tapan Parikh has argued (in personal communications) that I am “a dumb ass” for using Kant in this way, because Kant is on the record for writing some very racist things. I feel I have to address this point. No, I’m not going to stop working with the ideas from the Western philosophical canon just because so many of them were racist. I’m not a cancel culturist in any sense. I agree with Dave Chappelle on the subject of Louis C.K., for example.

However, it is actually essential to know whether or not racism is a substantive, logical problem with Kant’s philosophy. I’ll defer to others on this point. A quick Googling of the topic seems to indicate that either: Kant was inconsistent, and was a racist while also espousing universalist morality, and that tells us more about Kant the person than it does about universalist morality–the universalist morality transcending Kant’s human failings in this case (Allais, 2016) or Kant actually became less racist during the period in which he was most philosophically productive, which was late in his life (Kleingeld, 2007). I like this latter story better: Kant, being an 18th century German, was racist as hell; then he thought about it a bit harder, developed a universalist moral system, and because, as a consequence, less racist. That seems to be a positive endorsement of what we now call Kantian morality, which is a product of that later period and not the earlier virulently racist period.

Having hopefully settled that question, or at least smoothed it over sufficiently to move on, we can build in more context. Everybody knows this sequence:

Kant -> Hegel -> Marx

Kant starts a transcendent dialectic as a universalist moral project. Hegel historicizes that dialectic, in the process taking into serious consideration the Haitian rebellion, which inspires his account of the Master/Slave dialectic, which is quite literally about slavery and how it is undone by its internal contradictions. The problem, to make a long story short, is that the Master winds up being psychologically dependent on the Slave, and this gives the Slave power over the Master. The Slave’s rebellion is successful, as has happened in history many times. This line of thinking results in, if my notes are right (they might not be) Hegel’s endorsement of something that looks vaguely like a Republic as the end-of-history.

He dies in 1831, and Marx picks up this thread, but famously thinks the historical dialectic is material, not ideal. The Master/Slave dialectic is transposed onto the relationship between Capital and the Proletariat. Capital exploits the Proletariat, but needs the Proletariat. This is what enables the Proletariat to rebel. Once the Proletariat rebel, says Marx, everybody will be on the same level and there will be world peace. I.e., communism is the material manifestation of a universalist morality. This is what Marx inherits from Kant.

But wait, you say. Kant and Hegel were both German Idealists. Where did Marx get this materialist innovation? It was probably his own genius head, you say.

Wrong! Because there’s a thread missing here.

Recall that it was David Hume, a Scotsman, whose provocative skeptical ideas roused Kant from his “dogmatic slumber”. (Historical question: Was it Hume who made Kant “woke” in his old age?) Hume was in the line of Anglophone empiricism, which was getting very bourgey after the Whigs and Locke and all that. Buddies with Hume is Adam Smith who was, let’s not forget, a moral philosopher.

So while Kant is getting very transcendental, Smith is realizing that in order to do any serious moral work you have to start looking at material reality, and so he starts Economics in England.

This next part I didn’t really realize the significance of until digging into it. Smith dies in 1790, just around when Kant is completing the moral project he’s famous for. At that time, the next major figure is 18, coming of age. It’s David Ricardo: a Sephardic Jew turned Unitarian, a Whig, a businessman who makes a fortune speculating on the Battle of Waterloo, who winds up buying a seat in Parliament because you could do that then, and also winds up doing a lot of the best foundational work on economics including inventing the labor theory of value. He was also, incidentally, an abolitionist.

Which means that to complete one’s understanding of Marx, you have to also be thinking:

Hume -> Smith -> Ricardo -> Marx

In other words, Marx is the unlikely marriage of German Idealism, with its continued commitment to universalist ethics, with British empiricism which is–and I keep having to bring this up–weak on ethics. Empiricism is a bad way of building an ethical theory and it’s why the U.S. has bad privacy laws. But it’s a good way to build up an economic materialist view of history. Hence all of Marx’s time looking at factories.

It’s worth noting that Ricardo was also the one who came up with the idea of Land Value Taxation (LVT), which later Henry George popularized as the Single Tax in the late 19th/early 20th century. So Ricardo really is the pivotal figure here in a lot of ways.

In future posts, I hope to be working out more of the background of economics and its connection to moral philosophy. In addition to trying to make the connections to my work on Econ-ARK, there’s also resonances coming up in the policy space. For example, the Law and Political Economy community has been rather explicitly trying to bring back “political economy”–in the sense of Smith, Ricardo, and Marx–into legal scholarship, with a particular aim at regulating the Internet. These threads are braiding together.

References

Allais, L. (2016). Kant’s racism. Philosophical papers45(1-2), 1-36.

Kleingeld, P. (2007). Kant’s second thoughts on race. The Philosophical Quarterly57(229), 573-592.

Land value taxation

Henry George’s Progress and Poverty, first published in 1879, is dedicated

TO THOSE WHO, SEEING THE VICE AND MISERY THAT SPRING FROM THE UNEQUAL DISTRIBUTION OF WEALTH AND PRIVILEGE, FEEL THE POSSIBILITY OF A HIGHER SOCIAL STATE AND WOULD STRIVE FOR ITS ATTAINMENT

The book is best known as an articulation of the idea of a “Single Tax [on land]”, a circa 1900 populist movement to replace all taxes with a single tax on land value. This view influence many later land reform and taxation policies around the world; the modern name for this sort of policy is Land Value Taxation (LVT).

The gist of LVT is that the economic value of owning land comes both from the land itself and improvements built on top of it. The value of the underlying land over time is “unearned”–it does not require labor to maintain, it comes mainly from the artificial monopoly right over its use. This can be taxed and redistributed without distorting incentives in the economy.

Phillip Bess’s 2018 article provides an excellent summary of the economic arguments in favor of LVT. Michel Bauwen’s P2P Foundation article summaries where it has been successfully in place. Henry George was an American, but Georgism has been largely an export. General MacArthur was, it has been said, a Georgist, and this accounts for some of the land reform in Asian countries after World War II. Singapore, which owns and rents all of its land, is organized under roughly Georgist principles.

This policy is neither “left” nor “right”. Wikipedia has sprouted an article on geolibertarianism, a term that to me seems a bit sui generis. The 75th-anniversary edition of Progress and Poverty, published 1953, points out that one of the promises of communism is land reform, but it argues that this is a false promise. Rather, Georgist land reform is enlightened and compatible with market freedoms, etc.

I’ve recently dug up my copy of Progress and Poverty and begun to read it. I’m interested in mining it for ideas. What is most striking about it, to a contemporary reader, is the earnest piety of the author. Henry George was clearly a quite religious man, and wrote his lengthy and thorough political-economic analysis of land ownership out of a sincere belief that he was promoting a new world order which would preserve civilization from collapse under the social pressures of inequality.

A note towards formal modeling of informational capitalism

Cohen’s Between Truth and Power (2019) is enormously clarifying on all issues of the politics of AI, etc.

“The data refinery is only secondarily an apparatus for producing knowledge; it is principally an apparatus for producing wealth.”

– Julie Cohen, Between Truth and Power, 2019

Cohen lays out the logic of informational capitalism in comprehensive detail. Among her authoritatively argued points is that scholarly consideration of platforms, privacy, data science, etc. has focused on the scientific and technical accomplishments undergirding the new information economy, but that really its key institutions, the platform and the data refinery, are first and foremost legal and economic institutions. They exist as businesses; they are designed to “extract surplus”.

I am deeply sympathetic to this view. I’ve argued before that the ethical and political questions around AI are best looked at by considering computational institutions (1, 2). I think getting to the heart of the economic logic is the best way to understand the political and moral concerns raised by information capitalism. Many have argued that there is something institutionally amiss about informational capitalism (e.g. Strandburg, 2013); a recent CfP went so far as to say that the current market for data and AI is not “functional or sustainable.”

As far as I’m concerned, Cohen (2019) is the new gold standard for qualitative analysis of these issues. It is thorough. It is, as far as I can tell, correct. It is a dense and formidable work; I’m not through it yet. So while it may contain all the answers, I haven’t read them yet. This leaves me free to continue to think about how I would go about solving them.

My perspective is this: it will require social scientific progress to crack the right institutional design to settle informational capitalism in a satisfying way. Because computation is really at the heart of the activity of economic institutions, computation will need to be included within the social scientific models in question. But this is not something particularly new; rather, it’s implicitly already how things are done in many “hard” social science disciplines. Epstein (2006) draws the connections between classical game theoretic modeling and agent-based simulation, arguing that “The Computer is not the point”: rather, the point is that the models are defined in terms of mathematical equations, which are by foundational laws of computing amenable to being simulated or solved through computation. Hence, we have already seen a convergence of methods from “AI” into computational economics (Carroll, 2006) and sociology (Castelfranchi, 2001).

This position is entirely consistent with Abebe et al.’s analysis of “roles for computing in social change” (2020). In that paper, the authors are concerned with “social problems of justice and equity”, loosely defined, which can be potentially be addressed through “social change”. They defend the use of technical analysis and modeling as playing a positive role even according to the politics the Fairness, Accountability, and Transparency research community, which are particular. Abebe et al. address backlashes against uses of formalism such as that of Selbst et al. (2019); this rebuttal was necessary given the disciplinary fraughtness of the tech policy discourse.

What I am proposing in this note is something ever so slightly different. First, I am aiming at a different political problematic than the “social problems of justice and equity”. I’m trying to address the economic problems raised by Cohen’s analysis, such as the dysfunctionality of the data market. Second, I’d like to distinguish between “computing” in the method of solving mathematical model equations and “computing” as an element of the object of study, the computational institution (or platform, or data refinery, etc.) Indeed, it is the wonder and power of computation that it is possible to model one computational process within another. This point may be confusing for lawyers and anthropologists, but it should be clear to computational social scientists when we are talking about one or other, though our scientific language has not settled on a lexicon for this yet.

The next step for my own research here is to draw up a mathematical description of informational capitalism, or the stylized facts about it implied by Cohen’s arguments. This is made paradoxically both easier and more difficult by the fact that much of this work has already been done. A simple search of literature on “search costs”, “network effects”, “switching costs”, and so on, brings up a lot of fine work. The economists have not been asleep all this time. But then why has it taken so long for the policy critiques around informational capitalism, including those around informational capitalism and algorithmic opacity, to emerge?

I have two conflicting hypotheses, one quite gloomy and the other exciting. The gloomy view is that I’m simply in the wrong conversation. The correct conversation, the one that has adequately captured the nuances of the data economy already, is elsewhere–maybe in an economics conference in Zurich or something, and this discursive field of lawyers and computer scientists and ethicists is just effectively twiddling its thumbs and working on poorly framed problems because it hasn’t and can’t catch up with the other discourse.

The exciting view is that the problem of synthesizing the fragments of a solution from the various economists literatures with the most insight legal analyses is an unsolved problem ripe for attention.

Edit: It took me a few days, but I’ve found the correct conversation. It is Ross Anderson’s Workshop on Economics and Information Security. That makes perfect sense: Ross Anderson is a brilliant thinker in that arena. Naturally, as one finds, all the major results in this space are 10-20 years old. Quite probably, if I had found this one web page a couple years ago, my dissertation would have been written much differently–not so amateurishly.

It is supremely ironic to me how, in an economy characterized by a reduction in search costs, the search for the answers I’ve been looking for in information economics has been so costly for me.

References

Abebe, R., Barocas, S., Kleinberg, J., Levy, K., Raghavan, M., & Robinson, D. G. (2020, January). Roles for computing in social change. In Proceedings of the 2020 Conference on Fairness, Accountability, and Transparency (pp. 252-260).

Castelfranchi, C. (2001). The theory of social functions: challenges for computational social science and multi-agent learning. Cognitive Systems Research2(1), 5-38.

Carroll, C. D. (2006). The method of endogenous gridpoints for solving dynamic stochastic optimization problems. Economics letters91(3), 312-320.

Cohen, J. E. (2019). Between Truth and Power: The Legal Constructions of Informational Capitalism. Oxford University Press, USA.

Epstein, Joshua M. Generative social science: Studies in agent-based computational modeling. Princeton University Press, 2006.

Fraser, N. (2017). The end of progressive neoliberalism. Dissent2(1), 2017.

Selbst, A. D., Boyd, D., Friedler, S. A., Venkatasubramanian, S., & Vertesi, J. (2019, January). Fairness and abstraction in sociotechnical systems. In Proceedings of the Conference on Fairness, Accountability, and Transparency (pp. 59-68).

Strandburg, K. J. (2013). Free fall: The online market’s consumer preference disconnect. U. Chi. Legal F., 95.

Notes on Krussell & Smith, 1998 and macroeconomic theory

I’m orienting towards a new field through my work on HARK. A key paper in this field is Krusell and Smith, 1998 “Income and wealth heterogeneity in the macroeconomy.” The learning curve here is quite steep. These are, as usual, my notes as I work with this new material.

Krusell and Smith are approaching the problem of macroeconomic modeling on a broad foundation. Within this paradigm, the economy is imagined as a large collection of people/households/consumers/laborers. These exist at a high level of abstraction and are imagined to be intergenerationally linked. A household might be an immortal dynasty.

There is only one good: capital. Capital works in an interesting way in the model. It is produced every time period by a combination of labor and other capital. It is distributed to the households, apportioned as both a return on household capital and as a wage for labor. It is also consumed each period, for the utility of the households. So all the capital that exists does so because it was created by labor in a prior period, but then saved from immediate consumption, then reinvested.

In other words, capital in this case is essentially money. All other “goods” are abstracted way into this single form of capital. The key thing about money is that it can be saved and reinvested, or consumed for immediate utility.

Households also can labor, when they have a job. There is an unemployment rate and in the model households are uniformly likely to be employed or not, no matter how much money they have. The wage return on labor is determined by an aggregate economic productivity function. There are good and bad economic periods. These are determine exogenously and randomly. There are good times and bad times; employment rates are determined accordingly. One major impetus for saving is insurance for bad times.

The problem raised by Krusell and Smith in this, what they call their ‘baseline model’, is that because all households are the same, the equilibrium distribution of wealth is far too even compared with realistic data. It’s more normally distributed than log-normally distributed. This is implicitly a critique at all prior macroeconomics, which had used the “representative agent” assumption. All agents were represented by one agent. So all agents are approximately as wealthy as all others.

Obviously, this is not the case. This work was done in the late 90’s, when the topic of wealth inequality was not nearly as front-and-center as it is in, say, today’s election cycle. It’s interesting that one reason why it might have not been front and center was because prior to 1998, mainstream macroeconomic theory didn’t have an account of how there could be such inequality.

The Krusell-Smith model’s explanation for inequality is, it must be said, a politically conservative one. They introduce minute differences in utility discount factor. The discount factor is how much you discount future utility compared to today’s utility. If you have a big discount factor, you’re going to want to consume more today. If you have a small discount factor, you’re more willing to save for tomorrow.

Krussell and Smith show that teeny tiny differences in discount factor, even if they are subject to a random walk around a mean with some persistence within households, leads to huge wealth disparities. Their conclusion is that “Poor households are poor because they’ve chosen to be poor”, by not saving more for the future.

I’ve heard, like one does, all kinds of critiques of Economics as an ideological discipline. It’s striking to read a landmark paper in the field with this conclusion. It strikes directly against other mainstream political narratives. For example, there is no accounting of “privilege” or inter-generational transfer of social capital in this model. And while they acknowledge that in other papers there is the discussion of whether having larger amounts of household capital leads to larger rates of return, Kruselll and Smith sidestep this and make it about household saving.

The tools and methods in the paper are quite fascinating. I’m looking forward to more work in this domain.

References

Krusell, P., & Smith, Jr, A. A. (1998). Income and wealth heterogeneity in the macroeconomy. Journal of political Economy106(5), 867-896.

Herbert Simon and the missing science of interagency

Few have ever written about the transformation of organizations by information technology with the clarity of Herbert Simon. Simon worked at a time when disciplines were being reconstructed and a shift was taking place. Older models of economic actors as profit maximizing agents able to find their optimal action were giving way as both practical experience and the exact sciences told a different story.

The rationality employed by firms today is not the capacity to choose the best action–what Simon calls substantive rationality. It is the capacity to engage in steps to discover better ways of acting–procedural rationality.

So we proceed step by step from the simple caricature of the firm depicted in textbooks to the complexities of real firms in the real world of business. At each step towards realism, the problem gradually changes from choosing the right course of action (substantive rationality) to finding way of calculating, very approximately, where a good course of action lies (procedural rationality). With this shift, the theory of the firm becomes a theory of estimation under uncertainty and a theory of computation.

Simon goes on to briefly describe the fields that he believes are poised to drive the strategic behavior of firms. These are Operations Research (OR) and artificial intelligence (AI). The goal of both these fields is to translate problems into mathematical specifications that can be executed by computers. There is some variation within these fields as to whether they aim at satisficing solutions or perfect answers to combinatorial problems, but for the purposes to this article they are the same–certainly the fields have cross-pollinated much since 1969.

Simon’s analysis was prescient. The impact of OR and AI on organizations simply can’t be understated. My purpose in writing this is to point to the still unsolved analytical problems of this paradigm. Simon notes that the computational techniques he refers to percolate only so far up the corporate ladder.

OR and AI have been applied mainly to business decisions at the middle levels of management. A vast range of top management decisions (e..g. strategic decisions about investment, R&D, specialization and diversification, recruitment, development, and retention of managerial talent) are still mostly handled traditionally, that is, by experienced executives’ exercise of judgment.

Simon’s proposal for how to make these kinds of decisions more scientific is the paradigm of “expert systems”, which did not, as far as I know, take off. However, these were early days, and indeed at large firms AI techniques are used to make these kinds of executive decisions. Though perhaps equally, executives defend their own prerogative for human judgment, for better or for worse.

The unsolved scientific problem that I find very motivating is based on a subtle divergence of how the intellectual fields have proceeded. Surely economic value and consequences of business activities are wrapped up not in the behavior of an individual firm, but of many firms. Even a single firm contains many agents. While in the past the need for mathematical tractability led to assumptions of perfect rationality for these agents, we are now far past that and “the theory of the firm becomes a theory of estimation under uncertainty and a theory of computation.” But the theory of decision-making under uncertainty and the theory of computation are largely poised to address problems of the solving a single agent’s specific task. The OR or AI system fulfills a specific function of middle management; it does not, by and large, oversee the interactions between departments, and so on. The complexity of what is widely called “politics” is not captured yet within the paradigms of AI, though anybody with an ounce of practical experience would note that politics is part of almost any organizational life.

How can these kinds of problems be addressed scientifically? What’s needed is a formal, computational framework for modeling the interaction of heterogeneous agents, and a systematic method of comparing the validity of these models. Interagential activity is necessarily quite complex; this is complexity that does not fit well into any available machine learning paradigm.

References

Simon, H. A. (1969). The sciences of the artiﬁcial. Cambridge, MA.

Bridging between transaction cost and traditional economics

Some time ago I was trying to get my head around transaction cost economics (TCE) because of its implications for the digital economy and cybersecurity. (1, 2, 3, 4, 5). I felt like I had a good grasp of the relevant theoretical claim of TCE which is the interaction between asset specificity and the make-or-buy decision. But I didn’t have a good sense of the mechanism that drove that claim.

I worked it out yesterday.

Recall that in the make or buy decision, a firm is determining whether or not to make some product in-house or to buy it from the market. This is a critical decision made by software and data companies, as often these businesses operate by assembling components and data streams into a new kind of service; these services often are the components and data streams used in other firms. And so on.

The most robust claim of TCE is that if the asset (component, service, data stream) is very specific to the application of the firm, then the firm will be more likely to make it. If the asset is more general-purpose, then it buy it as a commodity on the market.

Why is this? TCE does not attempt to describe this phenomenon in a mathematical model, at least as far as I have found. Nevertheless, this can be worked out with a much more general model of the economy.

Assume that for some technical component there are fix costs $f$ and marginal costs \$c\$. Consider two extreme cases: in case A, the asset is so specific that only one firm will want to buy it. In case B, the asset is very general so there’s many firms that want to purchase it.

In case A, a vendor will have costs of $f + c$ and so will only make the good if the buyer can compensate them at least that much. At the point where the buyer is paying for both the fixed and marginal costs of the product, they might as well own it! If there are other discovered downstream uses for the technology, that’s a revenue stream. Meanwhile, since the vendor in this case will have lock-in power over the buyer (because switching will mean paying the fixed cost to ramp up a new vendor), that gives the vendor market power. So, better to make the asset.

In case B, there’s broader market demand. It’s likely that there’s already multiple vendors in place who have made the fixed cost investment. The price to the buying firm is going to be closer to $c$, the market price that converges over time to the fixed cost, as opposed to $c =+ f$, which includes the fixed costs. Because there are multiple vendors, lock-in is not such an issue. Hence the good becomes a commodity.

A few notes on the implications of this for the informational economy:

• Software libraries have high fixed cost and low marginal cost. The tendency of companies to tilt to open source cores with their products built on top is a natural result of the market. The modularity of open source software is in part explained by the ways “asset specificity” is shaped exogenously by the kinds of problems that need to be solved. The more general the problem, the more likely the solution has been made available open source. Note that there is still an important transaction cost at work here, the search cost. There’s just so many software libraries.
• Data streams can vary a great deal as to whether and how they are asset specific. When data streams are highly customized to the downstream buyer, they are specific; the customization is both costly to the vendor and adding value to the buyer. However, it’s rarely possible to just “make” data: it needs to be sourced from somewhere. When firms buy data, it is normally in a subscription model that takes into account industrial organization issues (such as lock in) within the pricing.
• Engineering talent, and related labor costs, are interesting in that for a proprietary system, engineering human capital gains tend to be asset specific, while for open technologies engineering skill is a commodity. The structure of the ‘tech business’, which requires mastery of open technology in order to build upon it a proprietary system, is a key dynamic that drives the software engineering practice.

There are a number of subtleties I’m missing in this account. I mentioned search costs in software libraries. There’s similar costs and concerns about the inherent riskiness of a data product: by definition, a data product is resolving some uncertainty with respect to some other goal or values. It must always be a kind of credence good. The engineering labor market is quite complex in no small part because it is exposed to the complexities of its products.