Households vs markets

The first symptom was the clutter on the kitchen counter. One cutting board, two pans, one knife. My colleagues had arrived at the rented house the day before, so they'd had plenty of time to arrange things to their liking. I was sure the clutter was not to their liking, if they noticed it at all.

A teachable moment. Instead of tidying the counter myself, and accreting a small amount of resentment, I suggested to one of them that she think of the things on the counter as things that were in her power to arrange however she liked, to suit her taste, selfishly. (“Just as you might optimize your text editor to suit your workflow,” my other colleague chimed in.) She took this suggestion, and spent a few minutes arranging and rearranging the items on the counter. She put away the knife in the knife block.

A puzzle. She noted that she doesn’t usually think of the items in her home this way. Instead, household chores feel as though they are impositions from an abstract, outside authority. She was capable of accessing this other, more pleasant way of working on the things around her. Why wasn’t it natural for her to feel that way in her own home?

An hypothesis. In our usual mode of life, there is a separation between a job - which is done for someone else, to satisfy someone else’s standards, outside the home - and consumption, which is at least ostensibly done to suit one’s own taste. One of the goods you can buy with an income from a job is a nice place to live, and you can also buy services to keep the place clean and tidy. For the most part, you maintain the place you live by leaving it, and entering the domain of an outside authority. Household chores are the remainder that cannot efficiently be outsourced, or an echo of a previous era in which such outsourcing was less common.

A household. I pointed out that in the past, people mostly did not work for a salary. Instead, they worked on things in their local environment. For the most part, this was not in order to receive money, but in order to have the thing, even if it was part of a process directed towards producing goods for trade. Home improvement used to be, not a hobby or special interest, but what one did if one wanted an improved home. Even those without a substantial amount of arable land to work might keep a garden. A minority engaged in trades or professions. Loops were mostly closed, either at the level of the household or at the level of the village.

A leak. My colleague pointed out that taxation means you can’t actually just have a closed loop anymore, even if you were willing to do without modern inconveniences. To occupy a space, even a space you legally own, unencumbered by any debt or lien, one must pay rent in the state’s currency. If you don’t pay, you have to leave. This means that at least some of a household’s activity has to be, in effect, defense spending: providing the state with mercenary services, directly or indirectly.

External standards. It’s worth noting that the phrase “good enough for government work” was originally a compliment; it referred to the exacting procurement standards of the US Government, more precise than the standards people were otherwise accustomed to. Things need to be machined with more legible precision if the customer can’t just go consult with the craftsman.

Tribute. Likewise, it’s a commonplace that a village can’t improve its prospects by taking in each other’s washing. But, actually, a village can’t improve its prospects by engaging in any sort of closed-loop commerce; something must be procured as tribute. In a country with an income tax, exchanging services - if legibly enough to be detected - actually causes an outflow of wealth.

Why are we doing this to each other?

Taxation is mobilization

Imagine a peaceful village with a closed economy. Much of the villagers’ productive activity is not transactional, but simply working to make the village a better place. The reward for producing food is that the village has more food. Perhaps some transactions are market-based, though few will be arms-length. If so, it is easy to imagine that a precious metal like gold might be, if not an actual medium of exchange, at least an unit of account. In addition, people often maintain their own households, and improve them. Again, the reward is an improved household, not money.

This way of life affords a freedom to which the people of my generation and the generation before are not accustomed: if you don’t like the activities by which one might get gold, you can just not do those things. Accordingly, social policing has to be comparatively direct. If you want to exclude someone from village life, you have to actually coordinate to run them out of the village. Especially if they own land to deprive them of their livelihood you have to physically expel them from their own house and land. Anything less is merely an inconvenience.

Suppose the Golden Benevolent Empire decides that this village, like many others along its border, needs defending against the Barbarian Horde. The Golden Benevolent Empire has limited resources, and insists that villages contribute to their own defense, in the form of professional soldiers.

One way to do this would be to demand specific in-kind contributions from each village. But centralized resource allocation of this sort is tricky, especially without reliable record collection and a very large computer, so it settles on a simpler expedient. Require a certain, small quantity of gold from each villager (a head tax, or maybe a land tax), on pain of death.

Now, everyone in the village needs to come up with at least a little gold. Not only will some people be happy to accept pay as professional soldiers, but the other villagers will be eager to provide whatever goods and services your army needs - so long as you are willing to pay in the same coin you demand from the villagers. Like magic, your army is fed, clothed, and equipped.

But something else happens. In the village, gold - which was perhaps used occasionally, either for transactions of ritual significance, the occasional foreign trade, or largely optional market transactions - is now just as necessary to sustain life, as food and water and shelter are.

Different villages may solve this problem differently. Some may coordinate to produce trade goods that can be sold elsewhere, otherwise retaining their accustomed mode of life. Others, already integrated into larger markets, may simply shift their production person-by-person slightly more towards trade. On the margin, closed-loop households are destroyed; no one can be fully self-sufficient. Villages nearest the military encampments will be in a good position to serve as intermediaries. Villagers from poor or remote villages, that can’t afford their tax, may move closer to these trade centers, or accept employment as mercenaries themselves.

In any case, all across the Golden Benevolent Empire, production shifts towards things that can be traded for gold, and people are more eager to keep accounts. Commerce, in other words, is booming.

In some ways, this points towards our present-day situation. We pay taxes, and this would be sufficient to explain why we can’t have totally closed loops. Small towns are dying, and people are moving towards participation in the global economy when they can. What it doesn’t explain is our apparent reliance on this process, such that when the demands made on us by the economy decline, our society doesn’t revert to more home production; instead, we anxiously seek out employment, and hope the state will stimulate additional demand.

MobsterBucks: an interlude

The need to concentrate resources to administer the Golden Benevolent Empire has led to the emergence of a few very large cities, where its administrators and soldiers have gold to spend. This drives up wages, which draws peasants from the poorer villages, the villages which are not productive enough to bear the burden of their land taxes. There are also great merchant ports, enabling gains from trade that could not have been realized before so many lands were unified and pacified under Imperial rule. Both of these cities also draw immigrants from other lands, because gold has no national allegiance.

The growth of these cities has outpaced the Empire’s ability to enforce its own laws, and in one of them, something strange and new is happening.

It is not at all uncommon that immigrant communities sharing a nation of origin have their own customs, norms, and ways of enforcing these. This can take the refined form of the Ottoman millet system, or the crude form of street gangs.

What is uncommon is how one of these gangs is administering its territory.

It is not at all uncommon for a gang to demand payment from the residents of its territory, in exchange for “protection” - both from outsiders, and from the gang itself. But in many neighborhoods, the amount of hard currency available is nearly nil - the people live on credit. Demanding in-kind payment is administratively difficult, for the same reason the Golden Benevolent Empire ultimately decided against it. One enterprising gang has a solution: MobsterBucks.

The proposition is simple, perhaps inspired by a folk tale about a village oppressed by archers. Each person in this gang’s territory has to pay one MobsterBuck per year, lest they meet with some sort of mishap like a broken kneecap or worse. How does one acquire MobsterBucks? Well, the gang is the sole issuer of said currency, and is happy to exchange it for goods and services it needs. Soon, the internal economy of this community is denominated primarily in MobsterBucks.

Having implemented this scheme, this enterprising gang now needs a monetary policy. If it spends too many MobsterBucks, then people will be less afraid of injury for want of MobsterBucks, and the exchange value of the currency will decline. This can of course be corrected by simply raising the rate of taxation - demanding more MobsterBucks from each person.

On the other hand, with an imbalance in the other direction, an inefficiently high number of people will be kneecapped, permanently reducing the productive capacity of the gang’s territory. Another problem with deflation is that inside the gang’s territory, debts are now denominated in the convenient unit of MobsterBucks. Anything that increases demand for MobsterBucks may unsustainably immiserate a large number of debtors, forcing them into less-productive debt slavery, and substantially eroding any good will towards the gang.

What to do if the gang is spending too few MobsterBucks? Giving money directly to the people lacking money would eliminate the incentive to work, which would reduce the productivity of the gang’s territory, but the gang can correct the imbalance indirectly by increasing spending or reducing taxes.

One might imagine that to avoid either an excess or shortfall of MobsterBucks, the correct policy would be a balanced budget: demanding and spending the same number of MobsterBucks each year (or other budgetary period). But in practice, some wealthy people in their territory may hoard MobsterBucks against a future need, leaving less than nothing for others, who may go into debt - leading ultimately either to debt slavery to the richer ones, or to kneecapping. So the optimal MobsterBucks spending and taxation levels are not obvious, and require considerable sensitivity to economic conditions.

A second question the gang may face is the optimal level of resource extraction. If the neighborhood is transient, or they face an emergency situation that requires all the resources they can bring to bear, they may as well extract all they can, as quickly as they can. On the other hand, if the neighborhood is comparatively stable, they may want to extract as little as they can, in order to allow the reinvestment of productive resources. The exception is the occasional public good; where the gang is well-positioned to make productivity-enhancing infrastructure improvements to the neighborhood, or subsidize otherwise undercompensated activity.

To some extent the Golden Benevolent Empire must account for the same things, but these are somewhat obscured by the fact that gold also has foreign exchange value, limiting the Empire’s freedom of action. I waited for MobsterBucks to introduce these complications, as a simpler example.

Wartime inflation

The Golden Benevolent Empire is at war! Its very survival is at stake! More soldiers are needed! More equipment is needed! The treasury is spent down, and taxes are raised. Whole villages are reorganized, to meet the increased demand for arms, supplies, and soldiers. People swarm towards the cities and fortresses and arms factories, where the money is flowing. Areas that are not so useful to the state suffer under the new taxes, and sink into debt.

The value of money changes during this period. The Empire’s demand for additional resources is greater than its territory’s ability to supply them, and more money chases increasingly scarce goods. Prices rise, and common citizens must make do on less. In war time, one needs national economy.

Interest rates also change. As the decisive battle approaches, the Empire would much rather have money now, than a year from now. It is willing to borrow, even at high rates of interest, since if it loses this battle, it loses everything. The towns and villages of the empire acquire a correspondingly high time preference. If you can get a better return on your money by lending it, than by reinvesting it in productive assets, then it is more profitable to do the former than the latter. This, too, is appropriate behavior for wartime; spend down resources, and recover once you are at peace.

But a side effect of this policy is that the poor sink into debt to pay their taxes, while those with money are further enriched by a high return on investment.

Then the decisive battle is won, and the Golden Benevolent Empire is at peace. Soldiers are released from duty, and sent back to their villages. Conscientious administrators and common citizens alike breathe a sigh of relief, and expect that after the austerity of war, they will reap the rewards of peace.

But things are not so easy. Enterprises that sprung up in the cities to serve the war effort find themselves suddenly out of business. The populations brought into the cities during wartime now find themselves with little to do. Many of them go back to their villages, but the villages themselves have less of their former character, and are oriented towards serving the national economy.

What’s more, while spending is reduced, this is not so much true of taxation. The Empire is honestly administered, and if it borrowed, then now it must pay back its debts. But this deflationary policy forces indebted farmers off their lands, reduces businesses that borrowed to support once-profitable enterprises to bankruptcy, and immiserates whole villages.

The Imperial government is not pleased. Imperial administrators have hearts, like anyone else, and they did not fight a war to immiserate their citizens. In the heart of the Imperial Treasury, a clever bureaucrat from humble origins in a poor area of the capital city comes up with a plan, based on what he saw his neighborhood’s street gang do.

In his plan, the Empire will confiscate all gold, and replace it with a scrip issued by the Empire: GoldenBucks. Creditors must now accept payment for all private debts in this currency, and it can also be used to pay public debts - taxes. The gold will be enough to pay off foreign creditors, but the Empire is no longer constrained by honor to tax as much as it spends. It can simply issue more GoldenBucks. As the people need employment, the Empire will spend or lend its newly minted GoldenBucks, until demand matches supply.

A massive, disruptive deurbanization is thus averted, and the Imperial economy continues its operation. However, the resulting taxation means that resources and attention still flow towards the places the Empire spends its money.

Of course, the government will still be constrained by a need to preserve the value of GoldenBucks - it would not do to disrupt the national economy too much, too quickly - so taxes will still be collected.

The world wars

In the first half of the 20th Century, the world order was shattered by two successive, cataclysmic wars. Great empires were brought down. The country that ultimately emerged victorious - and became the world’s sole superpower - won with a strategy of complete economic mobilization. In between these world wars, this country experienced a massive economic disruption in which a full quarter of people who wanted a job could not find one. The government responded by confiscating all hard currency, and substituting pieces of paper that its citizens were required to accept for debts previously denominated in gold. It then engaged in massive public works projects, paid for by this new, fiat currency.

The symbolism of this new currency is a bit too on the nose for me to include in a fictionalized narrative. On the obverse, a portrait of the country’s highest-ranking general, and a statement that this note is legal tender for all debts, public and private. On the reverse, a pyramid, perhaps the most famous of monuments built by centrally planned, conscripted labor, topped with an eye, a symbol of surveillance. And a bird of prey, holding an olive branch and an arrow; production and violence bound together by the agency of an apex predator.

These world wars coincided with unprecedented levels of urbanization. At the beginning of the century, 40% of the country’s population lived in cities. Halfway through, after the wars, 64% did. These wars were not isolated events. The transition to a state of total mobilization was happening before them. (In 1860, at the beginning of the US Civil War, only 20% of the US population was urbanized.)

The timeframe of this massive urbanization has roughly coincided with the timeframe in which recessions begin to be a thing. In earlier societies, we hear about immiseration, about famines, about disruptions in trade, about heavy taxation and debt serfdom, but not recessions. That’s a modern thing - we start hearing about them and related financial panics after the US Civil War, which was perhaps the first modern war with total economic mobilization.

What’s perhaps more surprising is that the trend has continued. After the conclusion of the second world war, the victorious US elected its foremost general as president. In his two successive four-year terms as leader of the free world, he presided over a transition from a system with the capacity to mobilize on demand, to a system of permanent readiness, the military-industrial complex he described in his valedictory speech:

Our military organization today bears little relation to that known by any of my predecessors in peacetime, or indeed by the fighting men of World War II or Korea. Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security more than the net income of all United States corporations. This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. […] Another factor in maintaining balance involves the element of time. As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage.

We do not seem to be in the middle of a cataclysmic war. Even the “cold war” against Russia appears to have been decisively won by the liberal Anglo-American system. But we behave as though we are still at war. I don’t just mean the routine bombing of foreigners, or maintenance of a huge permanent military establishment. I mean that we still have an elevated time preference, as though we were in a state of emergency; 10% is not an unusual internal rate of return for major corporations. Many businesses’ effective time preference is even higher. Perhaps we have become so accustomed to wartime mobilization that we don’t remember any other way of life.

The scarcity factory

Recall that between the world wars, the US (and much of the rest of the world) experienced, not peacetime prosperity, but a massive economic contraction leading to immiserated laborers, driven out of their homes and forced to wander as vagrants.

The orthodox policy solution is to create demand for labor. To manufacture scarcity. To create a pressure differential between money sources and money sinks, such that almost everyone in the country is required to do things, to alleviate that pressure.

But in the process we have become accustomed to accumulating wealth in the form of financial instruments and rising prices, rather than improved homesteads. These are the sort of wealth one can accumulate during wartime, but are only valuable as claims on the work of others. We can’t become richer by all going into debt to each other. So someone has to become poorer.

The composition of major businesses reflects this. The growth of the financial services industry is often cited in this context, but a classic business with a real physical product, like Coca-Cola, is a marketing company dedicated to persuading people to drink flavored sugar water. Facebook is mostly trying to maximize the attention it uses up. More generally, business as we know - especially weighed by profitability - is largely marketing, in the sense of creating needs. When it isn’t, it’s often about bottleneck capture. (There are of course major exceptions.) This is a battle for control of a fixed resource (cash flows), not production. Business books and news articles routinely use the framing of war to describe the running of a business. One is reminded of stories about how groups of chimps that encounter a stable food source begin to fight over it.

Our rulers didn’t create this system out of perversity; they did it to win two successive world wars. We can think of countries as engaged in an adversarial game, making tradeoffs between creating resources, and using resources in adversarial contests. The character of modern war has been such that while rapid militarization typical of the German strategy has failed, persistent economic mobilization of the kind employed by the Anglo-American alliance has dominated. Countries that succeeded in relaxing back to peacetime standard were perhaps simply selected out of the pool by means of conquest long before.

That doesn’t make the consequences of permanent mobilization any less unfortunate. Lifespans are declining at the center of the empire, though not yet at the periphery. This suggests that near the center time preference has increased to the point where we’re creating scarcity faster than we’re alleviating it, while at the periphery scarcity is still actually being alleviated because there’s enough scarcity to go around, or perhaps marginal areas do not suffer so much from total mobilization.

The friends I grew up with still live in a world where they can’t help with the family homestead because there is no homestead, even though in most cases they grew up not in a city, but in a house in the woods. If they can’t find a job with wages, they’re in serious trouble, even if they’re willing to work, even though there’s no war on, and no conscription. A high cost of housing, and tax burden, means you can have a situation, but not really property. The state will be happy to kick you off your land if you don’t cough up tribute, and this is the new normal.

Thanks to Jessica Taylor for helping me think through the households example, Jack Gallagher and Ben Pace for independently suggesting the idea of MobsterBucks, Wei Dai for pointing out the possibility of strong selection for political orders that can engage in total mobilization, Michael Vassar for independently noting that WWII in a sense never ended, and I owe a debt to David Graeber for the basic framework of taxation as mobilization.