Banking and value

Tim Harford offers a short but useful piece on the medieval origins of modern banking—in the Knights Templar, the great fair of Lyon, and so on.*

The Templars dedicated themselves to the defence of Christian pilgrims to Jerusalem. The city had been captured by the first crusade in 1099 and pilgrims began to stream in, travelling thousands of miles across Europe.

Those pilgrims needed to somehow fund months of food and transport and accommodation, yet avoid carrying huge sums of cash around, because that would have made them a target for robbers.

Fortunately, the Templars had that covered. A pilgrim could leave his cash at Temple Church in London, and withdraw it in Jerusalem. Instead of carrying money, he would carry a letter of credit. The Knights Templar were the Western Union of the crusades.

But, with the loss of control over of Jerusalem, the Templars were eventually disbanded in 1312.

So who would step into the banking vacuum?

If you had been at the great fair of Lyon in 1555, you could have seen the answer. Lyon’s fair was the greatest market for international trade in all Europe.

But at this particular fair, gossip was starting to spread about an Italian merchant who was there, and making a fortune.

He bought and sold nothing: all he had was a desk and an inkstand.

Day after day he sat there, receiving other merchants and signing their pieces of paper, and somehow becoming very rich.

The locals were very suspicious.

But to a new international elite of Europe’s great merchant houses, his activities were perfectly legitimate.

He was buying and selling debt, and in doing so he was creating enormous economic value.

And that’s Harford’s mistake: there’s is nothing about the buying and selling of debt (or, for that matter, any other financial service, from changing money to issuing letters of credit) that creates value, enormous or otherwise.

Banking often enables value to be created. Surplus-value, too. But it doesn’t create either value or surplus-value.

What bankers do is capture a portion of the surplus-value that is embodied in the goods and services that are produced, which is then distributed to them by those who actually appropriate the surplus-value. In other words, bankers (like many others, from managers to merchants) share in the booty.

Medieval bankers managed to get a cut of the surplus they did not create. And that’s exactly what bankers do today.

 

*Harford also notes that “by turning personal obligations into internationally tradable debts, these medieval bankers were creating their own private money, outside the control of Europe’s kings.” But he fails to mention the obvious contemporary parallel, Bitcoin, the private digital currency and payments system that was invented to finance criminal activities.

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Lies, damn lies, and statistics

Regular readers know I take statistics quite seriously. So, as it turns out, did Stephen Jay Gould who, in the most poignant story about statistics of which I am aware, explained how important it is to go beyond the abstractions of central tendencies and understand the distribution of variation within the numbers.

And right now, when the numbers are under attack—when, for example, the new Trump administration is threatening to purge the inconvenient numbers about climate change—it is even more important to understand the role statistics play in economic and social life.*

William Davies [ht: ja] offers one story about statistics, starting with the recent populist attacks on public statistics and the questioning of the experts that produce and interpret them. His view is that, for all their faults, the numbers collected and disseminated by technical experts within national statistical offices need to be defended—as the representation of “common ideas of society and collective progress”—against the rise of private “data.”

A post-statistical society is a potentially frightening proposition, not because it would lack any forms of truth or expertise altogether, but because it would drastically privatise them. Statistics are one of many pillars of liberalism, indeed of Enlightenment. The experts who produce and use them have become painted as arrogant and oblivious to the emotional and local dimensions of politics. No doubt there are ways in which data collection could be adapted to reflect lived experiences better. But the battle that will need to be waged in the long term is not between an elite-led politics of facts versus a populist politics of feeling. It is between those still committed to public knowledge and public argument and those who profit from the ongoing disintegration of those things.

I understand the threat posed by big, private data—all those numbers that are collected “behind our backs and beyond our knowledge” when we travel, make purchases, and participate in social media, and in turn are utilized to sell us even more commodities (including, of course, political candidates).

But I also think Davies, in his rush to condemn private control over big data, presents too uncritical of a defense of “the kinds of unambiguous, objective, potentially consensus-forming claims about society that statisticians and economists are paid for.”

Consider, for example, one of the “unambiguous, objective, potentially consensus-forming claims about society” Davies himself cites: GDP. Just last Friday, the headlines reported that the U.S. economy grew “only” 1.6 percent during the last quarter of 2016, “the lowest level in five years.”

The presumption was that the decline in the number (with respect to both previous quarters and economists’ forecasts) represented a fundamental problem. But why should it—why should a decline in the growth rate of GDP be taken as a sign of something that needs to be fixed?

Davies does mention that GDP “only captures the value of paid work, thereby excluding the work traditionally done by women in the domestic sphere, has made it a target of feminist critique since the 1960s.” But the controversies surrounding that particular statistic are much more widespread than Davies would have us believe. As a number of recent books (including Ehsan Masood’s The Great Invention: The Story of GDP and the Making and Unmaking of the Modern World) have clearly explained, the initial formulation of that particular measure of national income as well as subsequent revisions have involved theoretical and political choices about what should and should not be included—government expenditures but not labor within households, the production of fossil fuels but not the destruction of the natural environment, sales of private security but not the growing inequality it is designed to protect against.**

Even more fundamentally, GDP is a measure of market transactions, of goods and services produced—and thus the contemporary counting of the elements celebrated by Adam Smith’s notion of the “wealth of nations.” But what it doesn’t measure are the conditions under which those commodities are produced.

Me, I’d be much more willing to join forces with Davies and defend the claims about society that statisticians and economists are paid for if they were also paid to calculate and publicly report one other number, S/V, the rate of exploitation.

 

**We should remember that perhaps the real hero of volume 1 of Capital was Leonard Horner, who as a factory inspector “carried on a life-long contest, not only with the embittered manufacturers, but also with the Cabinet, to whom the number of votes given by the masters in the Lower House, was a matter of far greater importance than the number of hours worked by the ‘hands’ in the mills.”

**Other useful books on GDP include the following: Philipp Lepenies’s The Power of a Single Number: A Political History of GDP (Columbia University Press, 2016), Lorenzo Fioramonti’s Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number (Zed Books, 2013), and Thomas A. Stapleford’s The Cost of Living in America: A Political History of Economic Statistics, 1880-2000 (Cambridge University Press, 2009).

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Chart of the day

source (pdf)

The share of American workers in unions fell to 10.7 percent in 2016 (down from 11.1 percent in 2015), the lowest level on record, according to the Bureau of Labor Statistics (pdf).

What we’re seeing is a return to the downward trend for organized labor after membership figures had stabilized in recent years—and this is before the new Republican administration even took office.

source (pdf)

Union membership in the private sector fell by 119 thousand and the membership rate fell 0.3 percentage point to 6.4 percent. There was a slightly larger decrease in union membership in the public sector (down 121 thousand), corresponding to a 0.8 percentage-point drop in the public sector membership rate to 34.4 percent.

Although public sector workers are more likely than their private sector counterparts to be union members, there are still more private-sector union members (7.4 million) than public-sector union members (7.1 million). That’s because public-sector workers account for only about 15 percent of the workforce.

Addendum

source (pdf)

The Bureau of Labor Statistics does not publish union data by education level. However, according to the Center for Economic and Policy Research (pdf), union membership rates rise as education level increases

therefore workers with an advanced degree are the most likely to be union members. In 2016, their membership rate decreased 0.9 percentage point to 16.0 percent. The membership rate for workers with a bachelor’s degree fell 0.5 percentage point to 10.4 percent. Workers with some college but no degree and those with a high school degree all saw their membership rates decrease 0.3 percentage point to 10.6 percent and 9.9 percent, respectively. Workers with less than a high school degree had a union membership rate of 5.4 percent in 2016, the same as in 2015.

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Beyond Trump and free trade

Now that President Trump has begun carrying out his campaign pledges to undo America’s trade ties, formally withdrawing the United States from the Trans-Pacific Partnership and announcing he will start to renegotiate the North American Free Trade Agreement, it’s time to analyze what this means.

As it turns out, I’d already started to do this before the election, with a series of posts (e.g., here, here, here, and here) on Trump and the mounting criticism of the trade agreements the United States had signed (such as NAFTA) or was in the process of negotiating (the TPP).

It’s clear Trump’s decisions—which he claims are a “Great thing for the American worker”—challenge the view of economic and political elites, as well as those of mainstream economists (such as Brad DeLong), in the United States and around the world that everyone benefits from free trade.*

But, we now know, there has also been a growing counter-narrative, that not everyone has gained from growing international trade and trade agreements, which have generated  unequal benefits and costs. What’s interesting about this alternative story, at least when it comes to NAFTA, is that critics on each side argue the other side is the one that has benefited: U.S. critics that Mexico has gained, and just the opposite in Mexico, that the United States has captured the lion’s share of the benefits from NAFTA.

Here’s the problem: workers on both sides of the border have lost out, and their losses are mostly not due to NAFTA.

We know, for example, that the wage share of national income in the United States has in fact declined after NAFTA was implemented (in January 1994)—from 45.1 percent of gross domestic income to 42.9 percent. But we also have to recognize workers have been losing out since at least 1970, when the wage share stood at 51.5 percent.

Much the same has been happening in Mexico, where (according to the research of Norma Samaniego Breach [pdf]), the wage share (the dark green line in the chart above) has been falling since 1978—and continued to fall after NAFTA was put into place. And, as Alice Krozera, Juan Carlos Moreno Brid, and Juan Cristóbal Rubio Badan have shown, economic and political elites in Mexico, much like their U.S. counterparts, have mostly ignored the problem of inequality and resisted efforts to raise the minimum wage and workers’ share of national income.

The fact is, while NAFTA did propel a large increase in trade between Mexico and the United States, it “did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters” (according to a 2015 study commissioned by the Congressional Research Service [pdf]).

The bottom line is, eliminating or renegotiating NAFTA—including in the manner Trump is proposing—is not going to help the working-classes in either Mexico or the United States. It is merely a diversion from the real changes that need to be made, to which the political and economic elites as well as mainstream economists in both countries stand opposed.

 

*The only real debate within mainstream economics is between neoclassical economists who argue free trade generates the most efficient outcomes, within and between countries (regardless of whether countries run trade surpluses or deficits), and their critics (such as Jared Bernstein) who argue that trade deficits lead to a loss of jobs (e.g., in U.S. manufacturing), and thus require interventions of the sort Trump is proposing to change the pattern of international trade.

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