July 16, 2013

Protectionism: A Fairy Tale of the State and War

Writing about web page http://www.pieria.co.uk/articles/in_defence_of_protectionism

On Pieria, John Aziz writes in defence of protectionism, that is, the use of taxes and subsidies to shield a country's economy from foreign competition. He begins from the Ricardian story of the benefits of two countries sharing the benefits of free trade based on comparative advantage.

England was good at producing wool, Portugal wine, so they trade and both are better off. There is the fairy tale about how because market transactions are always voluntary and always beneficial that trade, being simply a market transaction across borders, is always win-win.

But this, he says, is a "fairy tale." In real life, he argues, comparative advantage has little to do with resource endowments and is generally artificial. Comparative advantage may be part of the historical pattern, he concedes. But it misses something essential. What's missing? He goes on.

Let's imagine a model with two different goods, say, guns and butter. England specialises in producing guns and munitions, and Portugal in butter and agricultural produce. For years, they trade and enjoy the benefit of maximising output through specialisation. Then, England starts a trade dispute with Portugal. They cease trading. England loses access to butter and various agricultural products from Portugal's large population of butter-producing cows, having to replace Portuguese butter with lower-quality and higher-priced Welsh butter. Portugal, however, loses access to guns and munitions. Although this is immediately recognised as a risk to national security, and Portugal quickly tries to start up its own domestic firearms industry, the trade dispute escalates into full-blown war and with their geostrategic advantage in guns, England swiftly triumphs and occupies Portugal.

The implication is clear. Portugal should have insured itself against the contingency of conflict with England by limiting trade through protectionism. By means of an interventionist industrial policy, Portugal would have developed its own guns and could then have resisted England.

Several things are noteworthy about this argument.

First, it too is a fairy tale. As John Aziz rightly points out, there's nothing intrinsically wrong with that. All our models are fairy tales. The point is that some are useful and others not. How can we tell? We test them against stuff that has actually happened. If they survive the confrontation, then we can use them to suggest practical implications for the future. So, the fact that it's a fairy tale is of interest, but it's not a problem. Let's move on.

Next noteworthy point: Let's test this model against something that actually happened. Not literally, because England has not been to war with Portugal since long before gunpowder came along. Replace Portugal by Germany, however, and the fairy tale suddenly acquires an ominous ring of truth. Doesn't it have an uncanny fit with what happened in 1914?

No, not exactly. In 1914 Germany and Britain went to war. While Britain was the pioneer of free trade, Germany had practised protectionism since 1879. German tariffs limited trade and promoted self-sufficiency in both industrial and agricultural goods. In Britain, by contrast, free trade accelerated the decline of agriculture and maximized the exposure of the British economy to imports. In 1913 at least 60 percent of the calories used at home for human consumption were imported. Many observers thought that left Britain ridiculously vulnerable to wartime blockade. German naval strategists agreed. It's true that in World War I food became a weapon of war just as much as guns.

Yet in the outcome it was Germany, the protectionist power, that struggled to manage the wartime disruption of trade and saw civilians die of hunger, while the British got by without serious shortages.

What explains this turnaround? As Mançur Olson (1963) argued (and before him Friedrich Aeroboe), the German economy entered the war in 1914 already weakened by protectionism. Food tariffs had encouraged peasant farmers to stay on their farms. This kept a large subsistence agriculture in being and reduced productivity and incomes. Because German farmers were already well into diminishing returns it was then hard to increase output at need, when war broke out.

As for industry, because imports of food into Germany were restricted in peacetime and labour held back in agriculture, German urban employers faced higher wage costs. To compensate for higher wage costs, industrial firms economized on labour and pushed up productivity. But across the economy as a whole, efficiency and average incomes were reduced.

A history of protectionism gave no national advantage in either World War. I've argued (in several places; see Harrison 2012 for example) that the main factors that gave systematic advantage were a country's size and wealth, and the main source of disadvantage was a peasant-based agriculture.

In that case, what's protectionism all about? In understanding protectionism, redistribution is much more important than development. Whether tariffs and subsidies raise or lower long-run growth, in the short run they redistribute income away from consumers and exporters to import-competing firms, often by very large amounts. This should draw attention to their political significance. As Dani Rodrik (1995, p. 1470) once wrote:

Saying that trade policy exists because it serves to transfer income to favored groups is a bit like saying Sir Edmund Hillary climbed Mount Everest because he wanted to get some mountain air.

In history, protectionism has given politicians a powerful instrument to bind those "favored groups" into their projects. To Bismarck, protectionism was political: it brought together the interests of "iron and rye" to share rents and support Germany's "peaceful rise." Similar motivations lie behind most real-life experiments in protectionism that I am familiar with. The only real exception is the Soviet experience of autarkic industrialization; that was different because Stalin was an absolute dictator who ruled by fear and had no need to pay off campaign funders.

Modern promoters of the developmental state (including Dani Rodrik) could reply that they advocate only those selective interventions that are designed to improve social welfare, not corrupt the political process. That's an argument I understand, but it requires a benevolent, far-sighted government with the power to intervene and the self-restraint to do so only for the common good, not for the good of its supporters. That's a bit of a problem. I don't see a political system anywhere, short of totalitarian dictatorship, in which you could advance those policies and see them implemented without vested interests jumping on your bandwagon and hijacking it for their own purposes, which will have nothing to do with social welfare.

(It's ironic, then, that John Aziz lists "graft and corruption" as a problem of trade liberalization, because opportunities for corruption are created only where the government has something to withhold.)

The historical link between protectionism and aggressive nation building is strong. Using data for 1950 to 1992 Erik Gartzke (2007) has shown that restricting a country's trade and capital flows is a good predictor of its propensity to engage in conflict. From data for 1865 and 1914, Patrick McDonald and Kevin Sweeney (2007) have shown that protectionism was a robust precursor of engagement in "revisionist" wars.

John Aziz concludes with a warning:

China's monopoly on rare earth metals which have very many military applications may have national security implications for other nations including Britain and the United States whose ability to manufacture modern military equipment might be impeded by a trade breakdown.

Shouldn't we worry? Yes, but that's because we need to understand China, not because we should be preparing for war. Indeed, one of Mancur Olson's key conclusions was that it's a mistake to think of particular raw materials, and even oil or food, as in some way "strategic" or "essential." Only the final uses of resources are essential. In practice, if some particular material suddenly becomes scarce, the price goes up and and opportunities present themselves to economize at the margin or find alternative sources or substitutes.

The price goes up, it's true. In other words, the alternatives may be costly. But the richer you are, the more easily you can meet the cost. That's why rich countries survive trade disruption and win wars. As for protectionism, to the extent that it diverts resources from their best uses, it makes the country poorer in advance and so less able to afford the measures that might become necessary in a national emergency.

Which brings me to the last noteworthy point about the arguments that John Aziz makes: They have nothing to do with personal well being. As he correctly comments:

The relative value of outcomes is simply a matter of one's criteria.

In truth, the two fairy tales that he tells differ in addressing completely different criteria. The free-trade fairy tale always was and is about the personal welfare of all members of society. Here, society is global: when trade is free, all gain, not just the residents of one country. The protectionist fairy tale, in contrast, is about nation-building and facilitating conflict in a world where elite coalitions build states, states compete for power, and a gain for one country is a loss to others.

The world is a complicated place. In the same spirit as John Aziz when he notes that the free trade story has some merit, I'm going to accept that the unregulated interaction between real world economies sometimes creates losers. There have evidently been historical circumstances when protectionist policies accidentally did no harm, or even did good by accidentally correcting some market failure.

But the design of protectionism has generally been far more driven by vested interests and power building than by concern for social welfare. Those who enter themselves in the reckoning against free trade often rely on an idealized understanding of the record.

References

  • Gartzke, Erik. 2007. The Capitalist Peace. American Journal of Political Science 51:1, pp. 166-191.
  • Harrison, Mark. 2012. Pourquoi les riches ont gagné: Mobilisation et développement économique dans les deux guerres mondiales. In Deux guerres totales 1914-1918 − 1939-1945: La mobilisation de la nation, pp. 135-179. Edited by Dominique Barjot. Paris: Economica, 2012 (here's a preprint in English).
  • McDonald, Patrick J., and Kevin Sweeney. 2007. The Achilles’ Heel of Liberal IR Theory? Globalization and Conflict in the Pre-World War I Era. World Politics 59:3, pp. 370-403.
  • Olson, Mançur. 1963. The Economics of the Wartime Shortage: A History of British Food Supplies in the Napoleonic War and in World Wars I and II. Durham, NC: Duke University Press.
  • Rodrik, Dani. 1995. Political Economy of Trade Policy. In Handbook of International Economics, vol. 3, pp. 1457-1494. Edited by Gene Grossman and Kenneth Rogoff. Elsevier.

July 13, 2013

Ken Wallis at 75: Lessons in Life and Leadership

Writing about web page http://www2.warwick.ac.uk/fac/soc/economics/news_events/conferences/kenwallis_open/

On Thursday evening I was asked to say a few words at a conference held to honour Ken Wallis at the age of 75. Ken is Emeritus Professor of Econometrics at Warwick. There were a lot of distinguished people there from the world of econometrics. I would guess I know less about econometrics than just about anyone else that was present. I was there to thank Ken not for what he taught me about econometrics but for what he taught me about life.

When Ken became chair of the Department of Economics at Warwick (I would guess around 30 years ago), he gave me my first serious admin job. I became exam secretary for the department. Now, this job was a real headache. One reason is that in those days we had no administrators, so the exam secretary did it all. Another reason is the nature of university exams. We have a lot of rules and courses, and students come in all shapes and sizes, and somehow you have to fit every single one of them to the rules. It's like being given a packet of screws of different types and threads and the only instrument you have is a hammer.

Anyway, because the students gave me many problems of that kind, I found myself knocking on Ken's door a lot. For example, in my first year it just happened that a lot of our best students were cricketers and they suffered a lot of injuries in the warm days of May when they should have been indoors revising. So I had a succession of sufferers from broken thumbs and sprained wrists. The first time this happened, I went to Ken and said: "What do we do?" He asked right back: "What do you think?" And I said: "I have absolutely no idea!"

The next thing, Ken gave me a look. This was a look that I got to recognize and know quite well. He would sit back in his chair, tilt his head slightly, and his mouth would twitch as if he might be going to smile, or maybe not, but he was definitely about to say something that I knew I had to listen to carefully.

Then Ken said: "Okay, you go away and spend a bit of time working out what you think we should do. Then come back and tell me, and probably, almost certainly, I'll agree with you." So, that's what I did. But I also realized Ken was telling me something deeper. He was saying: "Don't be part of the problem. Be part of the solution." And this was a very important lesson for me, one that I have always tried to follow.

In passing, I'll add that this lesson was particularly useful later on, when I became chair of the department myself. I soon realized that if you go to the faculty chair or the vice chancellor and you say "I have a problem" they quickly get to hate you because they are already extremely busy and you're just adding to their burdens. But if you go and say "I have a problem but I also have the solution" they love you because they feel reassured that you are in control and you're not going to make their lives any more miserable, and they can focus their hatred on the ones that are just burdening them with problems that have no clear solutions.

Here's another thing I learned from Ken. One year I was going through the exam files and I came up with what I thought was a big problem: a student whom we had misclassified or misadvised or mistreated in some way -- it's a long time ago and I really don't remember the details, but nobody knew about it except me, and I was panicked by the thought of what would happen if other people, and particularly the student, found out about it. I knocked on Ken's door and told him about the problem and said: "What do we do?"

I looked at Ken and once again Ken gave me that look. So I waited and listened, and then Ken said: "This isn't even a problem. If we messed up, we'll just tell the truth. If we need to do something to fix it, we'll do that, If we need to apologize, we'll do that too." This was my second lesson from Ken, and again it was important to me later: I learned that it's wrong to cover your misdeeds.

My third lesson was the hardest one. It's in the nature of exams administration that everything comes at once. Every June I found myself working my socks off to get all the exam scripts distributed to the right people and get all my colleagues to follow the rules about marking (in those days everything was independently double marked) and get their marks in on time and correctly recorded, and I also had to do my own marking at the same time. It was hard going. So in my last year I went to Ken, and I explained the problem and in the way that I had learned from him I also suggested a solution: "Can I give myself a discount on the marking load?"

Again the look. Then, Ken said:"No." (My audience laughed a lot when I said that.) Ken went on: "The officers have to lead from in front. You can't send the troops into battle while you're sitting in the rear." As I said, this was the hardest lesson for me personally, but it too made a deep and lasting impression on me.

Anyway, Ken never succeeded in teaching me any econometrics, but he taught me a lot about life and leadership, and these lessons have stood me in very good stead over the years since then. So Thursday evening was my chance to say "Thank you" to Ken at 75.

PS If you want to know more about Ken's contributions to econometrics you can look him up on RePEc, where he is listed among the top 5 per cent of economists worldwide on a whole string of criteria.


June 12, 2013

Mordor: An Economic History

Writing about web page http://lectures.gaidarfund.ru/articles/1698

When I visited Moscow in April, Ilya Venyavkin of the Gaidar Foundation was kind enough to interview me. The interview has just appeared in Russian on the Gaidar Foundation website. Here I've translated it back to English.

***

Mark Harrison: “When people said they’d prefer a strong leader to democracy, as an economic historian I say: I’ve heard that before somewhere." A professor of economics at the University of Warwick, Mark Harrison recalls his attraction to communist ideas and explains why we need economic historians, and why the USSR reminded him of Tolkien’s Mordor.

  • Gaidar Foundation: Why did you become interested in the Soviet economy?

Mark Harrison: I’m a child of the Cold War - my parents followed events in the Soviet Union closely and felt the fear of nuclear war. At the age of six or seven, I already knew of the Soviet Union as a threat. An incident when I was in school had quite an influence on me: during English class we had to demonstrate correct usage of an idiom, “a household name” (“a person that everyone knows”). When my turn came, I said: “Khrushchev.” Then my problems began. First, the teacher began to ask me why I named Khrushchev and not, for example, Kennedy; then my classmates teased me that I was a communist. At the time I had no idea what that meant, and in the end I decided to find out. A few years later I began studying economics, and one of the reasons I became interested in it was Karl Marx’s Communist Manifesto. I read it and asked my father if what was written there was true. My father said he didn’t know, and then I decided to look into that too.

The end of the 1960s, when I went to university, was a time when youth culture and student movements flourished: we were all revolutionaries and socialists. I studied at Cambridge and we had lectures from Charles Feinstein, one of the leading economic historians of the twentieth century. Charles was born in South Africa and was a member of the Communist Party of South Africa. In his homeland he faced a choice: leave the country or go to jail. He ended up in England and I learned a lot from him. Another of my teachers was Maurice Dobb: he was a member of the British communist party, and he wrote the first serious (although somewhat biased) history of the Soviet economy. All this led me naturally to the idea of studying the Russian economy.

  • GF: And you also became a leftist?

MH: Yes, and I stayed on the left for quite a long time.

  • GF: Were you hoping to find in the USSR a model of a more just social and economic order?

MH: That’s what I hoped, but it’s not what I found. I can describe clearly the impact on me of visiting the USSR in 1972. I brought two thick books: one was the works of Jane Austen, and the other was The Lord of the Rings in three volumes. I read Jane Austen first, and that was great because it was a complete escape from life in the Soviet Union. Then I started to read The Lord of the Rings, and a depression descended on me because I saw something just like the Soviet Union: border guards, barbed wire, a secret police ...

To live in the Soviet Union was both frightening and interesting. As a foreigner I lived a privileged life - we always knew that nothing would happen to us, unless we did something really stupid. We knew we were living in a police state, and we quickly learned the simple rules – for example, always to call only from a phone booth, if possible, and not to tell anyone about one’s plans.

  • GF: Did you come across the secret services during your first visit?

MH: Not directly. But I’ll tell you a story: before going to the USSR (our student trip fell under an intergovernmental agreement), we attended a meeting at the Foreign Office where a diplomat, who was in charge of the meeting, told us:

You are going to Moscow to study and that’s fine. But be careful, because the KGB will be interested in you – they may follow you, see who you are talking to, or even try to compromise you by using alcohol or drugs to put you under pressure. If that happens, come to us and we’ll help you.

Last year, I chanced on a document in the archives of the KGB, dating back to the end of the 1960s. The document says that the British Foreign Office is advising everyone who visits the Soviet Union about the working methods of the KGB. It goes on to detail all the advice that our diplomat gave us. I was reading the paper and I was wondering what they would write at the end – would they say that this was pernicious anti-Soviet propaganda? But in the last paragraph I found the words:

We circulate this information to all operative staff so that they can be aware that our working methods are known.

  • GF: Do you remember exactly when you became disillusioned in the system?

MH: I continued to believe in the possibility of a more just world order and I was attracted by the idea of Euro-communism – the ideas of reform communism that arose in Italy, France and Spain. With many friends I was very excited when Gorbachev came to power. We hoped that he would be able to combine the ideas of socialism and democracy. But this did not happen. That was when I realized that I needed to move on – the stage of my life that began in 1970 came to an end in 1991.

I think it’s a very interesting example of how each new generation came to the Soviet experience with new knowledge and new hope. New knowledge meant an understanding of how terrible everything could be, but there was always the hope that it could all still be put right, and Khrushchev had that, and then the Eurocommunists, and then Gorbachev. Today what I believed then looks completely crazy, but nonetheless I believed it wholeheartedly.

  • GF: How did you react to the rejection of socialist values in the 1990s?

MH: I think that at that point I was already becoming a liberal. I am very grateful for my experience of the 1990s, because I was able to see how a colossal system broke down as production stopped, money lost its value, and law and order stopped working. I understand that the transition period was very difficult, although I don’t accept (as some do) that it was because of this that millions died.

Another issue is the growing nostalgia today in Russian today for the days of Brezhnev or Stalin. But it is very useful to compare this situation with that of Germany: After the fall of the Berlin Wall, all the opinion polls showed that residents of the former East German state were very happy to get rid of self-censorship and constant surveillance by the Stasi. Today, people have had time to forget about what it was like for them, and nostalgia for the GDR is growing.

  • GF: What do you think of Gaidar’s reforms as a scholar?

MH: I’m not sure I have an easy answer. I have a few answers. First, he was a brave man. Secondly, I am not sure that at that moment he had a lot of choice. The state was collapsing and in such a situation it’s not particularly important what policy you choose, or whose advice you listen to, because you have only a very limited ability to influence the situation. The collapse of the Soviet Union had begun under Gorbachev and by 1991 has already gone so far that, it seems to me, the trauma of transition was unavoidable. As you know from my lecture, I’m not one of those who believe that the Soviet Union could have followed China’s path.

The main problem of the transition period in Russia was the oligarchy that emerged from privatization and the loans for shares deal; many people both here and in the West believe that there was dirty dealing. This is the original sin of the Russian reforms, which continues to define the nature of the economic and political system in Russia.

I could imagine a different version of events in which the Russian companes could have been sold off in open international auctions. In this case, the Russian government would have been able to recoup much more money, and then a limited stratum of extremely rich people would not have been created. But that raises another question: could the Russian government at that moment have afforded to sell the most important industrial companies to foreigners?

Now I think a lot about the disastrous consequences of nationalism, and this is another example of how nationalism hinders the government from making the right choices.

  • GF: Was it possible to avoid the collapse of the Soviet Union?

MH: No, I think not. Gorbachev’s decisions were very important. You can quite easily imagine that if Andropov lived a little longer, he would have used repressive methods, and they would most likely have had some effect.

When the miners went on strike in 1989, Gorbachev gave a very clear signal that the old repressive methods would not be applied. It was Gorbachev’s personal decision and everything followed from that. It is easy to imagine how Andropov might have decided otherwise. In that case the Soviet Union would have survived longer, although it would not have become a prosperous state, just there would have been some more time before it collapsed.

  • GF: What issue in the economic history of Russia do you think is most interesting?

MH: There are areas of research that I think are extremely promising. My co-author Andrei Markevich is working currently in one of them – to reconstruct the economic history of pre-revolutionary Russia. The point is that what we know about this period is based on various assumptions with little idea of how they correspond to reality. Now Andrei is building regional statistics, and this should give us a much better idea of how Russian agriculture was organized and how effective were the measures to reform it. I think that in 10 or 15 years we will have very precise answers to these questions.

A second major theme, one that I am engaged in now, it is the question of how the security system worked in the Soviet Union and how it influenced the Soviet economy.

  • GF: What is going on today in economic history as a discipline?

MH: I think economic historians are currently doing two things that are important both for science and for society. [One is that] they are giving much attention to the long-term. My colleagues are working on the national accounts of England and Holland and tracking them back to the eleventh century so that they can make use of a thousand years of data. Tracking and comparing data in the long term, we can think much more clearly about the nature of economic growth. For example, we find that medieval Europe was much richer than many modern countries, and that the conditions for the industrial revolution matured over several centuries. Such studies are extremely important and of significant interest to the public. This, incidentally, is an additional complexity facing economic historians: in contrast to more traditional historians, it’s more difficult for us to tell a compelling story and attract public attention.

Another important task of modern economic history is to tell people about the economy in historical perspective. Today the world and, especially, the Western capitalist countries are going through an economic downturn and people are in a panic because they have not lived through a similar crisis before. But economic historians can say: Look at the Great Depression of the 1930s for other examples of economic crises – what's going on is not new.

This is an important lesson. Currently many people are saying: Look at the disastrous results of democracy and the free market economy, the government should step in. Maybe we need less democracy and more strong leaders! As an economic historian, I say to myself: I’ve heard this before somewhere. In the 1930s it was just the same. Then, it seemed, liberal democracy had failed and many countries turned readily to communism and fascism. This was a real disaster, ending in the Second World War and 50 million deaths. We shouldn’t do it again.

***

Video presentation and transcript of Mark Harrison’s lecture: “Stumbling Bear, Soaring Dragon: Could the Soviet Union have Followed the Chinese Road?”

Mark Harrison’s three must-reads for those that are starting out in economic history:

  • Lizzie Collingham, The Taste of War: World War II and the Battle for Food(Allen Lane, 2011).
  • Jared Diamond, Guns, Germs, and Steel: The Fates of Human Societies (Norton, 1997).
  • Paul Gregory, Terror by Quota: State Security from Lenin to Stalin (an Archival Study) (Yale University Press, 2009).

June 11, 2013

Needles in the Mega–Haystack: NSA versus KGB

Writing about web page http://www.bbc.co.uk/news/technology-22811580

Widespread concerns about mass surveillance in Western societies have been triggered by two revelations in The Guardian: a court order of the U.S. Foreign Intelligence Surveillance Court giving the FBI unlimited access to the call logs of the Verizon telephone network; and details of the Prism program that gives the U.S. National Security Agency – and maybe others, such as our own GCHQ, access to servers through which foreign communications pass.

Natural questions arise. Are our liberties at risk, along with our privacy? Are we moving in the wrong direction along the spectrum that runs from a free and democratic society to a totalitarian police state?

To help answer such questions, it would seem only sensible to ask how surveillance works in real totalitarian police states. The answer might give us a reality check. That comparison is what I’m going to offer. I’m going to point out some important similarities between what the U.S National Security Agency (and others) are up to and the functions of the secret police under communist rule. I’m also going to show some differences. My conclusion is going to be that we are a long, long way from mass surveillance in the style of the Soviet KGB or China’s Public Security Bureau. But that should not be completely reassuring.

Here are the similarities that look important to me:

  • Mass surveillance

American counter-intelligence is in the business of mass surveillance. They’re looking at everyone. Jeremy Bash, chief of staff to former CIA director and defense secretary Leon Panetta, is quoted in the New York Times as saying:

If you’re looking for a needle in the haystack, you need a haystack.

That haystack is the millions and billions of bits of our data that are being gathered. Mass surveillance was also the business of the KGB, as it is the business of the secret police under any dictator. In fact, counter-intelligence everywhere has an unquenchable thirst for personal facts. Every secret policeman knows that the most dangerous enemy is the one you don’t have on file. You can keep tabs on the ones already in the Rolodex – but what about the sleepers, the new recruits, the ones that are out there and completely invisible to you? It’s what you don’t know that can kill you. So, in the interests of staying alive you can never know enough.

  • Detection relies on big data

How do you find the enemy you don’t know? By using data and looking for patterns in the data. This is what the KGB did. They looked for several kinds of patterns. They were pioneers of profiling, for example. They figured that many disloyal people had markers in common, although exactly what mattered changed from one period to another. In one period it was your social origins – upper class (which meant the regime had taken your property) or poor. In other periods it was whether you had family members that had fled abroad, or you spoke a foreign language, or you had stayed behind when the war came and tried to live quietly under German occupation. So, the KGB looked for people with those markers. Another thing the KGB looked for was who knew whom or was related to whom. When they put a person under surveillance, they obsessively tracked friends and family members, telephone callers, letter writers, and so on. A third thing was just to look for unusual patterns of activity in the street and at work. To know what was unusual, they had first to know what was usual, and this in itself required data collection on a massive scale. The abnormal would stand out only against the normal. Qualitatively, this isn’t different from what the FBI or the NSA are doing. They too are mainly just looking for anomalies, or patterns of interest in the data.

  • The goal is prevention

The ultimate goal of surveillance is prevention. Exactly what is being prevented may vary. Most western intelligence agencies today are trying to prevent another 9/11 or its London equivalent, another 7/7. They are also trying to prevent the public from finding out exactly how they are doing this, because that knowledge might help their targets to pass under the radar. China’s Public Security Bureau has a wider set of goals: to prevent public disorder, to prevent open criticism of China’s leaders and political order, and to prevent everyone from getting the idea that open opposition could ever be normal and go unpunished. The KGB’s goals were pretty similar. To do any of these things you have to be ready to react instantly to signals that something is up. Sometimes you receive a signal, and you can wait and see how it develops. Sometimes you have to react and nip it in the bud even before you know what it is that “it” might be. To prevent the bad stuff you have to review all situations that look as if they have a potential for going bad, and consider all people that look as if they have a potential to become enemies. Identifying the potential enemies is always and everywhere a judgement call.

  • Risk of type I errors.

So much in this line of work is a judgement call that errors are inevitable. Some are what statisticians would call Type I errors and some are of the opposite type – Type II. You make a Type I error when you see a pattern in randomness, so for example a person has a random resemblance to a terrorist by having the wrong appearance and being in the wrong place at the wrong time, and suddenly you’ve got them on a plane to Guantanamo Bay. And then a Type II error is when you miss a pattern, or overlook a real spy or terrorist. To explain this another way, when you’re looking for a needle in a haystack, and it’s important to avoid missing it, it’s inevitable that you will turn up lots of things that might be needles because they look quite like needles and in fact you might have even stuck one in the pin cushion before you realized that it’s just a shiny thorn … and now you can’t be bothered to retrieve it. Yes, and that means that where there is scope for error there is also scope for abuse, because secret policemen are not all dedicated professionals; among them will be those that are too lazy, or too ambitious, or too much in love with power to correct a mistake. In most situations Western societies show a preference for Type II errors over Type I errors; we’d rather leave a criminal at liberty than imprison an innocent person. That’s not so hard when we’re talking about shoplifting; it’s harder by orders of magnitude when the criminal at liberty has the potential to behead a bystander or fly a passenger jet into a shopping mall.

Those are the ways in which western counter-intelligence looks very much the same as counter-intelligence under totalitarian rule. But there are also some key differences. Here they are:

  • Law governed and openly contested

Most obvious is the existence of a legal framework. It was not always like this but in both Britain and America the intelligence services now operate within the law, subject to both legislative and judicial oversight. The law permits some things and not others. The NSA can find out that X sent an email to Y, but it can’t read your email without a court order that names you and convinces a judge of probable cause. This framework may well look unsatisfactory, and may indeed be unsatisfactory; I’m not a lawyer and don’t pretend to know. At the same time, we also have a free press and intrepid journalists that have strong incentives to find scoops and dig out scandals. As a result, the scope of secrecy and surveillance is law-governed (although imperfectly), open to free discussion (to the extent that we know of it), and contested (vigorously and continually). If you don’t like the law you can take the contest to the polls, and do the hopey-changey thing of tossing out the law makers. Or you can take a personal stand, break the law, and answer for it in the courts like Bradley Manning (although this does not seem to be the path preferred by Julian Assange or Edward Snowden). The contrast with the situation in countries under communist rule could not be more stark. There the KGB responded only to the instructions of the ruling party (and the same no doubt holds in China, Cuba, North Korea, and North Vietnam); there was and is no answerability to the parliament, the courts, or the press. What is more, the merest mention of secrecy and surveillance was completely suppressed; the existence of secrets was a well policed secret.

  • A much bigger haystack

America’s haystack is of unimaginably vast dimensions. It’s so big that, according to Edward Luce in the Financial Times, it employs a data-intelligence complex with a staff of nearly a million and a budget of $80 billion. The KGB’s haystack was pretty large in its time. It was put together from many individual straws: agent reports of gossip from canteen queues and student dormitories, surveillance reports, information gathered from microphones, phone taps, opening the mail, and so forth. In 40 years the archive of KGB counter-intelligence in Soviet Lithuania (a country of around 3 million people) accumulated at least a million pages of documents. On that basis, the total paperwork of the entire Soviet KGB archive (for 70 years and a country of 200 million people and more) ought to exceed that of Soviet Lithuania by at least two orders of magnitude. And this was in a society with one landline system and one mail service, without networked computers or mobile phones, where no one even had free access to a photocopier. When even intercity phone calls had to be booked through an operator in a city exchange, it was relatively easy for the KGB to monitor anyone’s personal network. So the size of America’s haystack must be thousands of times larger than this, and probably tens or hundreds of times larger than even China’s haystack. This observation, at first alarming, is testimony to the fact that we live in a free society in which communication is unfettered and of negligible cost by historical standards. We, the citizens, are the ones that make the haystack so large by our abundant use of the freedom to communicate.

  • Many fewer needles

The problem of finding needles in this vast haystack is magnified by the fact that western societies do not appear systematically to produce needles – certainly not on the scale of more repressive societies. As the sociologists Inkeles and Bauer (in The Soviet Citizen, 1959) reported from the first wave of the Harvard Interview Project, the Soviet system of repression was apparently based on the assumption that everyone had a reason to hold a grudge against the communist rulers somewhere in their past. A parent had lost property, a brother had been arrested, a husband shot, a cousin’s family resettled in the remote interior. As time passed the salience of such historical events might recede, yet for some reason each new generation of Soviet-educated citizens kept on throwing up new kinds of nonconformity and outright disloyalty that had to be monitored and checked. In contrast western societies are not governed by dictators that have systematically expropriated property and penalized wide social classes and ethnic groups; they also provide multiple channels for citizens to express discontent and resentment and organize for social and political change. Despite this, there are still needles: enemies of openness and tolerance. But they are far fewer in number than the hostile forces that repressive regimes cannot help but produce and reproduce continually.

  • More type I errors.

You put a much bigger haystack together with far fewer needles and the implication is unmistakeable. When the haystack is small and needles are many, the chances of making Type I errors are reduced. Under communist rule, if it pricked like a needle and it looked like a needle, there was at least a good chance that it was a needle. Any western intelligence agency trying to find those few needles in today’s mega-haystack has a much reduced chance of coming up with real needles compared with their communist counterpart, and a correspondingly heightened chance of false positives. The fact that so many people are looking for the few needles, that the number of big data analysts must exceed the probable number of real terrorists by a factor of one hundred or even ten thousand, just makes it much, much worse. So you want to make a career as an analyst. How can you distinguish yourself if you never identify a threat? How can you fend off boredom if you never reach the point of saying: “This is someone we should look at more closely”? So you do it, and you make a mistake. Well, it was worth looking into. And that is most unfortunate, because as a society we want to live in safety but we also hate Type I errors. We intensely dislike the idea that an incidental bystander might get investigated, or even detained, because of an intelligence error. So intelligence errors sow cynicism and mistrust.

Now I’ll summarize. NSA versus KGB: Is there good or bad news in the comparison? To me the news looks mostly good. Compared with the KGB, the NSA looks quite benign. But there is also a warning. The warning flows from the observation that there is no limit on what our guardians would like to know about us. The more they know, the better informed they are. But the more resources they have, the greater is the scope for over-ambition, the abuse of power, and the false positives that we rightly fear. How much is enough? The purpose of national security is not to suffocate us with cotton wool. It is to enable us to be the people we would like be and to protect the rule of law that we would like to have. In a free, open society the limits of security are something we, the citizens, should always debate, contest, and, if necessary, push back.

About me: I've spent much of the past five years working with archives of the KGB of Soviet Lithuania held at the Hoover Institution Archive. This work is in a paper I have coming out soon in the Journal of Economic History and in other work in progress or under review.


May 31, 2013

When the USSR Collapsed: What do Russian school students think?

Writing about web page http://gaidarfund.ru/articles/1693

What do Russian school students think about the collapse of the USSR? On 28 May the Gaidar Foundation published excerpts from an essay competition among Russian school students, in which they write about their impressions and the family histories that have been passed down to them.

With permission, here is my translation of the article on the Gaidar Foundation website. I've kept as close to the orignal as I can; any words that I inserted for clarity are in [square brackets]. An important Russian word is perestroika, which literally means "restructuring" or "conversion." Mikhail Gorbachev did not invent it; in fact it was a common Stalinist buzzword for reorganization. But he used it to describe the package of economic and political reforms that he developed in the late 1980s, which turned out to point the way to the dissolution of the Soviet Union, and that's how most people know it today. I have left it as perestroika, capitalized or not as in the original, except in one case where the writer clearly has a double meaning in mind.

Anywhere, here it is.

What do students think about Perestroika and the collapse of the USSR?

May 28, 2013

Excerpts from essays by students who participated in the historical game “The Last Russian Revolution (1989-1993),” organized by the "Memorial" Society in conjunction with the Yegor Gaidar Foundation under the competition for schools “The Person in history: Twentieth-century Russia.”

In April 2013, the winners of the Fourteenth All-Russian senior school students’ historical research competition organized by the “Memorial” Society came to Moscow. On one of their days in the city, they took part in an historical game jointly organized with the Yegor Gaidar Foundation, dedicated to events of the late 1980s and early 1990s.

During the game, students listened to two expert lectures, went round a historical exhibition, and took part in a debate. The players were formed into teams, and with the help of an adviser each had to formulate its own response to the questions of the time in mid-1991: Should we keep the Soviet Union? Should we move from a command economy to a [market] economy? On which countries should Russia focus its development? In addition, each team had to support the perspective of one of the social forces influential in the early 1990s. They had to defend this point of view in debate.

Before the game started, the competition winners had to write a short essay on Perestroika and the collapse of the Soviet Union. Below are the most vivid excerpts from these works, which form an interesting picture of the younger generation's [attitudes to] the events of 20 years ago.

Why did the Soviet Union collapse? What leading characters and events determined the course of Russian history of the late 1980s and early 1990s?

I do not know exactly, but I think the Soviet Union fell apart because there was a power struggle. I think that's what happened in 1991.

***

In my opinion there are several reasons. First was the weakening of central authority. Second was ethnic conflict. As we know, republics could not secede from the USSR. The third reason was the deep economic crisis after the Great Patriotic War, the “Cold” War, and the arms race. Resources went to build nuclear weapons and heavy industry, and the social sphere was left with tens of percents. The fourth reason was dissatisfaction with control over all spheres of society – people were becoming more active in political life.

***

The words Gorbachev and Perestroika are inextricably linked. Gorbachev was young enough when he came to power, and he had a birthmark on his forehead. Everyone said that he was a marked man, that he would do either much good or much bad, but he leaned more to the bad side. The result was Perestroika.

I think change was necessary! Gorbachev's ideas were not bad. But at the same time there was no clear plan or support team.

***

Before I begin my story of Perestroika, I will say I am neither “for” nor “against” perestroika. Yeltsin, Sobchak, Gorbachev are the main heroes and villains of this comic book called “perestroika.” There are many nuances, so I will not come to straightforward conclusions. My parents were all ardent activists for perestroika and yes, in many ways, I understand them. Communism sounds good, but how many plans were there and what was the outcome? Nothing, it was all beautiful on paper. My grandmother used to say: “in childhood we were all dreamers, we all lived with the idea that we would live better than anyone.” And in fact humanity was the last thing they thought about. In criticizing and condemning communism, I don’t say that democracy is better. No, since then, little has changed. My friends, we are just as hidebound. The only thing is that we can move forward freely.

Why did the Soviet Union collapse? Because “empires” don’t last forever. Each republic wanted independence, something I understand, but they forgot that it would go hard for them without our support. It’s enough to recall the gas dispute between Russia and Ukraine, which actually led to the breakup.

But there is something else. Our top elite wanted wealth, because under communism everyone had to be equal. That's the reason. My grandmother used to say this and I say the same. You watch how the Olympics went, and our overall score faded out at fifth, and then add on the medals of the former Soviet republics, and that’s when nostalgia hits you ...

I cannot judge from the records and books of Perestroika, I just had to live through it. My mother and grandmother living in Kyrgyzstan were literally thrown out back to Russia, they carved out entire neighbourhoods of Russians. My grandmother's girlfriend was raped right there in a summer house. This tells you that it was not just the political elite that wanted the collapse, everyone wanted it. My family had to flee. And there was a huge number of such cases. Now look at life today and you wonder if the restructuring [perestroika] is over. You know the answer.

***

When people talk about the USSR, there is not a very happy picture in my mind: harassed people go to work / school / college, life under continual oppression, it is not clear whether you're a citizen of your own country or a slave of the totalitarian system. It seems that people living in the USSR had little no joy in life. Even when these events come to mind, everything appears in a grey-brown color. For me, it is not surprising that the Soviet Union collapsed. What’s strange that this did not happen earlier. Fifteen countries could not coexist under a single rule. The USSR united the unreconcileable, having built its system on the bones of people, and paid for it by its collapse.

***

From the 1960s, the foundation of the state budget was so-called “piss money” that the state alcohol monopoly brought in. The more Russian people drank, the greater was the revenue to the treasury. Drunkenness was instilled in the Russian people as a tradition, and one of the world's once most sober people became the most drunken.

In 1985, Gorbachev introduced prohibition, betting on oil to be the main source of revenue to the treasury. But Saudi Arabia, evidently at the request of the United States, pumped the oil harder, and this led to a sharp drop in the price of “black gold” and the collapse of the Soviet economy.

***

In this matter are encapsulated the fates of the peoples, and of the whole world, and of course the fates of ordinary people drawn into the vortex of history. There was no single cause of the collapse of the Soviet Union. There was an entire complex of reasons, and they all played their own significant parts in the history of our country.... Now there are active discussions on the issues of perestroika, the collapse and the whole Soviet period of our history. The people and the Russian authorities have finally to determine their attitude to the country’s past. On this depends the future of our common motherland, Russia.

***

It's hard to express my thoughts on this topic, since I myself personally did not catch the collapse of the USSR, and the views of those around me like teachers and relatives are very mixed. For example, my family was affected by inflation. If, as my grandmother said, with yesterday’s family savings they could buy two new cars, the day after they could not afford anything with the same money. But generally after the revolution from 1989 to 1993, people could live more easily and better. Interesting films began to appear on TV, anti-religious propaganda stopped, and there was openness. The rules and traditions of that time had outlived themselves. Reflecting on this topic, the movie Born in the USSR comes to mind. This film is evidence that people’s lives have changed for the better.

***

M. S. Gorbachev wanted to make his country and the people living in it, happy. Yes, on one hand he did it: he opened the iron curtain and ended the American threat hanging over Russia (the atomic bomb), but on the other hand, there were endless queues in stores where the shelves were half empty.

How did perestroika and the events of the 1990s affect your family's life?

My associations with perestroika are like movie clips where crowds of people with banners and swords move onto a government building, and also the ballet Swan Lake which was being broadcast on TV.

***

Until now I had no interest in conversations at home about the 1990s. What did it have to do with me, a child? But growing up, I began to realize that my parents have a different perspective on the 1990s. Oh, and mum and dad were affected by shortages of goods, political instability, and the collapse of the Soviet Union ... But now, after a while, which gave them a chance to reflect on a lot of things, they get into arguments. Mum likes to live in a brand new country where she isn’t worried about the future, where she can buy what the children need, of course, if she has earned it. But dad regrets [the passing of] the USSR. And he is very negative about Gorbachev, [he thinks] he alone is to blame for the breakup of the USSR. In my view it was not only his fault.

The life of my family in the 1990s came down to one thing: you need to find ... I see it now as a kind of struggle to survive. To feed the family at that time my grandmother travelled to Moscow for groceries. They brought cakes, sweets, and … oranges, even! It was bliss!

I'm not used to that. I live in a quiet time. And the events of those years reach me only through stories. “You know, Olga,” mother says, “when the economy looked up and children's dresses appeared in the shops, I go there one day, and there’s satin in ribbons, just lovely! And it was 580 rubles! I found the money and bought it. And you looked just wonderful in it.” Sometimes it’s better to understand our country’s history through a connection like that than through the textbooks.

***

My mother's parents were laid off from work and she was left without means of support. Dad was in a children’s home. They had very harsh rules. The children stole to feed themselves because the home did not feed them enough and they were always looking for something tasty. Some were put on trial, marking them for life as convicts just for petty theft. There were shootouts where my dad was involved, but he was just a pawn. My mother's parents were trying to get work, but no one would take them on; they got by on moonlighting, but that was unstable.

Now I think that I was lucky that I was not born at that time. But my parents worse luck than me and my sister. When I ask about the time when the Soviet Union collapsed, my parents make excuses or laugh it off, and won’t tell me. Some of my friends who were alive at the time say that for them it was a great time, but I don’t think so.

***

On the slide before me now I see a white, blue, and red flag flying over thousands of heads. I would not want to change the flag. Also, I do not think it is possible to get rid of it altogether. But this is not a flag that can be a symbol of a generation, not one that can be raised so high. I do not love it. It’s so simple and stupid, but also infinitely important. I am one of those to whom (they say) the country's future [is given] – [yet] I do not love it. And how can I love a symbol of the new world, if I have such pride in the old one?

***

I was born in the Russian Federation. I cannot fully understand how life was in the Soviet Union, so I settle for the recollections of those alive at that time. I understand that perestroika was a step, a step for the better. Now I live in a country that seeks to promote democracy, civil society and a law-governed state. I am glad that my voice has political importance, that I have not just rights but a guarantee of their realization. The only thing I regret is the very process of perestroika and the events of the 1990s. This time it was very hard for everyone. Were there better ways to get it all more easily? I’d like to believe that. But history is born at the crossroads of ideas. I believe that our new country, which until now has been rising and recovering from the events of the 1980s and 1990s, will become a democratic model, and will be a country where the ideas of human rights will stand above the personal ideas of political leaders, and a strong but not harsh state.


April 09, 2013

Margaret Thatcher and Me

Writing about web page http://www.voxeu.org/article/economic-legacy-mrs-thatcher

Like a million other bloggers and tweeters, I woke this morning thinking about Margaret Thatcher, who has just died.

The front page of this morning's Coventry Telegraph calls her "The woman who divided a nation." In the Financial Times, Janan Ganesh notes that those who call her policies "divisive" often wish to avoid a simple fact: "It is almost impossible to do anything significant without enraging some people"; at best, they indulge "the fantasy that her reforms could have been undertaken consensually."

In my heart, at the time, I was enraged by what Margaret Thatcher did. But now she belongs to history. In my head, looking back as an economic historian, I have to acknowledge the necessity of it. When she came to power, our country was a pretty miserable place: stagnant, strife-torn, and full of bullies. Money was more equally distributed than it is now, but money was worth less than power, and power was highly concentrated in the hands of state monopolies, private monopolies, and organized labour. If you are among the many that think heavier taxation and more market restrictions can make a more consensual, peaceful society, you need to take a closer look at this period of our history. In short, Margaret Thatcher did not invent social division and conflict, which were already present, but she redrew the lines in favour of market access and free enterprise.

When the economic historian looks back, what else is there to see? No one has looked back more clearly than my colleague Nick Crafts on yesterday's Voxeu, so I'll leave the last word on that to him.

I'll finish on a personal note. Nothing annoyed me more at the time than what Margaret Thatcher famously had to say about "society," for I am a social scientist and what she appeared to say was that society does not exist:

I think we have gone through a period when too many children and people have been given to understand “I have a problem, it is the Government's job to cope with it!” or “I have a problem, I will go and get a grant to cope with it!” “I am homeless, the Government must house me!” and so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people.

Yet a close reading shows that Thatcher had in mind something very close to the kind of model that all economists must use to understand the distribution of income in society, based on the idea that income must be produced by some before it can be redistributed to others:

When people come and say: “But what is the point of working? I can get as much on the dole!” You say: “Look” It is not from the dole. It is your neighbour who is supplying it and if you can earn your own living then really you have a duty to do it and you will feel very much better!”

It's a message for today. I didn't want to hear it at the time. Thatcher didn't seem too bothered by that, and that annoyed me even more. It's still hard for me to say it, but it was a good thing she didn't care.


April 03, 2013

North Korea: Dangerous, but Not Crazy

Follow-up to From 1914 to 2014: The Shadow of Rational Pessimism from Mark Harrison's blog

Is the North Korean regime crazy or calculating? Here is a timeline of North Korea's actions since March 10, when I wrote last.

  • March 11: North Korea revokes the armistice ending the Korean War in 1953.
  • March 12: Kim Jong Un places the North Korean armed forces on maximum alert.
  • March 20: Attacks on South Korean news and banking websites, possibly from North Korea.
  • March 27: North Korea cuts a military hotline to the Kaesŏng special region (a joint economic project with South Korea).
  • March 29: Kim Jong Un places the North Korean armed forces on standby to strike U.S. territories.
  • March 30: North Korea warns of a state of war with South Korea.
  • April 2: North Korea will restart weapons-related nuclear facilities.
  • April 3: North Korea closes entry to the Kaesŏng special region.

In various ways, these are all costly actions. Some are financially costly to Pyongyang, such as restarting nuclear facilities and disrupting Kaesŏng-based production and trade. Other are reputationally costly, because they stake out positions that are hard to retreat from without loss of face. All of them have a common element of danger -- the risk of triggering a ruinous catastrophe.

Why is North Korea doing these things if they are so costly? In a common interpretation, the North Korean regime is crazy. They don't understand the world or know what is good for themselves. I think this is unlikely.

On the basis that the North Korean leaders are not insane, there are several possible ways to think about their actions and understand them, but in the end they all point to the same outcome.

Opportunity cost. While the measures listed above are costly, North Korea believes that it would not find a better alternative use of the resources consumed or put at risk as a result of their actions. There are few profitable opportunities for production in the world's worst economic system. Investing in confrontation may well be, for North Korea, the better alternative.

Diminishing returns.In the past, North Korea has extracted billions of dollars of aid from South Korea and the West by holding its own people hostage and showing a willingness to play with fire. The problem with this strategy is that Western countries and their Asian partners have learned how it works. As a result, the North Korean strategy has run into diminishing returns. Pyongyang can continue to extract an advantage only by going to greater and greater lengths. This means taking greater and greater risks with peace.

Rational pessimism (That's what I wrote about here). North Korea's leaders see two scenarios. In one, there is a peaceful future in which their regime will inevitably disintegrate and howling mobs will drag them into the street and tear them to pieces. In another, there is a high probability of war in which millions might perish but there is some faint chance of regime survival. You wouldn't jump at either, and you might not rush to make a choice. Still, ask yourself: If you were Kim Jong Un, and push came to shove, which would you prefer?


March 10, 2013

From 1914 to 2014: The Shadow of Rational Pessimism

Writing about web page http://www.ft.com/cms/s/0/e29e200a-6ebb-11e2-9ded-00144feab49a.html

China’s territorial claims and bellicose actions in the Western Pacific have aroused concerns about where this process could lead. In The Shadow of 1914 falls over the Pacific (in the Financial Times on 4 February), Gideon Rachman asked whether we are watching a re-run of events that led to the outbreak of World War I in 1914.

Then, a rising power (Germany) was challenging the established power (Britain) for a say in world affairs and a share in the world's colonial territories. It was not Germany's plan to make war on Britain; German leaders wanted only a say and a share. The economic, military, and naval power that they built was not made to go to war, only to prevent Britain from blocking Germany’s demands. They wanted to ensure peace and to command respect. The war that then came about was not meant to happen. The war would not have happened at all if allies, agents, proxies, and third parties beyond their control had not helped to bring it about.

Replace Britain by the United States, Germany by China, and Austria-Hungary, Russia, and Serbia by Japan, Vietnam, and North and South Korea, and you have Rachman's story in a nutshell. Rachman's conclusion is hopeful, however: China's leaders have tried to learn from history. That, and the inhibitions added by nuclear weapons, will help to avert war.

What was the role of calculation in the outbreak of World War I? Rachman writes as though the war was not calculated at all:

Leaders on all sides felt helpless as they were swept towards a war that most of them did not want.

But something is missing here. While the war was in some sense unwanted, the leaders were not helpless: they chose war. It was a calculated decision, and it was not a miscalculation: those who favoured war correctly estimated that victory was far from certain. They had a war plan for a quick victory over France that relied on a high speed military manoeuvre on a colossal scale, a decision by Britain to abstain, and a Russian mobilization that would obligingly wait until the German Army was ready to switch its focus from West to East. They knew it was an outrageous gamble.

Critical to this story was something that I will call rational pessimism. By 1912, Germany no longer felt itself the confident, rising power once led by Bismarck. Germany’s leaders had come to fear the future. Their own attempts to secure Germany’s rightful place in the sun, they feared, were leaving Germany ever weaker.

These fears were well founded. Externally, the balance of power was tilting away from Germany. More countries were adhering to the anti-German alliance of Britain and France. Britain and Russia were rearming at a pace that nullified Germanys’ own efforts. Given time, Germany would only become weaker. Within Germany the balance was tilting away from monarchism and conservatism towards parliamentary socialism. The fiscal demands of rearmament were opening up new social divisions. Germany’s Prussian bureaucracy and aristocracy felt itself more and more besieged.

Increasingly the calculation became: If we fight, we may lose but at least there is a chance that we win. If we remain at peace, we certainly lose. From this point of view the war was a gamble, but it was not a miscalculation. It was simply the choice with the highest expected value. For this reason the leaders of the Central Powers went to war full of foreboding, but they went to war anyway.

In July 1914 the German chancellor Bethmann Holweg confided in his friend Kurt Riezler, who wrote in his diary:

Russia’s military power growing fast … Austria grows ever weaker … This time things are worse than 1912, because now Austria is on the defensive against the Serb-Russian agitation. … The future belongs to Russia, which grows and grows into an ever great weight pressing down on our chest.

The chancellor is very pessimistic about Germany’s intellectual condition. Frightful decline of our political niveau. Individuals are becoming ever smaller and more insignificant; nobody says anything great and honest. Failure of the intelligentsia and of the professors.

This pessimism was general. When Germany’s Wilhelm II was informed of the Austrian ultimatum to Serbia, he wrote:

Now or never.

In Vienna, Kaiser Franz-Josef wrote:

If we go under, we better go under decently.

(The latter quotes are from Holger Herwig’s The First World War: Germany and Austria-Hungary, 1914-1918, published in 1997 by Arnold).)

From this perspective it becomes crystal clear why North Korea’s predicament is so dangerous. Day by day, North Korea is provoking enemies and losing friends. The tensions within the country are largely unknown but surely increasing. What insider would predict a peaceful future for the Pyongyang regime that is better than today? What does Kim Jong-Un have left to lose from gambling on conflict, no matter how poor the odds? Rational pessimism is surely tilting North Korea’s choices towards war. Still, we are not there yet.

As for China itself, the threat of war should be thought of as one for the future. It seems unlikely that China’s leaders would ever choose to gamble everything on a major war as long as they expect to gain more from a continuation of peace. Their optimism is a bulwark against war.

The risk is that optimism is fragile. China faces many problems that could sap the confidence of its leadership. Edward Luttwak (in The Rise of China vs the Logic of Strategy, published in 2012 by the Belknap Press of Harvard University) has written that China is pursuing an impossible trinity of prosperity, diplomatic influence, and military power. China’s economic growth may falter. Even if economic growth is sustained in China, the chances are that at some stage the West will recover its prosperity and technological leadership. Meanwhile China’s rearmament and territorial claims are losing it friends in Japan, Vietnam, and India. At home, there are protests over a range of issues that widens continually: the rule of law, corruption, censorship, inequality, wages and working conditions, land grabs, and pollution. China’s rulers rely on xenophobia and stories of foreign encirclement and penetration to manage these threats to their legitimacy.

Putting all this together, it is not hard to envisage a future in which China’s leaders would become rational pessimists. Would they then be held back by knowledge of history and by the possibility of nuclear war? Maybe. Is Kim Jong-Un restrained by these things today? So far, yes. If Germany’s rulers in 1914 could have seen the future, would they have chosen differently? Perhaps. Unfortunately, we can’t be sure.


February 04, 2013

Alternatives to Capitalism: When Dream Turned to Nightmare

Writing about web page http://cpasswarwick.wordpress.com/overview-2/peking-conference/proposed-topics/

On Friday evening I found myself debating "Socialism vs Capitalism: The future of economic systems" at the Peking Conference of the Warwick China Public Affairs and Social Service Society. The organizers also invited my colleagues Sayantan Ghosal, Omer Moav, and Michael McMahon, who spoke eloquently. The element of debate was not too prominent because we all said similar things in different ways. I'm an economic historian and the great advantage of history is that it gives you hindsight. Anyway, here is what I said:

Let’s start from some history. There was a time between the two world wars when the capitalist democracies, like America, Britain, France, and Germany, were in a lot of trouble. In 1929 a huge financial crisis began in the United States and went global. There was a Great Depression. Around the world, many tens of millions of farmers were ruined. Tens of millions of workers lost their jobs.

As today, people asked: What was the cause of the problem? One answer they came up with was: Capitalism is the problem. Lots of people decided: the problem is the free market economy! The government should step in to take over resources and direct them! The government should get us all back to work! The government should get us building new cities, power stations, and motorways!

Another answer many of the same people came up with was: Democracy is the problem. Lots of people decided: the problem is too much politics! We need a strong ruler to stop the squabbling! Someone who can make decisions for the nation! Someone who can organize us to build a common future together!

So there was a search for alternatives to capitalism. Different countries tried different alternatives. The alternatives they tried included national socialism (or fascism) and communism under various dictators, like Hitler and Stalin.

What happened next? On average the dictators’ economies did recover from the Depression faster than the capitalist democracies.

(Here's a chart I made earlier to illustrate the point, but I did not have the opportunity to use it in my talk. Reading from the bottom, the democracies are the USA, France, and the UK; the dictatorships are Italy, Germany, Japan, and the USSR. You can see that Italy does not conform to the rule that the dictators' economies recovered faster. Without Italy, the average economic performance of the dictatorships would have looked even better.)

Seven major economies in the Great Depression

But solving one problem led to another. Before the 1930s were over the dictators’ policies had already caused millions of deaths. A Japanese invasion killed millions in China (I'm not sure how many). An Italian invasion killed 300,000 in North Africa. Soviet economic policies caused 5 to 6 million hunger deaths in their own country and Stalin had a million more executed.

And another problem: As political scientists have shown, democracies don’t go to war (with each other). Dictators go to war with democracies (and the other way round). And dictators go to war with each other. The result of this was that in the 1940s there was World War II. Hitler, Mussolini, Tojo, and Stalin went to war -- with the democracies and with each other. Sixty million more people died.

After the war, capitalism recovered. In fact, far from being a problem, it became the solution. By the 1960s all the lost growth had been made up. Think of the economic losses from two World Wars and the Great Depression. If all you knew about capitalist growth was 1870 to 1914 and 1960 onwards, you’d never know two World Wars and the Great Depression happened in between.

(To illustrate that point, here's another chart I made earlier, but did not use. It averages the economic performance of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, New Zealand, Norway, Sweden, Switzerland, the UK, and the USA.)

great_depression_ver_3.jpg

After World War II fascism and national socialism fell into disrepute, but communism carried on. In China, Mao Zedong’s economic policies caused more deaths. In 1958 to 1962, 15 to 40 million people starved. Communist rule led China into thirty years of stagnation and turmoil. After that Deng Xiaoping made the communist party get its act together. And the communists forgave themselves for their past and agreed to forget about it.

Here's the takeaway.

Liberal capitalism isn’t perfect, but it has done far more for human welfare than communism. It has been the solution more often than the problem. Last time capitalism experienced some difficulties, many countries went off on a search for alternatives. That search for alternatives led nowhere. It wasn’t just unproductive. It was a terrible mistake that cost many tens of millions of lives. Lots of people have forgotten this history. Now is a good time to remember it.

Postscript. At one point I thought of calling this blog "Alternatives to capitalism: the search for a red herring" (a "red herring" is something that doesn't exist but people look for it anyway.) But I realized that would have been wrong, because alternatives to capitalism have actually existed. The problem with the alternatives is not that we cannot find them. It is that the people who went searching for them fell into a dream and woke up to a nightmare.


January 03, 2013

Fighting For Us — But Against Whom?

Writing about web page http://www.bbc.co.uk/news/uk-20813673

On 21 December Britain's prime minister, deputy prime minister, and leader of the opposition broadcast their Christmas messages to our troopsin Afghanistan and elsewhere. On Boxing Day Prince Charles, whose son Prince Harry is serving in Afghanistan, added his pennyworth.

These messages were notably similar. One after another, they worked the themes of courage, risk, danger, sacrifice, distance from home, and separation from family at Christmas.

Remarkable, also, was what they left out. According to our political leaders the threat confronting our troops is nameless and faceless. If we believe them, it is like an Atlantic storm or an airborne virus, a natural hazard that arises suddenly from nowhere and needs no explanation. Nick Clegg, the deputy prime minister mentioned an "invisible threat." Only Prince Charles referred to anonymous "insurgents." Cameron and Miliband did not mention an enemy at all.

In this postmodern age we struggle, it seems, to acknowledge that enemies face us who hate us and would like to kill us. They hate, specifically, our democracy, our traditions of political and religious toleration, our freedom of speech and association. They hate science, education, and public health. They hate women, particularly when educated and independent of men. These enemies do not hide their identity: they call themselves Al Qaeda and the Taliban.

Naming the enemy is only a start. Many questions then arise that do not have obvious answers. If enemies exist, should we go out into the world to find them, or wait until they come to us? Should we aim for victory or for a negotiated peace? Must we always be enemies or can we find common ground? These are questions on which reasonable people will differ. But we cannot put these questions clearly if we do not acknowledge that there is an enemy.

If our leaders cannot bring themselves to mention the enemy when they address the soldiers who risk their lives for us and for the families who must live with those risks, it is hardly surprising that most civilians at home are confused and doubtful of our armed forces' mission overseas. If there is no enemy, why have we put our soldiers in harm's way?


Mark Harrison writes about economics, public policy, and international affairs. He is a Professor of Economics at the University of Warwick. He is also a research fellow of Warwick’s Centre on Competitive Advantage in the Global Economy, the Centre for Russian and East European Studies at the University of Birmingham, and the Hoover Institution on War, Revolution, and Peace at Stanford University.



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