Monthly Archives: December 2012

The Information Age, 1749

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As we glide in towards the holidays, I treated myself to [amazon_link id=”0674066049″ target=”_blank” ]Poetry and the Police: Communication Networks in Eighteenth-Century Paris[/amazon_link] by Robert Darnton. Professor Darnton is the University Librarian at Harvard and has written a number of brilliant articles (like these in the New York Review of Books) about the modern technology of information, and its implications for books, libraries, and access to knowledge. I’m a fan.

This is a short book about the circulation of poems and songs attacking King Louis XV and his mistress, the notorious Madame de Pompadour, in 1749. A police investigation led to the arrest of 14 minor clergy and lawyers’ clerks – “In the end, the police filled the Bastille with fourteen purveyors of poetry. It was known as L’Affaire des Quatorze. It was impossible to prove authorship of the poems, as people added to them or adapted them, and they were often anyway descended from traditional songs or poems. Their creation was collective, a kind of UGC.

The book has a website that recreates how some of the songs might have sounded. Although this was four decades before the French Revolution, the affair reveals some of the social and political forces that led the country to that upheaval. The book concludes with some reflections on whether public opinion could be said to have existed in 18th century France, with this exuberance of singing rude songs and declaiming poems criticising the King. Professor Darnton concludes that in some form it did, so extensive was the transmission of these popular expressions: “The information society existed long before the Internet.”

He notes that by the early 1780s, Condorcet clearly saw public engagement as part of the playing out of political ideas: “Men of letters developed conflicting views of public questions and consigned them to print; then, after weighing both sides of the debates, the public opted for the better argument. It could make mistakes of course, but ultimately truth would prevail, because truth really existed, in social questions as in mathematics….Public opinion therefore acted as the motor force of history.”

We might accept the last leg of this Enlightenment optimism today, but probably not the first part. After all, in 1789 public opinion welled up from the streets of Paris in anything but a calm, reasoned manner.

[amazon_image id=”0674066049″ link=”true” target=”_blank” size=”medium” ]Poetry and the Police[/amazon_image]

Business monoculture

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My post yesterday on the lack of interest in Lincoln Electric’s combination of profit with an employment guarantee has prompted some debate. The story is told by Frank Koller in his book [amazon_link id=”1610390539″ target=”_blank” ]Spark[/amazon_link].

[amazon_image id=”1610390539″ link=”true” target=”_blank” size=”medium” ]Spark[/amazon_image]

Henry Stewart (@happyhenry) of Happy Computers pointed to more evidence on the commercial benefits of good employment practice (in his comment). On Twitter, Stephen King of HSBC (@KingEconomist) said Lincoln’s practice sounded like the Japanese system of a lifetime employment guarantee, which was now discredited. I think it’s actually a bit different: a promise by specific firms not to lay workers off rather than an expectation that many or most people in society will stay in one firm for their whole career. After all, Lincoln operates in the context of the fluid US labour market.

However, Stephen and I agreed that there is every reason to prefer a plurality of corporate models, and what a shame it is that there are not more alternatives to the conventional joint stock model. Monocultures are rarely healthy.

The model chosen by a specific business should depend on the transactions costs and information asymmetries that we know are important in determining the shape of any business. A commitment by employers to keep workers in a job as long as they want will make a lot of sense in an industry where craft skill and tacit knowledge is vital, for the reasons explained by the signalling literature; less so where the tasks involved in the job are easily codified.

Reality versus belief about corporate success

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Frank Koller, the author of [amazon_link id=”1610390539″ target=”_blank” ]Spark: How Old Fashioned Values Drive a Twenty-First Century Corporation[/amazon_link], emailed me this week in response to reading (on VoxEU) about the book I edited on the teaching of economics, [amazon_link id=”1907994041″ target=”_blank” ]What’s The Use of Economics? Teaching the Dismal Science After the Crisis[/amazon_link].

Frank’s book is about businesses with no-layoff employment policies, and particularly about a company called Lincoln Electric – I’d never heard of it but it’s the global number one in arc welding. Lincoln has a formal guaranteed employment programme as well as rewarding employees with bonuses and incentives. The company history sets out its longstanding (since 1895) commitment to employees and customers as well as shareholders. According to its latest results, published last week, employees got an average bonus of $33,915, the 79th annual bonus in a row, a bonus pool of $99.3m (the pool normally represents 32% of pre-tax profits).

[amazon_image id=”1610390539″ link=”true” target=”_blank” size=”medium” ]Spark[/amazon_image]

Spark has sold very well but the depressing news is that Lincoln’s CEO John Stropki told Frank that not a single other senior US executive has asked him the secret of the firm’s combination of phenomenal financial success with employment practices so good they sound like something out of a fairy tale. Why the lack of interest? Maybe – and this is where economics comes in – it’s because the reality demonstrated by Lincoln and the handful of other companies with such a strong commitment to what by now seem to be extraordinarily good employment practices is inconsistent with the belief system so many people hold about the way business works and the imperative of free markets. If so, the charge sheet against the narrow version of economics grows even longer.

[amazon_image id=”1907994041″ link=”true” target=”_blank” size=”medium” ]What’s the Use of Economics?: Teaching the Dismal Science After the Crisis[/amazon_image]

Wealth and the dark ages

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As my last big book before turning to a beckoning pile of thrillers for the Christmas holiday next week, I started Peter Brown’s [amazon_link id=”069115290X” target=”_blank” ]Through The Eye of a Needle: Wealth, the Fall of Rome and the Making of Christianity in the West, 350-550 AD[/amazon_link]. I know, I know. But it was strongly recommended to me and anyway is a beautifully produced book. I thought, too, that changing attitudes towards the wealthy on the eve of the Dark Ages could turn out to be an unexpectedly topical subject.

[amazon_image id=”069115290X” link=”true” target=”_blank” size=”medium” ]Through the Eye of a Needle: Wealth, the Fall of Rome, and the Making of Christianity in the West, 350-550 AD[/amazon_image]

I must say, though, that Chapter 1 has started in a comically school-masterly way: “In this chapter we will start with general considerations. We will deal first with the distinctive manner in which wealth and social status came together in Roman society. Then we will look at the way in which wealth was taken from the land. After this we will focus on a single century. We will attempt to sketch, inevitably briefly, the structure of upper class society in the Latin West in the fourth century AD….”

That ‘inevitably briefly’ did make me laugh out loud – this is a 759 page book. I will report back in due course. Meanwhile, one of my favourite novels ever evokes the post-Roman west brilliantly, Iain Pears’ [amazon_link id=”0099284588″ target=”_blank” ]The Dream of Scipio[/amazon_link]. His[amazon_link id=”009975181X” target=”_blank” ] An Instance of the Finger Post[/amazon_link] is better-known, but Dream of Scipio is absolutely superb.

[amazon_image id=”0099284588″ link=”true” target=”_blank” size=”medium” ]The Dream Of Scipio[/amazon_image]

Freaks of Fortune

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Jonathan Levy’s [amazon_link id=”B00AFS6LXW” target=”_blank” ]Freaks of Fortune: The Emerging World of Capitalism and Risk in America [/amazon_link]is a fascinating book. It is a history of the commodification of risk, the development of life insurance and, in time, the growth of wider markets for risk. Professor Levy, a Princeton historian, portrays the modern risk-based finance industry as the counterpart of the freedom of individuals in a capitalist society to manage their own lives. That responsibility of individuals for their own destiny meant the growth of institutions offering them the tools to do so, and the translation of highly individual risks into standard types of policy or financial instrument.

The early chapters start with the origins of risk management in marine insurance, and how those specific origins shaped early legal precedent in considering whether insurance policies should pay out. A cargo of slaves was considered insurable property whereas a working man who had taken out a policy could not successfully claim against his employer after being badly injured in an accident, because he had voluntarily taken the job, which paid a premium because of the dangers. The book’s descriptions of the historical examples are the best thing about it, revealing as they do patterns of thought so different from our own. It is particularly interesting about the link made between emancipation and the assumption of personal responsibility for risk – including by slave owners making the opposite argument, that slaves need never worry about their future as owners bore all the risks! – although I’m sure there is room for different interpretations of the historical record. (I’m a long way out of my areas of expertise here.)

There is also an interesting section on the early opposition to a secondary market in life assurance policies in the US – one existed then in the UK – and for the same kind of moral arguments that Michael Sandel raises in [amazon_link id=”184614471X” target=”_blank” ]What Money Can’t Buy[/amazon_link]. The need for policy holders to be able to gain some value from their policies (otherwise, why would they not just save money?) led to the early application of actuarial science to calculate surrender values. Indeed, early on most life policies taken out by farmers would benefit their creditors – they were used to raise working capital.The book goes on to trace the shift from a mass of small insurance companies starting up in the 19th century to the machinations of the big trusts at the turn of the century.

The underlying theme of the book is that, if we don’t put our faith in Providence, or rely on a master (whether a Feudal lord, or a slave owner, or indeed a husband), then we will of course seek other means of mitigating life’s risks. Some of these are a constant, such as storms or illness, and financial services have replaced a combination of fatalism and community support. Other risks are inherent to capitalism – “an economic system that thrives of radical uncertainty”, as the author describes it. Mitigating these means capitalism is inherently financial. However, individual responsibility for risks arising from personal choices will always have to be supplemented by collective responsibility, at a minimum by regulation of the financial services industry.

The epilogue points out that there was an era when risk seemed to have been tamed, in the 1960s, and the previously common phrase ‘freaks of fortune’, meaning the unexpected events that cause upheaval in every life, dropped out of use. The phrase lies dormant still, but that moment of stability in capitalism has passed. It is certainly obvious, post-crisis, that the state is the “risk manager of last resort”.

So it’s a fascinating story. I must say that the book was heavy-going despite the masses of terrific stories it tells – I think it’s because one has to chew quite a lot to extract the marrow of the argument, and my brief summary has no doubt not done it justice. Still, it’s worth perservering, with so much food for thought, and the stories are great. I would never have imagined finding a history of life insurance at all interesting, and it turns out to be very much so.

[amazon_image id=”B00AFS6LXW” link=”true” target=”_blank” size=”medium” ]Freaks of Fortune: The Emerging World of Capitalism and Risk in America[/amazon_image]