"Dancing With Tycoons?"

Whenever I read about thinkers like Adam Smith or Karl Marx and their evolutionary approach to modes of production, e.g. their explanations for the transition from feudalism to capitalism, I always wonder if capitalism is the end of the road, the last of the great modes of production, or if something else will follow. Marx, of course, thought capitalism would be supplanted by socialism and then communism, but I'm not so sure about that. I've always thought one possibility for the next step is worker ownership, though it's not quite clear how such firms would get started in the first place, i.e. where the capital would come from and who would decide which firms to start. But I suppose institutions could be constructed that would solve this problem (I'm not recommending this, but you could, for example, pass a constitutional amendment or more simply a law requiring an entrepreneur to sell the firm to the employees after the initial investment had been tripled or after fifteen years had passed, whichever comes first, or something along those lines. But that lacks institutional imagination and in any case I'm probably thinking too narrowly. Technological change, robots, computers, things I can't think of yet because they haven't been invented, things like that will likely frame the next step in our evolution to the next mode of production). So is this - capitalism as we know it - the end of the road, or will something else follow? Will capitalism be replaced by a newer, better mode of production? What will it be?

Here's David Warsh on a related topic - employee stock ownership plans:

Dancing With Tycoons?, Economic Principles: One of the things that news reporters learn early in their careers, if they are fortunate, is not to take anyone’s claim to authority too seriously. For example, I remember meeting Louis Kelso in the early 1980s.

Kelso was the San Francisco attorney and amateur economist who, starting in 1958, had gained a measure of fame as the author of a plea for employee ownership that he called The Capitalist Manifesto...

But it wasn’t until Mortimer Adler, the entrepreneurial educator, University of Chicago hanger-on, and founder of a Great Books of the Western World business, took an interest ... and agreed to share a byline on The Capitalist Manifesto that Kelso’s “two-factor economics of reality” began to attract a following, mainly among lawyers, small investors and businessfolk. A steady stream of books poured forth... He was in the process of taking his critique of neoclassical economics to Mike Wallace and 60 Minutes when we met.

Private-equity artists William Simon, Michael Milken, and Ronald Perelman were in their ascendancy at the time; the buyout firm of Kohlberg Kravis Roberts & Co. was gathering steam: famous journal articles, by Franco Modigliani & Merton Miller and Michael Jensen & William Meckling, were revolutionizing the practice of corporate finance: though wealthy, Kelso was an easy guy to ignore. He died, at 77, in 1991.

On the other hand, Kelso had been politically acute. In the early 1970s, he and his associates made a concerted effort to sell their ideas on Capitol Hill. They culminated in a famous dinner at the Madison Hotel in 1973 with Louisiana Sen. Russell Long. Son of famous Louisiana demagogue Huey Long and chairman of the Finance Committee, Sen. Long became a convert over the course of the four-hour meal. He was no populist Robin Hood, he asserted (implying that his father had been), but he liked the idea that every worker should become an owner of capital – he even paid for dinner. (Norman Kurland has written a thorough history of the episode.)

The upshot was that the influential Long wrote a series of little-noted tax breaks for Employee Stock Ownership Plans (ESOPs) into an enormous piece of legislation that eventually would become the Employee Retirement Income Security Act of 1974 (ERISA). The measure thus created a set of opportunities for a new generation of missionary organizers of worker ownership for firms for whom the Chrysler bailout of 1979 was a signal event. ...

In 1987, the same year that Avis employees bought their car-rental company with the assistance of Wesray Capital, William Simon’s firm, Mackin of the ICA founded Ownership Associates to advise workers and managers in the growing ESOP world. Soon the collapse of central planning in Eastern Europe and Russia would open a new set of opportunities, even if they were seldom taken up. Thanks to the ESOP legal framework, worker ownership had a seat at the table, though the seat was small and the table enormous. In 1998, Harvard professor Richard Freeman started a research project in Shared Capitalism at the National Bureau of Economic Research.

Eastern Europe was one thing. Little did I imagine, even then, that the path of employee ownership would lead some day to the mighty Chicago Tribune. I am a Chicagoan, ... and ... I still remember the fortress-like solidity of the arch-conservative Chicago Tribune, to whom President Roosevelt’s Lend-Lease Act of 1941 was “the Dictator bill.” ... Such a fount were its earnings...

Tribune Co. had suffered greatly in recent years, having drafted as its top managers accountants and investment bankers with little feel for the newspaper business, but in 2000 the company still threw off enough free cash that when the Chandler family was looking for a buyer for its Los Angeles Times, Chicago had but to write the check. With that, it became the nation’s second-largest newspaper publisher, after Gannett. (Among its other papers are New York’s Newsday, the Baltimore Sun, the Hartford Courant, and the Orlando Sentinel. Its other assets include television stations and even the Chicago Cubs, though it has pledged to sell the baseball team. )

Never mind that the lip of the waterfall lay just ahead. ...[T]raditional sources of newspaper earnings, both circulation and advertising revenues, were in serious trouble. The ebullience of the 1990s turned to despair. First Knight Ridder put all newspapers up for sale. Then Rupert Murdoch made an offer to the Bancroft family for The Wall Street Journal and the rest of Dow Jones that ultimately proved irresistible, Finally Tribune Co. put itself up for auction, a moved which produced only a couple of leveraged buy-out offers, which it spurned, before zeroing in on a management-led “self-help” deal, which would have led to large borrowing and the draconian cuts necessary to make it work.

At which point Chicago real estate developer Sam Zell, who had plenty of experience buying and selling undervalued real estate, but none with newspapers, slipped in with a surprise offer to lead an ESOP with $315 million of his own money. ...

Zell was taking advantage of a provision slipped into law in 1997 under which converting Tribune from a C Corporation (many shareholders) to an S Corporation (fewer than 100 shareholders) would permit the employees trust (60 percent ownership) and Zell (40 percent) to qualify as an ESOP, thus avoiding all Federal taxes for ten years, ... creating savings sufficient to permit the company to borrow enough to pay the highest price to existing shareholders who would tender their shares. The deal “exploits a loophole so gaping that we taxpayers can only pray somebody closes it quickly.” (Zell’s interest may have been spurred by two other recent successful applications of the ESOP provision, Amsted Industries and Unites Airlines – both Chicago firms.) ...

Since then, Zell has been on a tear, meeting with Tribune staffers in Chicago, hanging banners around the newsroom of the LA Times proclaiming “You Own This Place Now,” naming a board of directors conspicuous for its lack of experience in the newspaper industry, etc. He explained his new role to a reporter this way: “You call it CEO and I’ll call it owner.” ...

Perhaps Zell was just lucky to be at the right place at the right time. It is certainly true that, if it works, the deal offers a significant upside to employees. It prevented major cuts, at least to begin with. And the way it is structured, he won’t see a payday until the employees receive $750 million in value, a figure that would average tens of thousands of dollars, perhaps hundred of thousands, per employee. (For Zell, that payday could be a whopper: he holds a warrant entitling him to eventually buy 40 percent of the company for $500 million. The company was worth $8.2 billion when it changed hands.)

There are flaws in the ESOP, naturally, from the employees’ point of view. Union representatives point to the lack of any consultation by employees in selecting the ESOP trustee that will play the lead role in governing the corporation. They may be employee-owners, but they don’t have much of a voice. Retirement accounts will remain partially diversified, but will be overly concentrated in Tribune stock. Still, at the end of the day the Zell transaction means that a company that is in need of significant change will succeed or fail through the workings of a partnership between a tycoon and his partners, the employees.

Is that a good thing? The chorus of complaints about the tax expenditures that make the Tribune ESOP work (and others like it) is growing, among those who ... take the Treasury Department seriously. Already Congressman Charles Rangel (D-NY) has inserted a provision that would shrink them in the omnibus tax bill he is preparing for when the next Congress convenes a year from now. But are such experiments in collaboration between the super-rich and the deeply-threatened necessarily such a bad thing? David Henderson of the Hoover Institution has derided them as “a step towards feudalism.”

Suppose the Sulzberger family were able to use an S Corp ESOP to consolidate their control of The New York Times? Or the Graham family used the device to assure the continuing independence of The Washington Post? Suppose Warren Buffet were willing to take Michael Bloomberg out of the company he founded, by financing its sale to employees? As Mackin of Ownership Associates says, “In an economy as radically unequal as ours, it is difficult to defend tax breaks for the wealthy. But when the wealthy are ready to use those breaks to share real economic gains with workers they just might deserve a break. It all depends upon the alternatives. Sometimes a tycoon is the best friend a worker is going to get.”

Looking back, then, I am inclined to revise upward my opinion of Louis Kelso and Sen. Long, downward my estimate of the importance of those famous journal articles by Modigliani & Miller (which asserted that debt was essentially no different than equity) and Jensen & Meckling (which argued that owners ordinarily made better decisions than the professional managers who were their agents). Kelso’s ideas seemed a little wooly to me at the time; the journal articles had the virtues of clarity, depth and precision. Certainly Wall Street thought so. At one point, Jensen boasted, “By solving the central weakness of the public corporation - the conflict between owners and managers over the control and use of corporate resources - these new organizations [private equity firms] are making remarkable gains in operating efficiency, employee productivity, and shareholder value.”

What I have concluded since then is that reformers often know things that economists don’t begin to grasp. Sam Zell may think he’s the Tribune’s owner; he is also the steward of a 160-year-old newspaper. I’m rooting for the employees of Tribune Co.’s newspapers – past, present and future.

Comments

[Farrar]

First random thoughts from a non economist.

Capitalism certainly cannot continue as it is presently practiced. The time references are too short term. Externalities are not taken into consideration, nor are finite limitations on resources. Nor level playing field problems.

Can these problems be overcome by tinkering with markets? Perhaps.

I believe, however that we are destined for more command and control, hopefully in turn controlled or at least contained by the democratic process.

Will improving IT capacity and technology ever render command and control more efficient than markets ? (I expect an overwhelming chorus of negatives on this, but maybe we ought to think about it.)

Even democratically contained command and control would be unlikely to make sufficient allowance for the interests of future generations. What about a council of wise ones charged with entering a vote on behalf of our great grandchildren?

As for the Warsh article, and worker capitalism, this is obviously still capitalism. I do think this could be an improvement, and would probably extend management's time horizons.

[kett82]

Always find Warsh's writing interesting. He makes connections that only after reading them seem obvious.

Doesn't the amount of debt that The Tribune ESOP is starting with lessen its odds of success?

As a long-time buyer of the Tribune, my habits may be typical: I stopped buying it everyday about two years ago. Now, it is almost impossible to find in a vending machine (do they not stock those anymore?) And when Zell went from 50 to 75 cents at the first of the year, I stopped buying altogether. Not so much the cost but the fumbling to find three coins rather than two while the El is pulling up to the station make it not worth the effort. Online: I prefer the NY Times, WSJ, and Reuters.

Of course, I am sure Zell will get his. Talk that Tribune will sell Wrigley Field to the state in another sweetheart tax deal.

My note to employees: Never play poker with a tycoon.

Regards,

[Insufficient Diversification]

Employees can buy stock in their companies at any time, or band together to buy the entire company. It seldom happens. Most employees want a stable pay check, not variable income that depends upon variations in their employers fortune. Employees are better off owning a diversified basket of companies, rather than just the company they work for. Otherwise, they might lose it all like some Enron employees did.

That said, its possible that the laws governing corporations could be modified somewhat. Shareholders often don't have enough power now, allowing such things as executive salaries to grow out of control.

[hari]

This is a hobby horse for me...and I shall revert with a think-piece to digest!

[Marcus Pivato]

Warsh's article seems to suggest that worker-ownership of large corporations has not been taken seriously partly because it is not embedded within a respected theoretical framework of corporate finance (`Kelso’s ideas seemed a little wooly to me at the time; the journal articles [by Modigliani & Miller and Jensen & Meckling] had the virtues of clarity, depth and precision'). However, there are some economists ---such as Samuel Bowles and Herbert Gintis ---who have seriously analysed and advocated worker-ownership.

Bowles and Gintis claim that worker ownership is good for the workers because it gives them more control over their place-of-employment, and ultimately creates a more egalitarian distribution of wealth. They claim that worker-ownership is also good for economic efficiency, because it solves many of the principal-agent problems which plague traditional labour arrangements: if workers are the residual claimants on the profits of the firm, they have much more incentive to work hard, to promote improvements in efficiency, and to otherwise maximize the firm's profits.

Of course, the big problem with this approach is that it exposes the workers to much greater risk, because dividends are a much more volatile income-stream than wages. Indeed, there is a good argument that one of the main `purposes' of the traditional capital/labour division is that it shifts the risk from (generally poor, risk-averse) workers to (generally rich, risk-neutral) capitalists. Gintis and Bowles suggest that some kind of insurance mechanism could be used to mitigate this risk, but they don't convincingly address the issues of moral hazard that would arise from insuring worker-owners against their own firm's losses.

For a good summary of these arguments, see the book `Recasting Egalitarianism', edited by Samuel Bowles and Herbert Gintis (Verso, 1998), which is part of the `Real Utopias' series:

http://www.amazon.com/Recasting-Egalitarianism-Communities-Markets-Utopias/dp/1859842550

[Lafayette]

MT: I've always thought one possibility for the next step is worker ownership, though it's not quite clear how such firms would get started in the first place, i.e. where the capital would come from and who would decide which firms to start.

No way, José

It is inevitable, worker-ownership, if not particularly ineluctable in the short-term.

Only by employee representation on the Board as worker-owners will corporate governance have reached a point where fairness and equity is possible. With it will come one helluva lot less "piratage of the spoils" like obscenely lucrative stock-options and diamond-studded golden parachutes (for having done next-to-nothing during one's C-in-C tenure).

And, inevitably, more income fairness. The crass accumulation of capital beyonds ones wildest fantasy is not only immoral it is inefficient. There are better things to be done with capital than making it into a single individual's Critical Mass (of fissile material that generates even more capital).

Nobody noticed, or took notice, of the laws passed in Europe (in fact, implemented by communist Yugoslavia in a search for worker-ownership) that created Employee Committees and instituted their representation on the Board. Of course, the law has no fangs and the representatives are in a distinct minority. But, still, they are there. It's a start.

That's Europe, not America. The trip wire we need to get over and beyond in America is the ingrained, intuitive bent for individuality (aka personal greed). Entrepreneurship has little to do with the rewards of capitalism ... at least that is what Schumpeter teaches us. But, that is what we, in America, have made of it. And why?

For as long as we adulate those who get to the top -- by hook or by crook -- to bask in the limelight of luxury, we will not get beyond the Savage Capitalism as it exists today. We will not arrive at a society based upon human values and not financial value.

There's no way, José.

PS: The capital for a "good idea" is always there somewhere. The Brits conceived of a special agency inthe 1970s to fund such entrepreneurial activity. Nothing came of it. So, venture capital was born. How to break VC away from the owners of capital is the challenge. All it takes is a Bill Gates to donate his time and talent and capital to such a foundation that funds "good ideas" and requires that ALL employs share in the rewards. Not equally, but equitably.

[reason]

Farrar
More command and control than in the modern corporation? Surely you jest?
No the obvious problems arising in the future relate not just to environmental issues (including resource constraints). Data overload and information scarcity are also going to major issues, extrapolating from what is happening today. The possibility of nano-processing ending scarcity is seriously being discussed (think 3-D photocopying). I cannot exactly see what shape the world will be in the future, but we live in interesting times.

[reason]

Lafayette...
you are getting there.
My father is a scientist see, so my perspective is somewhat influenced by it.
Scientist you see seek the truth. The process is painstaking, heartbreaking and co-operative. But science has changed the world, mostly not in huge leaps, but by cumulative little steps, some of them backwards (to get out of a deadend street). They are all heroes, not just the ones you hear about. Often the findings of the brightest and most dedicated are all negative. But negative findings are also progress.
For my father, the idea that someone who made a big breakthrough should get to keep all the value encompassed by that breakthrough is just a criminally cruel idea. But that is the attitude we want to believe drives capitalism forward. How many scientists expect to become fabulously rich?

[ken melvin]

Employee may be too limited; like unions, their interests might not coincide with the public's. More and more automation is inevitable, so what happens to 'ownership'?

[robertdfeinman]

The Zeiss optical company was turned over to employees in the mid 19th Century and run by them until it was split up by the division of Germany after WWII. There used to be a nice history on the Zeiss web site, but they seem to have obscured the ownership part of the history now.

As more sovereign funds start buying chunks of western firms we are seeing a transition to a neo-socialist model. What's different is that the countries who are owners are not necessarily the ones where the firm is nominally based. This is different from the traditional conception of socialism.

The traditional capitalist model will have to change as has been pointed out by others (and by me, frequently) since it is based upon unlimited natural resources and never-ending growth.

I think the question of "ownership" is the wrong one, the question should be one of governance. Right now most firms are not subject to any meaningful governance. The board and CEO are not accountable to anyone. There is a story in today's NY Times about some hedge funds making a stealth takeover attack on CNet. This is the equivalent of a coup, the only way that ownership changes hands these days.

If the management of firms was in the hands of investors, mangers, employees and representatives of the public then the governance would be more democratic, and responsive. This depends upon government changing the rules for corporations, from "profit is all" to a more balanced one.

As an aside, I'll add that the situation for nonprofits is even worse. There are no stockholders to apply pressure and the boards are self perpetuating, even those that have nominal elections don't have any real mechanism for alternate candidates to be nominated or elected. I've had two experiences with this and in one case it took unprecedented state intervention to oust a runaway management.

The goals of firms need to be altered and the management needs to be made more democratic. If this is done the issue of "ownership" will become secondary to that of governance.

[Ken Houghton]

"On the other hand, Kelso had been politically acute."

I think that should be "astute."

And What Marcus Pivato Said (though he's more eloquent than I).

[lonesome moderate]

For me, the question about ESOPs is to what extent you regulate an eventual public offering. If you permit it, as usually seems to be the case, then it's really just another public company in pre-IPO stage, with big tax advantages in return for. . . well, I'm not sure what. If you attempt to prohibit it then it would probably be more of a quasi-governmental enterprise, where the people supposedly in charge function more like mid-level government bureaucrats; if they are given any significant autonomy then they will put most of their energy into lobbying congress to relax the restrictions (a la Fannie Mae).

[save_the_rustbelt]

The ESOP concept was an interesting and worthwhile experiement, but like many others it did not produce the desires results.

I'be been on both sides, and I think keeping labor and ownership seperate, especially inthe blue collar world, is probably the best for both. IMHO.

[Tim Worstall]

"I've always thought one possibility for the next step is worker ownership, though it's not quite clear how such firms would get started in the first place, i.e. where the capital would come from and who would decide which firms to start."

Come along Mark, you can do better than that. For capitalism (as it is usually understood) to work it requires that the scarce resource be financial capital: as you say, you can't see where this will come from in the absence of capitalists.
But what if the scarce resource were no longer such financial capital. What if it is (as just about every other article on economics now insists) human capital? In this case the owners of the scarce resource would end up owning the company via their increased bargaining power.
As indeed already happens with lawyers, accountants etc....we call them partnerships. And to a large extent, investment bankers (although with the twist that they get their capital return as a bonus rather than ownership). As with most Silicon Valley start ups....

[barry payne - economist]

Exactly, Marcus Pivato

A recent story about engineers and related technical professionals who owned a company that repaired boilers, steam systems and so forth, faced competition. Instead of milking the company dry like managers of an equity buy-out might do, they reinvested in the company, bulking up the capital and skills necessary to survive.

Unfortunately, this is the exception rather than the rule. Such incentives are not generally transmitted to influence key decisions in most corporations. Instead, the CEO is actually rewarded for manipulating the company for short-term earnings coupled with convenient lay-offs, particularly under the guise of "global competition". In many cases, the competition is simply bought out rather than faced.

While corporations spend much of their time advancing the virtures of "branding" to avoid commoditization of their product - which can mean serious head-to-head competition - they actually promote commodification of much of the work force as fungible, interchangeable components to be picked up on the spot market of short-term labor, a sharp contrast to the lifetime parachutes upper management provides to themselves.

In earlier days, the inventors and entrepreneurs that came up with major innovations tended to shy away from the subsequent mass of centralized corporate management that marketed, produced and distributed the product in question.

Good leaders are not necessarily good managers, and good inventors are not necessarily either. But when owners of companies are directly connected to outcomes as employees, they tend to produce better leaders, managers and employees, including inventors and entrepreneurs.

Today these distinctions have been subsumed under one huge tent of corporate control, for example, with patents being pumped out daily by single corporations with teams of attorneys overseeing the process like a production line. The obvious objective is to carpet bomb the area in question to block other patents.

Ownership has been tranformed from individual incentive and control into a bland, impartial notion of stock ownership in "others' ownership" by every gushing politician who refuses to accept deeper, more complicated sources of income inequality. Unemployed? Downgraded? Lost your pension? Company closed down? You should have invested in the company that took it away.

But maybe if the employees had owned the company in the first place, it wouldn't have happened. Yes there are risks, but some of these risks are not legitimate as competitive in nature, just as the added value of upper management has also come into question.

As rdf points out, the rules of competition via governance of that competition can easily overcome the beneficial effects of employee ownership. Profit as well as non-profit companies have blocked competitive entry in all sorts of ways, resulting in entrenched networks of political and economic control impossible to break into to and sometimes careening out of control.

[hari]

Mark -

It's amazing how random thoughts can materialize into something useful (and who knows) also intellectually productive...

The immutable destructive power of capitalism is now well recorded. US style free market capitalism may have run its full course, I don't know. Political Economists and others will have to reconcile with that if, in fact, it is coming to an end. May be not in our life's time!

What has really caught my fantasy is the renaissance of mainland China! This was a backward country struggling to come out of its Cultural Revolution (under Mao). My last official business trip was in spring 1980 with sectoral experts from a traditional industry representing not only the OECD block but also the then Comicon block and non-aligned states from the Third World, as it used be called at the time. We'd to finalize a document for global consultation which was to follow in summer in Cologne (FRG). The Chairman of my expert group was the head of the German industry group. My focus was essentially to get them to isolate no more than a handful of sector issues for our global consultation. I got them to agree to 3-5 major issues to be presented at the plenary session of some 500 industrial reps. My host was head of the Chinese (infant) industrial sector, in 1980! He was a graduate in engineering from Chicago.

You've a pyramid of hegemonic power invested in the Central Committee of the CPC. The Politburo is their party nominated governing board with a chairman and executive. China is ruled by this executive body of the CPC. Their origin is the working class of mainland China.

The transformation of China's mainland economy, since 1980s, is a historical watershed in what we've come to call in our textbooks "development economy". Yet, China is run by a single party and managed by its own cadres. Industrial development and trade and marketing structures are all indigenous and, as they like too call it, with Chinese characteristics. FDI has facilitated its globalization.

In this industrial transformation, with some 400 million still struggling to make an existence in the countryside, the mainland is transforming old traditions with newfound market access, and a savings rate unknown in OECD countries.

At some point in future, it will reach $2,000.- per capita income. It is at that stage of development, I suggest, things are going to happen - ideas you're toying with above in your introduction - and we may have to rethink our hitherto knowledge of capitalism and its raison d'etre!

I'm convinced American capitalism will NOT survive, as Lafayette has been alluding to in various ways including workers ownership and/or equity in enterprises. Because the pain - lets use that word for social impact - caused by destructive capitalism knows no boundaries, since profit maximizing is its simple and uncompassionate (effective) mantra.

China was formerly known as the Middle Kingdom! In 18th century China (and India) occupied the centre of the global economy. The moral of the present history, if it's going to be written with detachment, will recall how communist China facilitated the return of the Middle Kingdom - based on the age of WTO globalization.

The exploitation of labour will not be an issue under the worker's paradise (Anne will be relieved!). Yet, I've not the clue how they'll be able to reconcile unit labour cost with product development. If China can deliver wealth, health and welfare of its masses based on a modern social system with a human face, I'm prepared to argue, it will have laid the golden egg! And perhaps the death knell of capitalism, as we've known it.

The West failed in Africa since the dawn of civilization. China is facilitating African revival with its own injection of capital and manpower resources. [Anne has been listing all she can get her hands on!]. Chinese adventure into Africa and its incipient development problems still awaits a historical reckoning, and only time will tell if they succeeded (or not) where the West failed miserably including IBRD/IMF.

Chinese social economic model is no longer Maoist or Marxist-Leninist in its nature and function. Unlike Soviet Union, it has been able to retool its state management structures and succeeded beyond its own original self - a completely reformed and benevolent form of state socialism.

If this is the new face of global economic transformation, then we've a lot to learn and understand still....

[Cynthia]

I'd much rather see the next great mode of production be based upon a finely-made soup of capitalism and socialism than upon a souped-up version of capitalism -- especially with energy and natural resources become increasingly scarce.

[calmo]

The theoretical (philosophical?) musings ("capitalism as we know it") on the basis of Marx or Smith about the future of Capitalism (and in particular whether in the fullness of time past so far, there might be some revisions to apply)...or whether these musings are hopelessly tied to, and products of, that very ideology which accepts only the thinest of criticism (consider the Smith/Marx reduction already mirroring a 2 horse race style of inquiry), can make one slump deeper into the chair...scanning other blogs in the bar to the right for a possible early exit, you know?
Are you receptive to another opinion (provided it passes your AAA ratings standard and all the fickleness that implies?)[the globe is only temporarily warming and we will wish that NASCAR style commuting was mandatory in a decade when winters will be 9 months long] that might cost you and your blinkered view serious setbacks in your networth in the short term? [Hockey, not soccer, in the 2020 World Cup]
Well, I am obviously dangerously receptive...and can listen to just about anything...even scientific truths, you know?

hari,
"intellectual productivity" the poverty stricken cousin of Intellectual Property, yes?
Does this blog mode of inquiry constitute anything different from the traditional mode of your stack of (dusty I bet) reference texts dating from Marx to the current issues of political economics journals?

[Alex Tolley]

hari:

The exploitation of labour will not be an issue under the worker's paradise (Anne will be relieved!). Yet, I've not the clue how they'll be able to reconcile unit labour cost with product development. If China can deliver wealth, health and welfare of its masses based on a modern social system with a human face, I'm prepared to argue, it will have laid the golden egg!

Let's wait and see if that will happen. This view seems very rosy given the real damage China's race for growth has done to its people. The government is still unresponsive to its citizens, as the Three Gorges Dam project so vividly exemplifies. Maybe when teh per capita income exceeds some threshold things may change, but I don't see why that shouldn't be regarded as "hand-waving" away the real problems China faces.

Tim Worstall: I agree that as human capital becomes more valuable, the need for traditional capitalism becomes less important. What is not clear to me yet is how employee/partner ownership solves the problem of layoffs. I note that partnerships are usually formed in professions where there is little competition and the business is fairly static in nature. It is also not clear how many competing voices in a firm can improve on the relatively single-focussed leadership by the few, especially in rapidly changing markets. I would have thought that this would make firms less agile, rather than more so.

Personally, rather than a single monoculture "-ism", I would like to see many ways of economic and personal growth flourish, allowing individuals to choose their environment rather than be fitted to a one-size-fits-all model.

[DRR]

The rumors of capitalism's death have been greatly exaggerated. The problems with capitalism have been expounded upon, by very intelligent people for over 2 centuries now. About the same amount of time people have been speculating about which mode of production would come to replace it, and yet here we are today and we've come up with nothing better than that ever so harshly abused mistress. Oh sure changes have been brought about, and more will come to make it more egalitarian, less dangerous, more fair etc. But in the grand scheme of things we still have the same mode of production. still slouching toward utopia with market capitalism as the driving engine; bougoise euro welfare-state capitalism being the current pinnacle of anti-capitalists ability to reconcile the problems and inequities of that particular mode of production with the expectations of the good life.

And if "China" is the answer, than capitalism need fear no one. China's assent and export driven super growth hasn't come from a rejection of market capitalism (they learned their lesson there) but from a more erstwhile embrace of it, beating the West at it's own game by practicing a form of capitalism circa a 19th century U.S. The death of laissez-faire and wishful thinking about the "free-market" may be upon us but capitalism is alive and well. And thank god.

[donna]

If you look at the game economies in the games my kids are playing like EVE Online, they will be partnership ownerships of some sort. I don't know if they will work like ESOPs or not, but the idea of shared ownership is very common in the game economies. They are full of guilds and joint companies. You might want to start looking at these game economies if you are looking for models, they are quite sophisticated.

These kids are thinking differently than we are. My kids are called "the anti-consumers" in my house - they want for very little and are quite happy to play their online games or game with their friends. They are not impressed by material goods. I don't know how common this is among other kids, although it seems quite common among their friends. They know they are getting a very raw deal right now, and are quite upset that the low level service jobs are the best thing out there for them. Some work these jobs if they need to but others go to college and just hope for better days ahead.

And they are the lucky kids of this generation who have opportunities at all.

This is another civic generation coming up, one that values friendships and relationships above material wealth. It will be very interesting to see what kind of world they will create. I think they will make us proud though and I hope they will be given the chance to rebuild America as a better, more caring country that values its youth and its workers instead of only serving up more wealth to the rich.

[Robinia]

Um, indeed, what next?

My thoughts are that scarcity of natural resources (aka "peak oil") will result in a downgrading of the power of capital as the one scarce component.

The re-entry of sovreign wealth funds into the game as serious players is quite interesting-- in some ways, not a lot different from the actions of the Spanish Crown back in the days of the conquistadors. So, a new era of consolidated-state-backed colonialism seems a possibility, especially if those states are authoritarian, militaristic and have access to needed resources (oil, wind, water). Think this is what Cheney hoped to accomplish in Iraq.

That's a movement of economic system that we might rather not go with... workers organizing to have more ownership and control of their work might make some sense as an alternative (even with tycoon helpers), although most of the power to control is at the retail level now (Walmart).... the first step would be to get some workers who were invested in their work/profession and cared about a particular place, too. Precisely the opposite of "success-oriented" behavior in the current workforce, where loyalty or attachment to either community or company are considered to be something that holds an individual back...

[Callahan]

I didn't know they could dance.

[Donald A. Coffin]

Two very disjointed comments.

I'm reminded of an old Russian joks: "You know that capitalism is the exploitation of one man by another? Well, communism is just the reverse."

And, for me the key issue is not ownership structures per se; those seem to me to be fluid, changeable, and not all that relevant to the issue. And the issue is the creation of that which is new, what Schumpeter called creative destruction. Any restructuring of ownership or control that reduces the creation of that which is new will, in the long-run, to more to impoverish us than to liberate us. (And, by the way, if I knew how to make all this happen, I'd probably be rich and famous.)

[Bruce Wilder]

As a first gambit, I would venture to propose that capitalism has already transmuted at least twice, since the feudalism fell in 17th century Britain.

In its first guise, merchant capitalism combined with such diverse interests as scientific inquiry, global exploration and trade, and mechanical inventiveness to create the juggernaut that appeared as an infant in the High Middle Ages and broke the back of feudalism in the period 1500-1700, and created the infant institutions of finance capitalism: stock markets, fiat currency, central banks, national debt, etc. The greatest achievement of merchant/inventor/adventurer capitalism was its last and most prosaic: a highly productive agriculture with the potential to feed huge cities, that drove the mass of population off the farm.

In its second guise, industrial capitalism 1.0 exploited first waterpower and canals, then steampower and railroads, and finally petroleum and electricity, to build up a vast system of transportation, and large-scale manufacturing and distribution. This capitalism created a mass of wage labor living in cities, and a class of inconceivably wealthy robber barons, who nevertheless lost the political struggle to an alliance of the heirs of merchant capitalism and the newly awakened masses in the 20th century.

Industrial capitalism 2.0, beginning with railroads, but really coming into its own after 1890, created large-scale bureaucratic enterprise. It was this capitalism that ultimately saved the masses from dark exploitation, and created a class of professional managers and industrial unions. Communism was its bastard child. And, it is the decay of this capitalism, which troubles the world today.

I see one key problem with 21st century industrial capitalism 2.0, and diverse symptoms of this one problem. Basically, the secular tendency is toward larger and larger sunk cost investment driving higher and higher productivity, but putting almost the entire work force into administrative "overhead" positions -- the so-called services sector. Very few people are needed in direct labor to either grow food or make widgets -- a vanishing number, in fact. And, great market power is necessary to capture the returns on that sunk cost investment, with the result that a great many products have an uneconomic unit cost. The market price of almost everything from potatoes at the supermarket to life-saving drugs at the pharmacy to movie tickets are determined by administrative and essentially political processes.

There is an enormous scope, for good or ill, for economic transfers by political fiat. The rapidly rising compensation of CEOs, which results directly from subtle corruption of corporate governance rules, is only one symptom. The decline of industrial unionism is another.

I read the fantasizing about employee-ownership as a groping toward re-imagining economic relationships in this kind of world. I don't know that employee-ownership is any more realistic than Marx's fantasizing about proletarian government leading to utopian anarchy more than a century and a half ago.

The deep, deep problem of a highly productive technology is that we have way too many people on earth to employ that technology, share the output, and survive. Radical population reduction is necessary for the next stage, and I shudder to think about how that is going to come about.

[hari]

AlexTolley -

You've a point about environmental degradation in China...

My point is simply they'd to decide HOW to avoid the dismal collapse of the communist monolith - like what happend in Soviet Union - so they chose to accelerate the economic system and satisfy some of the basic demands of the masses - even at some real and substantial political cost!

What we've to recognize is that Chinese of all shades are good players of Monopoly Game! They love to gamble - why Maccao remains the "next" Las Vegas of Mainland China!

[Roger M]

Since when is capitalism about a particular arrangement of ownership, as opposed to the production of commodities that belong to the owner and sold (exchanged) by them in the market? Since when does a particular arrangement of ownership mitigate the laws of competition and the movement of capital? How is labor all of a sudden no longer a commodity, and subject to economic laws affecting all commodities? How does employee ownership change the nature of capital management from a small group, or a single individual, to workers' democracy, all the more in an economic system and culture hostile to it?

Companies in trouble or effectively tanking have and will continue to use employee ownership as a tactic for buying time to regroup and return to fight in the capitalist world another day. Sam Zell's deal is a wonderful example of this. On the other end, desperate workers, perhaps with a few dispossessed "entrepreneurial types" in their midst to stir the pot, sometimes delude themselves into thinking that employee ownership will somehow fundamentally alter capital/labor relations. It typically doesn't take long for these "experiments" to come apart and the workers to be disabused of their hopes. This is all the more true in a country such as the U.S., where capitalists and capital markets have little patience for employee (read: labor) dominance.

[Bruce Wilder]

"a great many products have an uneconomic unit cost. "

I meant an uneconomic unit price. The marginal cost of a manufactured product is much less than its price, which must recover the sunk cost investment to keep the enterprise that makes it, alive. But, the price is essentially an arbitrary function of power, and economic progress requires that that power, eventually, be broken down in the process of creative destruction. If it isn't we are all going to be enslaved to monthly payments to Microsoft, Time-Warner, mortgage banks, car loans, and HMOs.

says...

"I've always thought one possibility for the next step is worker ownership, though it's not quite clear how such firms would get started in the first place, i.e. where the capital would come from and who would decide which firms to start. But I suppose institutions could be constructed that would solve this problem (I'm not recommending this, but you could, for example, pass a constitutional amendment or more simply a law requiring an entrepreneur to sell the firm to the employees after the initial investment had been tripled or after fifteen years had passed, whichever comes first, or something along those lines."

Why do you want to invest your savings in the same firm in which you work? Do no put all your eggs in the same basket. If the firms goes broke then you loose your job and your savings.

[Winslow R.]

Mark great post and comments.

I'd just add Sen. Long went about fixing the problem of limited access to debt financing the wrong way.

To compensate for a tilted system of access he provided a provision where Federal income taxes would be forgiven for 10 years to allow employees to compete with corporate raiders and their investment bank backers.

Sen Long would ideally have fundementally changed the tilt in the system, rather than providing a tax holiday to a special class of citizens. Providing employees with access to the same funds at the same rate than investment banks, would allow for fair competition. Why give a corporate body (with no one to hold accountable) better rates than individuals who can readily indentified and punished?

TAF's allow all depository institutions to compete for funds on the same playing field. Why not allow all U.S. citizens access, including employees, to the playing field?

[hari]

Robert.fineman has a nice essay on his personal blog which talks about his personal consumption decisions after retirement...one car instead of two...no gifts...no European holidays, etc.

I found his essay reconfirming my own belief against overt consumption - while I was still professionally occupied. We can all reduce our conspicuous consumption ...bit by bit...like bicycle for car...so I can still keep my wine cellar! His healthcare costs are factor of four times mine! I may be getting a better deal also with a single payer rate...

You'll find his blog very enticing indeed...wish I could keep/open ...a place like he does it.

Bruce Wilder -

You're always into economic history from feudalism to capitalism and whatnot. However, you're oblivious of the fact that during the same historical junction - belief in religion, church and morality played a very central on deciding role of the state and the masses. Otherwise Christianity would not have won against almost plus four hundred years of war with Islam (see Gibbons). Just imagine if Islam, the children of Abraham, had won over the Catholic Church of the time!

Some day, I wish to see/read a bit from you - given your wide reading/experience (I've been on your SC Blog!) dealing with the role of Churches in American Economic History. They've more or less high-jacked the political man such as GWB, in my opinion.

Back to Mark and his introduction on what might follow our period of capitalism...

I interjected religion because it seems to me there's a renaissance in Bhuddism and Confucianism!

Capitalism based on their moral concepts might not be the same, I suppose.

Calmo (Morton I prefer!) -

You're a good reminder of the "rats" - which you sometimes use - but hardly mention the kitchen!

So, I suppose the rats are there as an analogy or what?

No, my musings (like Mark's) are not from articles/textbooks or any such sort of thinking. It comes more or less at our ripe old age, Morton! You remind me of my son, if I may say so, because he also tries pick on words rather than substance of the argument. I'm sure you can do much better!

[john c. halasz]

Er, Bruce Wilder, you do realize that you've been articulating that old chestnut "the tendential law of the falling rate of profit", eh? (Hint: it was articulated in terms of labor values, which, at least in per capita terms, are held constant, hence the increasing accumulation, concentration, and proportion of fixed capital amounts to "sunken cost").

[Winslow R.]

Donna wrote: "These kids are thinking differently than we are. My kids are called "the anti-consumers" in my house - they want for very little and are quite happy to play their online games or game with their friends."

My guys have said in the past all they need materially is a small cabin with a laptop and a highspeed internet connection.

They are just getting interested in girls so things may change.

[Lafayette]

reason: But that is the attitude we want to believe drives capitalism forward. How many scientists expect to become fabulously rich?

I suspect it would be sufficient if R&D that came out of a university campus and was funded by non-private VCs who assured that the profits returned to the university to fund further R&D -- and perhaps also some Research Chairs (lifetime job security) -- would be acceptable not only to your father but to a great many other scientists as well.

[Cynthia]

Callahan,

I too don't know whether tycoons can dance or not, but I do know they share a few other things in common with wolves.;~)

[Callahan]

Cynthia, and we are the little red ridin hood.

[Thai McGreivy]

Mark, I am guessing as the 34'th poster I will not even be read, but I thought I would give it a try anyway...

Are you familiar with Benoit Mandelbrot? He is a mathematician at Yale who wrote a non math book for us 'lay readers' called The Misbehavior of Markets.

As a way of legitimizing the book/author, another author you may have heard of-- Nassim Nicholas Taleb-- famous for Fooled by Randomness and The Black Swan, dedicated The Black Swan to Mandelbrot-- "A Greek among Romans".

Anyway, The Misbehavior of Markets tries to explain to us 'lay' (i.e. non-math) readers the difference between the two major types of risk/statistics that mathematicians use to describe the world:
1. Gaussian risk/statistics (which give 'The Bell Shaped Curve')
2. Cauchy or Lorentz risk/statistics (which give Fractals, Chaos Theory and Power Laws

Most people understand Gaussian statistics intutively-- we use them everyday to analyze things like casino gambling, coin tossing, etc...

Most people DO NOT understand Cauchy statistics intuitively at all. Most people therefore incorrectly misapply Gaussian statistics to problems that are fundamentally Cauchy and they end up with incorrect results (Daniel Kahneman, a psychologist, who won the 2002 Nobel Prize in economics, for his work on heuristics, would call this an example of a flawed heuristic for those who understand me)

Gaussian analysis/statistics work fine for things of 'small variation'-- height, IQ, weight, 'Six Sigma' manufacaturing quality control programs, etc...(just like Newtonian physics 'works fine' when applied at 'slow speeds').

However Gaussian analysis is fundamentally incorrectly applied to things of 'tremendous variation'-- things like wealth, knowledge, names, language, the internet, the stock market, etc...

... and interestingly enough, things of tremendous variation just happen to be most of the things people find meaningful/willing to go to war over-- wealth, love, hapiness, social justice, fairness and income distributions, etc...

When you get into talking about economic issues like 'fairness' and 'social cooperation' AND you apply Gaussian analysis, you will come up with inaccurate results. You are using the wrong statistical tool. If you built a home with simmilarly incorrect math, the home would fall apart.

It was just these issues that Joshua Epstein and Robert Axtell of The Brookings Institution accidentally stumbled upon when they started working on a project called SugarScape.

Sugarscape has profound implications to almost every single article you have written. Sugarscape clearly proves how most economists try to 'solve' issues using the wrong (i.e. Gaussian)mathematics.

In particular, Sugarscape shows how most economists beliefs on 'what is fair' and what is 'socially just' (which by the way have been my own until I learned this) are based on Gaussian logic and reasoning (since most of our minds work this way). Yet these problems are not Gaussian probabilities.

Re-ask every one of the question you have asked your readers but next time use Cauchy/Lorentz logic... you have been trying to 'solve' problems with the wrong tool.

You are using an evolutionary relic of how your own mind developed (no foul, we all do this).

The basic point I am trying to make here is that the entire logic of this very discussion is based ON FAULTY ASSUMPTIONS.

Do you understand what I am saying?

Look this up for youself if you do not believe me

[evagrius]

Do you mean that no one has heard of Mondragon in the Basque region of Spain?;

http://en.wikipedia.org/wiki/Mondrag%C3%B3n_Cooperative_Corporation

It's the world's largest worker cooperative, the seventh largest corporation in Spain.

Take a look at the article- then make your comments.

[Lafayette]

TM: The basic point I am trying to make here is that the entire logic of this very discussion is based ON FAULTY ASSUMPTIONS.

Well, I for one DON'T believe your Cauchy nonsense.

I am fairly sure I have an empirical correctness when I see income inequality.

Unless you are capable of explaining what you mean in concrete terms, it's a riddle, wrapped in a mystery, inside an enigma and without a key. Or, perhaps just twaddle.

[NC Jim]

Why does the next arrangement have to be "better"? As we consider that increasing population in combination with dimishing resources may make future wealth generation a negative sum game, then we may simply make a round trip, ie.,

feudalism ==> capitalism ==> feudalism

Of course the Dukes and Earls would be replaced. GEs and Toyotas perhaps?

Jim

[BJ Feng]

"In one experiment, the researchers tested theories about the distribution of wealth. Ever since Vilfredo Pareto, a nineteenth-century mathematical economist, first quantitatively described highly skewed distributions of income and wealth, economists have held that such stratifications are a given in human societies. Epstein and Axtell set out to test the theory in Sugarscape, where agents, like people in the real world, continually accumulate wealth (in the form of sugar). In run after run, under myriad variations of rules and environments, the law held up, Epstein says; indeed, it proved the first qualitative similarity between simulated and actual human societies."

From the website given by Thai. Fascinating, no wonder all attempts to reduce income inequality to "acceptable" Gaussian levels have usually ended in disastrous failure.

[Patricia Shannon - continued]

Of course, the big problem with this approach is that it exposes the workers to much greater risk, because dividends are a much more volatile income-stream than wages. Indeed, there is a good argument that one of the main `purposes' of the traditional capital/labour division is that it shifts the risk from (generally poor, risk-averse) workers to (generally rich, risk-neutral) capitalists.

This is interesting, because economics professor Dr. Ravi Batra studied the Great Depression, and concluded that it was the result of the redistribution of wealth into the hands of the few; one of the results being that the ultra-rich became very speculative, investing in risky ventures that failed; (and one of the results being that most people didn't have enough money to spend to keep the economy going).

I would expect that great riches could lead some to great risk-taking to alleviate boredom.

[realpc]

Worker ownership makes no sense, and ESOP is not worker ownership.

To start a company, you must have an idea for a product or service and you must have a marketing plan. You also must find investors and/or invest your own time and resources.

And most of the time, you fail.

So worker-ownership is a hare-brained idea. After going through the ordeal of starting a successful business, no owner is going to hand it over to their workers.

And even if you're an owner and for some reason you want to give your company to your workers, it turns out to be impossible. Will you give every worker an equal share and equal authority? Even the guy you hired yesterday to sweep the floor? Your workers are not all equal, and you know it.

Some have been with you for decades, are trusted friends with valuable skills and experience. They know your business, and if you were ready to retire you would hand it over to them (of course, you would keep a generous pension for yourself). But you would not, if you had a shred of sanity, donate your business to all your workers indiscriminately.

So even if the workers now own your business, the business is still just as hierarchical and non-Marxist as when you owned it yourself.

So worker-ownership is not even a half-baked idea, it isn't baked at all. Only an academic could get behind such a silly and impractical idea.

[realpc]

If something is coming after capitalism, we have no idea what it will be. Probably hunting and gathering.

If you hate capitalism and you like worker-ownership, you might also like parecon. Anti-capitalist Michael Albert finally admitted that socialism sucks, so he designed his own perfect economic system. If parecon follows capitalism, it will last about 5 minutes or less, a brief spark of insanity on the road to neo-hunter/gathering.

[Patricia Shannon - continued]

The results of Sugarscape reminds me of an article in Scientific American several years ago, which analyzed the mathematics of the distribution of wealth. ?hey found that even if everybody starts out exactly equal in ability and resources (which of course is not the case), some people will end up better off thru random chance. Once there, they will tend to do better and better, because they have an advantage in resources to invest. As a mathematician and observer/participant in the world, this seems obvious to me, but apparently not to many others. As in most things, reality is not either/or.

[Patricia Shannon - continued]

There is a saying which is said to be an ancient Chinese curse:

May you live in interesting times.

[Thai McGreivy]

Lafayette said... "Well, I for one DON'T believe your Cauchy nonsense. I am fairly sure I have an empirical correctness when I see income inequality"-

I am not trying to either seem either offensive or obtuse or even disagree with you in any argumentative way whatsoever, and yet the reality of what I am saying is perfectly true.

Yes, you are absolutely correct, there is NO DOUBT that 20% of the people own 80% of the wealth of this country! In fact, this 80/20 rule applies to the entire world: 20% of the people in the world own 80% of the wealth of the world (most of these people are in Western-Northern Countries but the oil block is coming on strong fast!). In fact, if you check for yourelf what scholarly studies on wealth distributions throughout history have been done, you will find that the Pareto 80/20 figure is in fact one of the most 'constant' ratios we have in all of economics (give or take 'fluctuations').

It was probably true 1,000,000 years ago (there is interesting suggestive evidence for this in the genetic/fossil records), it was definitely true 2,000 years ago (in the time of Rome), it was true 500 years ago when Pareto first started looking at the data in 1905. It has been true (again with 'fluctuations') ever since.

It is definitely true today, it will 'probably' be true in 1,000, 10,000, 100,000 years, even 1,000,000 if the human race is fortunate enough to last that long.

What is also so fascinating about the 80/20 rule is that if you look at that richest 20% as a group, who own 80% of everything, you will find that the 20% of them own 80% of the 80%. If you again look at the next richest 20% of the richest 20% of the richest 20%, you will see that they own 80% of the 80% of the 80%. And if you look at the richest 20% of these groups, you will see that they own 80% of the 80% of the... Do you get the picture?

Another one of the fascinating things about Sugarscape was that no matter what Axtell and Epstein did, they could not change the 80/20 rule.

The wealth/income distribution is scale invarant. It behaves occording to Power Laws (in fact it was the first know example of a power law-- until we realized they are in fact ubiquitous in nature). You deal with Power laws all the time, you may just not realize it. Let me give you an example, the area of a circle (pi r squared). No matter how large or small that circle is, it's area is ALWAYS pi r squared!
Gravity follows Power Laws, etc...

So yes, you are correct, as you say: "I see the numbers with my own eyes". The problem is that you are applying a Guassian statistical analysis to what those values mean and coming up with a sense that their is something 'unjust' or 'unnatural' or 'unfair' about them becasue another heuristic (that which tells you about material need) overrides your other heuristics and says "THEM MORE vs. ME LESS IS BAD".

Your mind operates as a conglamoration of multiple heuristics or 'rules of thumb' which rank issues according to order an internal of importance (also a heuristic) and come up with a final 'answer' which is what you think and what you do. These algorythms and rankings developed over millions of years of evolution, and were what helped you to survive and procreate into the next generation.

As material things mattered for survival so much throughout our evolutionary history, we have developed very strong notions of 'what is fair', etc... in order to maximize our chances of getting material things and surviving. And ALL of these heuristics are based on Gaussian logic-- Gaussian works very well in explaining things 'which are not too extreme' (Just like Newtonian physics works when speeds are not too fast).

Another example is an 'optical illusion'-- Your eye processess information and sends it to your brain. Sometimes the information processing sends signals which are 'incorrect', such as when you see a 'wavy' horizon along a hot desert surface. That is a processing bias created in the eye (also a heuristic), but you have another heuristic which tells you that you are seeing a 'mirage' so that you are not truly fooled.

But Gaussian is meaningless when variation is infinite (Cauchy problems). Applying Gaussian analysis (i.e. 'The Bell Shaped Curve') to the infinite problems is not correct... AND most of us do not have hueristics for this and so when those who understand them try to explain them, we seems cryptic or bizarre.

Again, this is just a relic of how your mind works/how you interpret information.

I am quite correct on this, the assumption behind what you are saying is wrong, you just don't realize it.

One thing Axtell also found in Sugarscape which was quite 'haunting' was that some agents, no matter what, never moved onto the 'sugar mountains' because 'they could not see them'-- predictably they were agents with very good metabolisms but very poor 'vision'.

This is a fundamental problem with heuristics. You may or may not understand me, there must clearly be things that I do ot understand that you see that I do not. This may sound 'bizarre'-- again I am not trying to insult your intelligence. I have no interest in arguing with anyone AND I am not speaking in a riddle AND I am correct. You may just not understand me.

I am just asking you to look at some of the assumptions in your question itself and in fact you may.

Physicists had a hard time sorting thissort of thing out for a long time, for example when they first heard about schrodinger's cat, and it drove them nuts, until they realized that the way the question was asked was part of the problem itself.

Econophysicists are doing good work all the time (I find people love physicists when they build bombs, solar power plants or better computers, they just don't like physicists when their lenses suddenly focus on things like values). Then the same forces that burned Galileo come to bear on them... have you ever thought of yourslef as part of the anti-science witch hunt?)

I can clearly see what I am talking about, I am not 'cryptic' though I may seem to be. I submitted this posting as I like the sentiment behind many of your comments-- a genuine concern for you fellow-- even though some of the analysis is fundamentally flawed. I thought I would try to share with you, I am not here to argue.

If you disagree with the theory of evolution, quantum mechanics, or that science even built the atomic bomb or that modern computers allow internet communication between people, all from the 'cryptic' world of science, I will not try to tell you otherwise.

By the way, I referenced an old 1997 article on Sugarscape only as it came up quickly on a Google search. The science of econophysics has moved a long way since 1997, check it out for yourself The Santa Fe Institute.

Open your mind

[Patricia Shannon - continued]

Thai McGreivy

I believe most of us would not accept your equivalence of "natural" and "fair/just/desirable". Innoculations are not natural, but I doubt that you would reject them for yourself. It is natural for the most successful fighters to leave the most offspring. So our nature leads us to continue to make wars. The result, now that we have modern technology, is the possibility of extreme damage to our species, perhaps extinction.

[Thai McGreivy]

Yes, absolutely, I agree with you! My point is in fact just that... I completely realize that most people will not accept what I say. Yet it doesn't make 'my reality' wrong, (By the way, I was not the first one to realize this, I just needed to get to it through science as that was the information network I trusted-- try readin anything by David Hume).

As I said in my last comment... "One thing Axtell also found in Sugarscape which was quite 'haunting' was that some agents, no matter what, never moved onto the 'sugar mountains' because 'they could not see them'-- predictably they were agents with very good metabolisms but very poor 'vision'".

If you understand 'my reality' (point of view is a key feature in physics/economphysics) the consequences of it all is probably the only pure thing we can hold take away so far-- 'risk' is infinitely scalable.

We live in a Fractalwrold, onlly most of us don't realize it. Fractals are 'self similar' things, i.e. The world looks the same no matter how much 'bigger' or smaller' we look at it.

The 'illusion of safety' many of us get from wealth/material things is just that, an illusion... remember the heuristic to find 'wealth' comes becasue we want to survive. Does it really matter if we have a 50,500,5000,50,000 square foot home?

We human primates have a natural tendency to 'look up' the material food chain (which is stupid since the real issue is the 'information' food chain anyway, wealth is really just information but I won't go into the details here-- another (flawed?) heuristic). So we seek 'materialism'. But cockroaches have been on this planet a lot longer than human beings, which is really 'smarter'? Do you care about yourself, your kids, your grandkids? etc...

Make no mistake on this, there is NO disagreement in the fractal literature, risk is infinitely scalable. The rich may be 'richer' than me, but they have just as much risk as I do. Welath does not bring safety, that is clearly an illusion.

And yes, we may all blow oursleves up. And if we are lucky enough to avoid it now, it will come up again and again (I hope of course that we don't)... Risk is infinitely scalable.

Another way of looking at the world is that their are information networks that cooperate and those that don't. I choose cooperation, though I knowingly realize it will not improve my risk profile whatsoever (my flawed heuristic).

But many arguments on this blog are based on flawed questions/assumptions. The libertarian vs. big governement debate is based on many flawed questions and is as dull as the 'nature vs. nuture' argument from people who do not understand evolution-- the very fact many people arguing over it often reveals they do not understand why the question is asked in the first place. There are results and no results, all the rest is just the way we get there.

[Gil]

Ultimately you're probably right Thai McGreivy. A similar question that supports your idea is 'why does each generation, who sees themselves as individuals different from the individuals of the previous generation, invariably seem to fall into the same patterns as the one before it'? Likewise, as you pointed, societies and sub-groups in society are inevitably hierarchial structures which represents the genetic range in various individuals in society. Yeah it's probably hopeless!

[Thai McGreivy]

Not hopeless, just highly improbable!

[Lee A. Arnold]

The distribution of income in modern societies is neither wholly Gaussian nor wholly fractal. It is something like a combination of both. A good picture of this appears at time 3:11 of the following YouTube:

http://youtube.com/watch?v=SA1f2MefsMM

In other words, it looks like a big segmented bug. This is because of the rise of the middle class.

[Gil]

Yeah but this is where I'd imagine Libertarians appearing out of the woodwork saying how modern society since the mid-20th century has been one of wealth redistribution and government intervention and therefore unnatural. A free wealthy society should have the same distribution of income and wealth as a free poor society.

[paine]

nice people
like producer co ops
and have for about 200 years

its an idea
that comes and goes
in episodic spasms

doc karl
saw the "joint stock coporation"
and the " co op "
or
"associated producers'" combines
as two
independently incomplete
and unreadable jagged halves
of
one note from clio

at any rate
the " objective process"
ie the gradual
socialization
of production
(nb not statification)
goes on apace

[Thai McGreivy]

Lee, nice video, thanks!

Yes! (and no!). Remember, income and wealth as we get all worked up over are measured in 'measurable' dollars (currency)... but the fact is that wealth is much more complicated than just what you make and what you own. What about IOUs for 'barter', 'swapping' and 'favors': "I will watch your kids Saturday night and in return can you pick up a can of tomate juice at the store while you are there"?

How do the models include things like 'smart' or 'attractiveness'?

There are lots of components of wealth that are unmeasurable by today's standards but are still very much part of wealth. Think about reputation, (You went to school at Harvard, I went to school at the local community college, etc...). Just think about how much money Bill Clinton and Rudy Gulianni have made from their speaking tours because of their 'reputations'?

This is in fact one of the primary criticisms that conservative econophysicists make (see how perspective always creeps in!), you may make an absolute difference in wealth appear smaller and therefore more Gaussian, but all you are doing is pushing overall wealth distributions down into unmeasurable territory.

So to say that it is neither wholly fractal nor wholly Gaussian is true as currently measured, and also in 'hot debate' because much of what wealth is cannot be currently measured with today's tools.

Further, Sugarscape's true 'fractal' distribution of wealth was seen during 'steady state'-- obviously an absurd assumption for any complex adaptive system since the economy is in constant change.

The nature of the world is cooperating vs. non-coooperating networks/information and cooperation is fundamentally impossible in zero-sum endeavors and people often forget this. They also forget that by looking at the same problem from a different framework, it can often be changed from zero-sum to non-zero sum.

The 'defenders' of this nation didn't understand this during the cold war when they first tried to solve The Prisoner's diemma. It took them 25 years to realize that if they played the game over and over (The iterated Prisoner's Dilemma) instead of playing it once, it became non-zero sum.

So in a world of fractals, infinite risk scalability and zero-sum vs. non-zero sum cooperative networks, I will take non-zero sum solutions with their fract distributions and infinitely scalable risk over Gaussian income distributions ANY day of the week... but this is just my reality.

The rest of you can choose war

Regards

Thai

[Lee A. Arnold]

Thai, Any other component of wealth will come out with the same result.

To begin with, non-monetized, qualitative things like "smart," "attractiveness," "reputation" all give value in the same abstract manner that innovations and institutions do: they decrease expenditure of space and time in one or another subsystem, within the whole system. (In this particular sense, these things are homologous.)

This leads to both fractal and "Gaussian" patterns simultaneously. As follows:

The subsystems, because they are directed subsystems, almost always have a one-to-many function somewhere within them, (and this is almost always related to a "property," real or imagined, of some type.) This fact, multiplied in a complex fashion, gives rise to the fractal pattern that is discernible in the whole.

But the modern economic system also involves a reasonably wide and dependable sharing of most of the goods and services. This occurs for at least three different reasons: (1) so entrepreneurs can get further ahead by selling stuff to a large and consistent market, (2) because there are general levels of aspiration among people, and of attainment in education, and (3) because democracies need to keep the peace.

It so happens that non-monetized, qualitative things like "smart," "attractiveness," and "reputation," in addition to the appetite for innovation, all enter in #2 -- and so there is a middle-class bulge here, too.

The whole thing is like a big fat bug. I was going to make it wiggle, but it looked too tacky.

[reason]

Thai,
but I think there is a big fallacy in your fractal argument. We have a finite beginning and a finite end. It is at the bounds that the scalability breaks down. No economic model has ever coped well with the question "what if MARGINAL productivity falls BELOW the susbsistance level". I think this is essentially what Bruce Wilder is arguing. If the historical relation between average and marginal productivity breaks down because of highly (I won't say infinitely) scalable technology then we NEED redistribution to stop the system from collapsing.

You have also ignored an important institutional fact - the limited liability company, which allows the rich to parcel their risk in small bundles. Only a systemic collapse (or their own mortality) can hurt them.

[reason]

Thai,
however, in general it would be clearer to everybody if you explained
a. Where you think gaussian logic has led us astray
b. What are the policy implications?

I happen to agree that most of the systems we deal are highly non-linear (but I think we look at sums of hysteresis curves not exponential curves).

[Lafayette]

NCJ: Of course the Dukes and Earls would be replaced. GEs and Toyotas perhaps?

Of democrats and plutocrats

Feudalism is as much a political paradigm as an economic one. At the time, the idea of monarchy was encrusted within conventional wisdom, and power derived from the Prince (read Machiavelli). And, that power was invested in the throne and passed from generation to generation. The idea being that power was not only a genetic heritage but supervised by a Christian God. Thankfully, when that notion was exported to the North American continent, it died a timely death.

We’ve come a way since then. Democracy is well anchored in the conventional wisdom as a better means for power to be held and administrated. In fact, the American version of a triumvirate “balance of powers”, an even more advanced version, is just making the rounds here in Europe. Up until recently, the Prime Minister (PM) controlled or could influence not only the Judiciary but, of course, the Legislature (of which the PM was the elected leader). Europe is just learning to separate the Judiciary from the Executive branches, but all too often the Judiciary remains under political influence.

The advent of large corporations on the economic scene, to a position of dominance both economically and, by means of influencing elections, politically is also a relatively new occurrence (mostly 20th century). And, for the moment, we (the US) don’t know what to do with it – aside from a meek suspicion that this power, enjoyed by a plutocracy, has perhaps more power than is wise for it wield.

But, this imbalance of influence is due to our inability, other than in blogs, to understand the real influence of plutocrats – and the plutocracy that they implement. (Plutocracy = an elite or ruling class whose power derives from their wealth.)

We elect a Senate constituted of millionaires, 40% to be exact. The present group of PotUS candidates are also extremely well off – particularly M. Romney who is a multi-millionaire. Why? Because getting elected in this country requires money – before, during and likely after – the election.

So, those who have it get elected. And, from where do they obtain the vast sums necessary to mount an aggressively successful campaign? A bit, at first, from their own resources; but inevitably, they must go to their respective plutocracies – both on the Left and Right.

Do these plutocracies give money to candidates without expecting anything in return? We can only hope so, but – until someone blows the whistle – we can never know. Wealth and politics is a secretive recipe, even today.

We do have a data-point, however. It is reported that BigOil gave at least 50 MegaBucks to the Bush-Cheney campaign. Once in power, Cheney called upon BigOil in his design of an “Energy Policy”. This policy, some thought, should broaden our dependence upon foreign oil sources, and introduce a nuclear alternative giving us some independence.

What became of the Energy Policy? It was all smoke and mirrors. And, the guys in Vienna at OPEC still have us by the short and curlies. And, who are these people at the OPEC in Vienna? Look at the countries represented there? Mostly run by plutocrats, not democrats.

So, why do people wonder who is running politics? Is it democrats or plutocrats?

Your guess is as good as mine. But, if betting on an answer, my money would go on the plutocrats. Why?

Because, given the embellishments of democracy and democratic institutions, money still buys elections - on the Left and on the Right.

And that, dear friends, is the fault of who?

[Thai]

Reason.... thanks and yes! And no, and I do not have an answer, that is not an information pattern I see... please realize there are those I repspect who believe it is 'impossible' to come up with one at all.

All our heuristics come from a historical perspective, they were not 'designed' to look forward, and ALL our heuristics have flaws, that is a fundamental to information as it grows: as we simplify more and more information to make it usable, we make it wrong and itis from that 'wrong' that one day it will come back and 'bite us'.

Einstein came up with relativity 'out of the blue' after reading David Hume, and was even unable to prove it, asking that of others to solve, so who knows, maybe you will have the epiphany?

Policy Implications... Everything is a Red Queen Game as far as I look at the world. Do you see it otherwise?

There is no policy implication 'that is lasting'.

No matter where you are on the information foodchain you are at risk... you are at risk from those 'below' who decide to get into zero sum 'wars' and you are risk from those 'above'.

Of course their reality looks pretty much like mine.

[Thai McGreivy]

Hysteresis vs. exponential... I agree with you they are also hysteresis: I see them as both true. 'A spectrum' of logic/statistics existing within a bounded continum as you say. Everything is clearly related to everything else, on that there seems to be NO disagreement that I am aware of from the physicists who study this crazy universe we live in. Do you know otherwise?

I am not 'rigidly' Fractal over Gaussian at all, I just simplified my explaination into Gaussian vs. Fractal in my first post in order to make my point more approachable to people so they will understand what I am saying... they can 'move' into further 'truths' if they understand the basic point. I am aware that the way I frame what I say based on my own logic makes it 'fundamentally' wrong.

But how approachable would the following statement be to most people: "there are an infinite nuber of statistical systems to explain"... I would loose readers in the first 5 words!

I think the way Mandelbrot explained to 'everyday readers' how there are really more than one statistical system in the universe (he focuses on Fractals as that was his life's work) is a wonderful way to introduce readers to the crazy world we live in from a classic economic viewpoint/pathway.

In your hysterisis world, the path we take to get to a destination is everything! I am sharing a 'snapshot' explaination from my path in order to make a point... I do know that by doing this I am making the problem 'wrong', but like you I am human and have boundaries.

As I said in one of my earlier postings: "By the way, I was not the first one to realize this, I just needed to get to it through science as that was the information network I trusted-- try readin anything by David Hume".

In the end, all bridges lead to Rome...

[Thai]

On last thing to share: Point of view is everything

There are many ways to look at the implications of what this study says:

1. Get rich and you become 'greedy'/'evil'/fill in the blank...
2. 'Leadership' forces you to look at things diffferently
3. We live in a fractal/hysteresis world and most of us do not see it.

[Lafayette]

TM: In the end, all bridges lead to Rome...

If not preposterous

But for you it depends whether the bridge is of Gaussian or Cauchian construction. This is esoteric, academic nonsense that you post in a public forum knowing full well that is far beyond the comprehension of most. (Why didn't you just email it to MT?)

In a public forum, explanations require a bit more proletarian detail and less abstruse statistical theory.

If roads led to Rome, not bridges, it was because they were paved at the time. The pavings of economics were shaped and set into its foundations by philosophers historically and they still resound today because they are based in empirical evidence of a reality that most can comprehend. Modern science has added to that body of knowledge, but not in a wholly positive fashion.

To discredit our present understanding of economics by a proposition that only mathematicians can grasp is ... intellectually dishonest. If not preposterous.

Come down to earth and reformulate it.

[paine]

"). However, there are some economists ---such as Samuel Bowles and Herbert Gintis ---who have seriously analysed and advocated worker-ownership."
not a counter example

these guys are beyond the pale
back in the day
they were both
full throttle urpe burpy types

as we maoites use to call em

they speak only to fellow left out ideologians
and to boot
not very much gets ruminated
beyond julian sorel
as bastard child of js mill

poli econ con wise
these chaps izzz nowhere baby

Thai says...

I am really sorry, I am not trying to be cryptic, I will keep trying to do my best. But again, my statements are no 'less true' than yours, they are no 'less relavant' to the discussion to people who understand them than your statements are to those who understand you.

Others may disagree with me, and yet they are 'correct'.

As an analogy: if you were to explain what you know to someone who lived 'a long time ago', who was completely unfamiliar with most modern ideas you take for granted(perhaps they