From this year’s student evaluations:
Economics teaching proceeds as follows: here is an extremely abstract and unlikely theory, go away and learn it, and don’t ask awkward questions about its veracity. But I want to know where these ideas come from, and whether they are true, not just whether they make neat mathematics. In this course I was finally able to ask some of the questions that had been bothering me, for example: Is the idea of maximising utility really true, is it useful, where does it come from? Has economics always been about rational individuals, or should it consider societal influences and morality? Does it make sense to talk about general economic laws, or does human action actually depend on culture?
History of Economic Thought is an excellent course for students who want to think about big ideas; this year we had some very good discussions. More reactions here.
Here is an excerpt from my review of Enacting Dismal Science (Palgrave, 2016), a new collection of essays on performativity edited by Igor Boldyrev and Ekaterina Svetlova.
Boldyrev and Svetlova have set out a challenging and important task to push forward the dispersed streams of thought on performativity of economics. While this volume offers a solid reconstruction of the historical origins of the concept, and while it addresses some of the main criticisms of performativity, the question remains whether we are converging to anything like a theory of performativity. If so, it seems we still have a long way ahead.
Earlier on this year, Howard Schultz stepped down as the CEO of Starbucks (NYT, Seattle Times, WSJ). In our paper, Erwin Dekker and I have looked into what can we learn from the ascent of Starbucks about the meaning of economic competition. Here is the abstract:
This paper offers an alternative to essentialist theories that conceptualize goods as bundles of objective characteristics. Extending the idea that economic competition is a discovery process beyond the discovery of costs and prices to the discovery of qualities, we argue that relevant qualities of goods emerge along with costs and prices from the process of economic competition. Such a discovery process revolves around exemplary goods—a novel theoretical concept we develop. Exemplary goods, as we argue, have a coordinative role within markets that is complementary to the coordinative role of prices. We illustrate our theory with a reinterpretation of a case study on the entry of Starbucks and conclude by challenging some of the normative implications derived from theories of salience.
This very decade Mexico rounds off two centuries taking on its independence. It seems, however, that although the independent Mexico has experienced a number of more or less radical transformations, these changes often did more to leave things as they were than to move the nation to anything resembling a liberal constitutional order. Classical liberal ideas have always been present in Mexico in one form or another but it is paternalism, patronage, and corporatism that have deep roots in the economic thinking, not liberalism.
Today the heritage of conservative colonial paternalism is a major contender for liberalism and a source of many contemporary Mexican problems. In the pre-independence Mexico, land, and labor never really got to become commodified. The colonial society never came to be constituted by competing individuals that would see themselves as self-interested and autonomous, market exchange was impeded by the aristocratic philosophy of noble idleness, through institutions of mayorazgo or ejido that would lead to the concentration of lands, and through encomiendas and repartimientos that would weaken the position of a typical laborer. The market mechanism was misunderstood and mistrust and by the time Mexico claimed its independence the notions of bargain, contract or competition were not too relevant. The Spanish paternalism which found a fertile soil in the subsistence economy of native Americans did not permit the rise of a merchant class in Mexico. Independence was not really a break with this tradition, rather, it was a return to traditional values in a changing world shaped by Bourbon reforms, Napoleonic invasion of Iberia and partial trade liberalization. Rather than a force of emancipation, Mexican independence was a kind of counter-revolution that reinforced corporatist interests and special privileges.
Mexico did not have a stable political system until the second half of the nineteenth century when Porfirio Díaz came to power. With Díaz the political system became stable and a national (as opposed to provincial) identity begun to shape up. Stable polity is key for a liberal order, but can we find some cultural allegiance to liberal principles during the Porfiriato era? Although it might seem so looking at the records of the time, the liberal program that the Reforma movement envisioned did not change the fact that by the time Díaz came to power, ownership of land continued to be concentrated in the hands of the hacendados and that labor – the only asset of the majority of the Mexican population – was not really a property of the individual. It was compulsion, not contract that controlled labor; the liberal program was in conflict with the reality of the landed power in Mexico and the costs of enforcing the liberal ideas of the 1857 constitution were too high.
Despite the irrelevance of the liberal order that was imposed on the Restored Republic, some Mexican historians of economic thought believe we can find an allegiance to liberal principles during Porfiriato. In fact, the argument goes, at the end of the nineteenth century – during the reign of Porfirio Díaz – liberalism prevailed and later on in the 20th century this political philosophy was renewed, updated and promoted by a group of intellectuals, businessmen and politicians establishing a continuity of the so-called “orthodox liberal thinking” or “neoliberalism” that can be traced to Porfiriato. The intellectual core of this kind of thinking counts with an elite that reforms the state with one principal objective: creating and strengthening the market; the government should bring about conditions under which the price mechanism functions correctly.
Granted, the 1883 commercial code defined the profession of a merchant, the civil code (1867-1884) exalted contractual arrangements for labor, all significant private law limitations on free commerce were abolished by legislature, in 1889 shareholder-owned corporations were permitted separating management from ownership, in 1896 alcabalas were mostly abolished and the value of Mexican industrial product doubled between 1878-1911. The fact remains, however, that bargaining for the purchase and sale of labor and goods did not prevail among large segments of Mexican population; the civil law did not provide a solid and inclusive framework for economic activity and the life outside of the cities was largely unaffected by the commercial and legal innovations of Porfiriato. Rather than private economic agents, it was the government that through institutions of fomento directed the country development. The development strategy of the Porfirian government was not liberal, rather, the strategy rehabilitated the Spanish mercantilist colonial tradition introducing a kind of economic nationalism spurring what could be called a closed door defensive modernization. Porfirio Díaz created a patronage pact that sustained the political establishment and protected powerful economic interests. This pact brought stable polity and modernization but not economic liberalism.
In many ways, the Mexican Revolution was a break with the Porfirian tradition but in many key aspects the movement brought about changes that made it possible to keep things as they were yet again. The Mexican Revolution was violent but most importantly it was conservative, it embodied the key ideas of Spanish economic paternalism: limiting the scope of avarice and bringing about social justice to protect the weak and poor from exploitation by private economic power. To achieve these goals, the constitution of 1917 (mainly through articles 27 and 28) rolled back traditional patterns of community ownership and weakened the development of market relations. With the formation of Partido Revolucionario Institucional (PRI) in 1946, the patronage pact introduced by Porfirio Díaz reemerged, the chief mechanism for allocating factors of production was still government coordination, not price mechanism.
The reforms of the 1980s – what some call the “second revolution” – did not modify the key institutions of Mexican Revolution either. The article 27 of Mexican Constitution stayed in place and the article 28 was amended to give the government power over key industries and the mandate to intervene so as to make sure markets are competitive. The “second revolution” of the 1980s and 1990s did remove some inefficiencies through privatization and partial liberalization of trade, it helped move the Mexican economy to the production possibility frontier. But the very frontier did not move outwards because the “second revolution” did not manage to strengthen the rule of law. The “second revolution” was again a predominantly conservative movement that firmly reified the rectorship (rectoría) of the Mexican government. Since the 1980s and despite the reforms the development has been lackluster, in large parts of the country poverty rates have not diminished and corruption, violence, and impunity are still major problems.
The argument about deep roots of liberal orthodoxy in Mexico is important, it tries to establish a link between the nineteenth century and the immediately present Mexican reality that is characterized by crony capitalism, patronage pacts, inequality and faltering social mobility. As I argue elsewhere, the thesis that links the Porfirian development strategy with the 20th-century Mexican liberal thinkers downplays the very prominence of economic nationalism during the Porfiriato era and the prominence of mercantilist arrangements that have survived and prevailed in Mexico since the 1980s. Liberalism has always been present in the history of Mexican thought. But it makes no sense to call the Mexican “orthodoxy” liberal, it is corporatist and contradictory to classical liberalism.
A Spanish version of this article was published in the Boletín de la Asociación Mexicana de la Historia Económica 11, 2. May-Aug, 2016
Sindakis and Walter present a book on entrepreneurship, innovation, management and policy making that should be of interest for anyone inhabiting the “start-up ecosystem, which is struggling to comprehend what it takes to build products for the [Southeast-Asia] region and how to enter emerging markets” (p. xv). I see the main shortcoming of this ambitious project in the omission of one of the most important but still generally understudied entrepreneurial tasks: convincing others to make use of artifacts (goods, services, processes) that work in other contexts and therefore legitimizing their use within local conditions. Unfortunately, the theoretical treatment of how the rules of the game interact with entrepreneurship remains weak throughout the book.
Read my review here.
I took part in a panel on surrogacy in Sweden organized by Timbro. Watch my talk here:
One of the general points that I make is that while it is only the extent of the market that limits the division of labor, market-making is not costless. More importantly, the character of costs to be incurred while introducing and maintaining markets is not merely technological.
In order to protect the surrogate mothers and the intended parents, entrepreneurs and legislative committees should keep three points in mind:
- A surrogacy agreement employing a gestational carrier is not a form of adoption and should not be treated as such.
- Public debate is key to reach a broad consensus on the merits of surrogate motherhood.
- Full contractual enforcement of voluntary agreements between parties to a surrogacy contract is essential for proper functioning of a system that will provide the means to the ends that childless couples and surrogate mothers pursue.
Coordination through the price system has been well studied and the coordinating aspects of price signals are appreciated among economists and non-economists alike. This paper argues that the coordination processes which take place within markets are often shaped by other systems of non-price coordination. These non-price coordination systems, or orders of worth as we call them, can be thought of as emergent orders just like the price system is an emergent order; they are sources of justification that can be drawn upon to warrant the worth of diverse artifacts and the legitimacy of trading them. We show that Adam Smith’s theory of sympathy hints towards the need for such non-price coordination systems and offers conceptual means for analyzing the emergence of such orders. We link Smith with contemporary work in economic sociology and we distinguish, following a framework developed by Luc Boltanski and Laurent Thévenot, between different orders of worth, we explain how they can help us understand the justification of the exchange and value of contested goods and we apply this theoretical framework to cases of art, life and reproduction.
Was Teotihuacan a work of art? Certainly, in one of the largest urban centers of ancient Mesoamerica craftsmanship and art – most notably mural paintings – burgeoned. Today the monumental architectural structures of the Pyramid of the Sun and the Pyramid of the Moon towering along the Street of the Dead in an almost perfect geometrical alignment leave the visitors of the ancient metropolis astonished. What was the power capable of such a monumental urban design? Was the city itself one monumental work of art?
The origins of this metropolis of the Valley of Mexico reach to about 100 AD and its hiatus is estimated to start around 550AD, the population of the metropolis reached around 150,000 people at its peak but when the Aztecs found the city, it was a metropolis of ghosts. For some reason, the Teotihuacan culture had almost disappeared before the Aztecs came. What kind of social organization can explain the rise and fall of one of the greatest and oldest urban structures?
Many archeologists believe that Teotihuacan was centrally controlled by powerful rulers and military elites and the existence of an early centralized government is often supported arguing that migration into the city was a result of deliberate policy enforced by coercion for the political advantage of keeping most of the Valley of Mexico’s population under direct control of the city. Furthermore, the monumental pyramids seem to provide evidence for the immense power of Teotihuacan rulers to call up labor; the alignment of the city quarters around 15° of true north seems to further suggest a high degree of planning implying a centralized control over the design of the city. How can this magnificent urban design not be a work of someone’s vision? How can Teotihuacan not be a work of art?
The facts may be highly suggestive of an anthropomorphic scenario explaining the organization of Teotihuacan. But even after decades of concerted archaeological search any direct evidence of strong centralized Teotihuacan government remains elusive. There are actually findings which seem to contradict the central design thesis.
Consider this: in Teotihuacan not a single piece of art depicting the subjugation of one person by another has been found and evidence of notation is so sparse that it was long thought that writing was absent altogether. This is especially puzzling in the context of the Maya, Zapotec, and other cultures which employed their writing systems to exhibit and glorify the exploits of their royal lineages. The relative absence of such writing in Teotihuacan is indicative of the relative absence of such lineage royalty.
This is not the end of the confusion; the Aztec records of the city’s origins explicitly speak of several old and wise leaders of the new settlers being installed as rulers. Not one powerful emperor but several leaders. The city’s population also seems to have been ethnically quite diverse; it might have included several foreign enclaves and it does not seem that the migration was coerced. It is in fact quite plausible that the influx of migrants from neighboring regions of the Valley of Mexico is a result of the Popocatepetl and Chichinautzin volcano eruptions. Was the Teotihuacan order polycentric, rather than centralized? If so, what made the diverse peoples of Teotihuacan stay together?
Mexico City’s UNAM researchers suggest that the origin of the metropolis results from a coming together of several disparate groups which would have facilitated the creation of a governing coalition rather than from a coercive central plan. Teotihuacan seems to have emerged as a voluntary alliance between around twenty social units, possibly related clans, or ethnic groups who were interested in trade and ritual rather than in empire building. This complex social system was most likely successfully managed collectively in a self-organized manner, involving neither powerful leaders nor an extensive bureaucratic apparatus and the globally optimal coordination mechanisms of Teotihuacan seem to have emerged spontaneously through agents’ actions and interactions even though each agent was behaving selfishly and even though no agent had the knowledge about the structure of the overall problem space. Froese, Gershenson and Manzanilla provide a genuinely system-level explanation of collective government thus attacking a tradition in which has strong roots both in archaeology and in social sciences, a tradition that necessarily equates social complexity with centralized hierarchy.
Collective action governing common spaces neither by a market nor by hierarchical mechanisms poses some genuine challenges as the tragedy of the commons story would suggest. But simulating the emergent urban organization of Teotihuacan which remained adaptive for around five centuries clearly shows that spontaneous cooperation is feasible even without centralized hierarchical control. How were the problems of collective action overcome in the metropolis of Teotihuacan?
Rather then centralized coercive bureaucratic aparatus, it was the system of shared beliefs that served as a coordination device for the heterogenous population of Teotihuacan. For example, the canonical orientation of Teotihuacan was originally a result of the cosmological observations made with the Pyramid of the Sun, while other principal constructions followed the Pyramid’s alignments to ensure the maximal use of available space in a crowded city. If people of Teotihuacan considered their city to be a sacred cosmogram and the center of the universe, it is unlikely that coercion was needed to convince immigrants to construct their compounds so as to share in this cosmic power. But such a symbolic behavior largely consists of arbitrary customs. How could the Teotihuacan population make sure that these customs would provide coordination guidelines that were adaptive? How could the system quickly converge to an optimum and, more importantly, how could the system visit different optima so as to avoid adaptively suboptimal attractors?
The suggested answer lies in behavioral randomization. The ritual calendar of Teotihuacan included infrequent, large-scale events during which normal social activity and norms were suspended. These rituals had more than an ornamental function. These rituals would infrequently disturb the common routines thus helping, by way of randomization and re-convergence, to occasionally introduce arbitrary behavioral choices and allow the population to re-converge to an equilibrium preventing an institutional lock-in on equilibria that were not adaptive. Froese and his colleagues refer to this strong form of self-organization as self-optimization. Consequently, if the pyramids mainly served a ritual function for the community, it would be better to think of them as large-scale public goods on a continuum with the constructions of large-scale housing for most of the population rather than conspicuous manifestation of power.
Is there anything we can learn today from the emergent self-organization of Teotihuacan? I certainly think so. Perhaps the history of this ancient metropolis is a chapter in a story told by Jane Jacobs. Perhaps it is the case that
to approach a city, or even a city neighborhood, as if it were a larger architectural problem, capable of being given order by converting it into a disciplined work of art, is to make the mistake of attempting to substitute art for life.
Perhaps the power that shaped the metropolis of Teotihuacan was not a power of an enlightened sometimes benevolent and sometimes cruel emperor. On the contrary, it is quite likely that the power which made the Teotihuacan population adaptive for five centuries was an emergent capacity of social groups to self-organize.
Entrepreneurs do more than just buy low and sell high; they sometimes also change our institutions, including our categories of thought. New institutional economics has been examining incentives that drive individuals to bring about market-supporting institutional arrangements. There is, however, an aspect of entrepreneurship conducive to institutional changes that has been neglected by contemporary institutionalist theories and that remains underdeveloped in entrepreneurship research. When and how does entrepreneurship bring about institutional change? I suggest that entrepreneurs are agents of institutional change when cultural categorization is ambiguous with regard to what the proper and permissible applications of novel artifacts are. Motherhood, for example, used to be a simple category, but surrogacy changed that radically. Examining newspaper evidence, social surveys, statutory law, and judicial cases, I show how entrepreneurs, by provoking a change in interpretation and judgment, challenged the existing institutional legal ordering of procreation turning a technically feasible method of surrogacy into current practice.