Monday, 19 September 2016

The John Lewis economy - a belated comment

In my last book review I summarized a very interesting book called The Spirit Level by Richard Wilkinson and Kate Pickett. In it the authors propose a solution that would not only lower inequality and thus correct many of the negative social outcomes related to it (but not caused by it, mind you; they don't prove causality), but also change the entire system of values in society, so that people would be less profit-oriented and would increase their levels of interpersonal trust (among other things). 

Their big idea is to introduce democratic employee ownership. Hence the title: The John Lewis economy (the John Lewis Partnership is the famous UK example of an employee-owned firm; it allows all of its employees to share the firm's profits and have oversight over management decisions through several democratic mechanisms of corporate governance). It's a belated comment since I wanted to write a piece about this ever since 2012, when UK deputy PM Nick Clegg of the Liberal Democrats introduced the actual term "John Lewis economy". It was part of his policy proposal to introduce tax breaks to companies if they offered shares to their employees. 

Although the idea of employee-ownership is certainly admirable (it is easy to get 'hooked' on it), there are several problems with this model being forced upon the entire system and applied in every company. First of all, how would one enforce it? Clegg had the idea of offering incentives in the form of tax breaks. Fair enough, but as Wilkinson and Pickett (as well as many proponents of employee ownership) clearly state this is not enough. Employees have to have a more democratic say in managing the company, not just a share that doesn't mean much to them if everything still stays the same. They need to have oversight over management decisions (like voters do in democracies). That is at least how the John Lewis Partnership works. The problem is that the John Lewis Partnership developed and perfected this model through 80 years of its existence. It had the time to adapt and adjust its employee ownership model throughout this turbulent time. 

Another problem with such a proposal is the statement that "participation, commitment and control would be maximized if companies were 100 per cent employee-owned". And furthermore that "companies could raise capital through loans or mortgages retaining control for themselves", since only a small amount of money on stock markets makes any contribution to companies. This is very problematic on a number of levels. Removing access to various sources of finance for companies means condemning them on the mercy of commercial banks, to name only one consequence. The second is that this would severely undermine the dynamism of the economy as it would reduce their expansion capability, not to mention the ability to employ more people. Firms raise money in various ways primarily in order to expand, to service more customers, and - most importantly - hire more people! Without an ability to expand, or with this ability being seriously constrained, the economy would drastically reduce its dynamism, and especially its innovative capacity. The proposal to virtually abolish the stock exchanges is literary a reduction of modern society to pre-industrial revolution times, where the lack of economic growth implied less belief in the future and forced the economies to remain in a Malthusian trap for millennia. I understand there do exist a lot of successful co-ops out there, and this is perfectly fine. I encourage them to set up shop, expand and include more people in their networks. But one cannot enforce this upon the entire economic system as it would go against the evolutionary foundations of modern capitalism (within which we fought hard to attain the human rights we today take for granted). Having a fairer system is absolutely necessary. But you do not achieve fairness by shattering the spirit of growth and progress. 

Furthermore, one of the biggest arguments to impose employee-ownership is to change the for-profit mentality. This term is very often being confused with a battle for talent on a global level. You cannot compare the wages of local workers of a multinational company with its management. First and foremost because the demand and the supply for the two groups are different. Local workers are supplied and hired on the local market, whereas management is assembled from a national or even global pool of talents. Attracting the very best costs money. 

The same argument is with wages for athletes. There is a huge earnings differential between athletes in a single sport, and an even bigger one for athletes across all sports. Football players (both American and European - which I refuse to call 'soccer') are much better paid than volleyball or handball players. Even an average or below average football player in a good club may have a higher salary than some of the best players in other less popular sports. And this is perfectly normal given the greater demand for watching high quality athletes compete in the most interesting sports for the majority of people (football, basketball, baseball in the US, etc.), which necessitates that they be paid the heftiest sums. This is even more obvious for individual sports and their superstars - think of the top 10 tennis players, formula 1 drivers, or legends like Usain Bolt - who is to say he is not a great performer in addition to being one of the greatest athletes of all time? People pay extreme sums of money to buy tickets for Olympic game finals only to see Usain Bolt run for 10 seconds! And none of them consider this a waste of money. 

The bottom-up approach to solving the inequality problem

By far the biggest problem problem I have with many such proposals aimed at lowering inequality is the focus they tend to have on high incomes and the profit-motive mentality. The main proposals are usually aimed at increasing the top tax rates or curbing the profit motive of companies so as to make them more socially responsible. And although I agree that having more socially responsible companies would be a good thing, I don't think anyone should force companies to make choices they don't want to make. Nudging them in the right direction with smart regulation is much better. Having customers aware of the products made by socially responsible companies is another good example. There have been numerous examples where civil action against polluters or socially irresponsible companies made them change their business practice. The last thing any company wants is a bad reputation. Now they must compete in their social responsiveness in addition to their prices and product quality.

To return to my initial point, why isn't any anti-inequality advocate focused on a bottom-up approach? Why aren't many policy proposal focused on the poverty side of inequality. After all, the variety of health and social outcomes linked with inequality can easily be attributed to poverty, like crime and violence, poor education performance, teenage pregnancies, imprisonment, selected health and mental issues, etc. In other words, if we can make the poor richer and better off by turning more of them into the middle class, we would surely be reducing inequality and simultaneously improving a variety of health and social issues, without imposing potential damage of wealth creation at the top. In fact, having high incomes can only serve as a motivation for people to invest in their education and abilities to achieve the same high living standards. A whole different problem is if the people are being prevented from upwards social mobility if they don't belong to a particular class, gender, or race. This is an issue any anti-inequality advocate should look into since low social mobility (caused primarily by cronyism and elite entrenchment) is arguably the biggest obstacle for lowering inequality - it prevents access on the low levels of society and thus immediately discriminates those on the low end of the earnings distribution.

Fighting poverty, in my opinion, is the most effective way of fighting inequality. Primarily since there are many more poor people out there than rich people. Helping all of them get higher earnings will necessarily solve many of their social issues as well. I understand the psychological factor of anxiety by seeing someone being so much more well off, however this mentality is perhaps a greater concern that the profit-motive one. Why should one care so much about the wealth of others? Because we only value our own success compared to other people's success. Ever more so in today's dynamic era of fast information. I still feel however that the resentment towards the well-off would be contained (but not eliminated) if we eradicate poverty. This remains to be scientifically tested. 

Finally, if you want to build a more egalitarian society than the first thing where to look is among existing egalitarian societies - like Scandinavia, Canada, or Japan. What makes them so successful? Mass employee ownership of private sector companies? The US and the UK have 10 times more employee-owned firms than all other countries in the world put together (don't believe me? See for yourself). So having employee ownership is not that crucial to achieve a more egalitarian society, is it? What is? Economic freedom is one thing. Look it up.

Wednesday, 14 September 2016

What I've been reading (vol 10.): Cronyism and inequality

Zingales, Luigi (2012) A Capitalism for the People. Recapturing the Lost Genius of American Prosperity. Basic Books, New York.

Luigi Zingales, a University of Chicago Booth School of Business professor of finance, is one of the true champions of liberal, free market ideas. In this book, similar to his previous success “Saving Capitalism from the Capitalists” (co-authored with Raghu Rajan), he delivers a powerful case in favor of markets, competition, liberty, and against big business, big governments and their clientelistic (cronyist) mutually beneficial relationship. In other words, Zingales knows the crucial and very important distinction between being pro-business and being pro-market. Confusing one with the other is a typical mistake every advocate of socialism tends to make – they tend to blame capitalism, markets, and the ideology “neoliberalism” for close ties between politicians, big businesses, and the media. Zingales correctly points out that this is hardly the case. If anything their relationship is a perfect example of cronyism – receiving government favors based on close personal relationships, not to mention things like corruption, nepotism, clientelism, conflicts of interest, bribery, and even something called institutional corruption (implementing laws that benefit partial interests of public or private enterprises, usually by handing out monopoly power). None of this has anything to do with competition. None of this has anything to do with classical liberalism, with Adam Smith, or free markets. And it is exactly competition and the classical liberal tradition that are at the forefront of Zingales' book. 

He opens the book with a personal touch. His story of how he wanted to escape what he calls a “fundamentally unfair” system in Italy, riven with nepotism, where meritocracy doesn’t exist (grades apparently don’t matter for enrollment into university), where political affiliation is the basis for promotion in any public sector job, where the only way to get rich is to be politically connected and receive government contracts, where mothers marry their daughters into power as a means of social promotion, where young people need to “carry the bag” for those on higher positions of power in order to get ahead in life (this is how the academia in Italy apparently works – you can only achieve promotion when the older professors retire or die – whichever comes first!). When he came to America in 1988 he was overwhelmed by the opportunities available to him. He had finally arrived in a country where his ability was the only limit to his dreams, not the people he knows. After all, as Zingales correctly emphasizes, Americans, whether Democrats or Republicans, “have no idea what it’s like to live in a country where there is virtually no meritocracy and competition is considered a sin.” 

Having this life-altering experience, Zingales is worried that the same forces that have occupied his native Italy for so long (and still do) are now grabbing steam in the US. He describes crony capitalism, American-style, where pro-business interests have vastly taken over pro-market and pro-competition incentives, where both businesses and the government have grown too big and too gruesome, and are now jeopardizing the very stability of the country. In other words, Zingales is overseeing the transformation of the US free market system into Italian-style crony capitalism. 

Nowhere is that more obvious than in finance. Too-big-to-fail banks being bailed out using public money; those same banks paying out huge bonuses to their executives in times of heavy losses imposed to the public (privatized profits, socialized losses); corporate lobbyists influencing legislation and regulation as they please; the list goes on. It was the scandals causing and arising from the biggest crisis since the Great Depression that led many people in the US to distrust markets and rebel. Voters lost confidence in the system they perceive to be elitist, corrupt, rigged against them, and unfair. No wonder they can easily resort to populism. And who could blame them when the self-defeating cycle has become obvious even to the layman: former politicians and former public officials, once they leave office, get fat paychecks in the private sector they once regulated. It’s a typical quid-pro-quo relationship and it’s ruining the foundations of American capitalism. 

Two political movements have arisen as a consequence: on one hand the Occupy movement opposing Wall Street’s too-big-to-fail attitude, and on the other the Tea Party, opposing taxes and big government, which arose partially as a response to the crisis. Interestingly both of these movements yielded political figures 6 years after they started. Bernie Sanders, the 'democratic socialism' hero, got attention as a clear consequence of the Occupy movement (he shares their messages and concerns), while on the other hand there is Donald Trump, a clear consequence of the Tea Party movement (also sharing their anti-immigration, protectionist, and against big government messages). 

Both of these movements are right in their own narrow way. But they fail to realize that their different enemies (big business and big government) are two sides of the same coin. Big business getting exclusive deals and monopolistic positions from the government; a government and congress riven with hypocrisy and highly prone to corruption – these are both typical signs of crony capitalism. Another thing both movements got it right is that the establishment elite has failed the system. They have allowed it to become cronyist, to become overburdened with the satisfaction of partial interests. In fact they themselves have become the key pillars of a crony system. 

So what does Zingales propose how to fight this? He calls for a seemingly paradoxical promarket populist agenda. He calls for a populist movement similar to the Populist Party of the late 19th century which never really achieved any major electoral victory, but it did help influence many of Theodore Roosevelt’s reforms like antitrust laws or accounting transparency. The idea is then to channel populist anger into fighting cronyism and the corrupt elites, not to destroy the foundations of American capitalism. A socialist would say these are synonyms. Far from it. Zingales cites numerous examples in this book of how cronyism is a natural enemy of the competition-based libertarian pro-market position. When businesses succeed based on their connections and political favors instead of their competitive advantages, there is simply no sign of markets. The idea of liberal capitalism vehemently opposes the concept of cronyism. Zingales goes a long way in proving how this is so.

Jones, Owen (2014) The Establishment. And how they get away with it. Penguin Books.

What can I say about this one? The first thought that comes to mind is – conspiracy theory. The book is a typical Marxist propaganda pamphlet full of personal biases of the author which he cannot seem to shake off in order to provide a balanced view; a book in which the author shows some basic misunderstanding of the patterns of economic history (which is a shame given that he majored history at Oxford); and finally a book that feels like an Ed Milliband Labour party manifesto (or even better Jeremy Corbyn’s Labour party, since Milliband was obviously too soft according to the author, whilst Blair is just another evil Thatcherite – see where I’m going with this?). It’s really a shame given that the title and the initial description of the book were so promising. I was expecting this to be a decent overview of how the British establishment has failed to prevent and eventually succumbed to cronyism, and how this is threatening the very existence of British democracy (so essentially a similar read to Zingales). But I was left entirely disappointed as the author kept making numerous false assumptions, kept writing in banter style, kept insisting that the Establishment is this all-powerful organism that shapes the foundation of our lives and forces the people to do things against their wills without even knowing it. It is unfortunate that the author cannot shake away his own very strong biases, as some of his investigations and analyses are actually quite good and accurate: the stories of big businesses feeding of government subsidies, the corruption of the media (the Leveson inquiry scandal), the financial elite, the police, and of course the politicians themselves. But all of this is wrapped around in a tin foil of banter against everything and anything conservative (it’s fine if you want to criticize conservatives, but this was not a criticism, it was honest hatred), and even free market oriented intellectuals which the author derogatorily refers to as the Establishment’s outriders.

Yet it had so much potential. According to the author the Establishment, a sparsely defined amalgamation of everything evil on this planet, depends on several things to feed itself (it’s almost like the Leviathan, although it’s quite obvious why the author refuses to use that particular term): they need support from the media and political elites (which are sometimes both the establishment themselves and sometimes they are just advocates of the current order), they rest upon ideological support from public intellectuals (right wing, mind you), the police (the extended hand of the establishment, not the law), and of course is consistent of big business that although supporting the “neoliberal” ideology wouldn’t survive without government subsidies (this one is actually a very good point, however it has nothing to do with markets – see the previous review). 

It’s fascinating how the author has complete disregard of facts and how he tries to fit every piece of information into his narrow worldview. For example, he constantly cites opinion polls (I assume filled out by Guardian readers) saying that the vast majority of the people support nationalization of public sector companies, or the re-imposition of capital controls, or the strengthening of the labour unions (so in effect, revoking all of Thatcher’s policies from the 1980s). However, given the recent electoral outcomes (2015 elections and the Brexit referendum) and the upcoming disaster for Labour under Corbyn (which, I would assume, the author would denounce and bravely and blindly argue that Corbyn will be the next PM), it’s hard to conclude that the “majority” of Britons would support Ed Milliband’s soft socialism or particularly Corbyn’s hard socialism. They haven’t done this since the 1970s and given their current sets of preferences I don’t see any reason as to why they would revert to it. But that’s the media’s fault according to Jones. The media, which vehemently supports the Establishment, carries out its important role in biasing electoral campaigns against the Establishment’s (read: the Conservative party’s) opponents. The media is therefore responsible (along with the neoliberal ideologues, mustn’t forget them) in biasing the public opinion and their vote choices against socialist policies (moving the “Overtone Window”). This conclusion is another example of a logical fallacy committed by the author: if the media and neoliberal ideologues form public opinion and their voting choices, how come certain polls allegedly show that public opinion is in favor of socialism? Shouldn’t the people then overwhelmingly support socialism come election day? Are they being brainwashed perhaps? If so, if they are being brainwashed by the neoliberal dogma, why do they lie in the polls saying they want socialism? What is going on?!

Too bad the book was written before the 2015 elections and the recent EU referendum, since I would be interested to see which line of reasoning the author would use for explaining their outcomes. Before the generals in 2015, every newspaper was talking about a split Parliament, many of which were saying Labour will be taking a close victory. Guardian columnists were even considering a Conservative-Labour coalition. In the end Conservatives won by a 6-point landslide. On the EU referendum every mainstream media supported Remain. One could actually say the Establishment supported Remain. But the author is clearly also a Remain supporter (perhaps he changed his mind recently). I wonder how all this would fit into his biased media angle. 

These are just a few examples, there are many more that are outright contradictory and sometimes even ridiculous and amusing. At one point he even says that because of Labour and Conservatives looking so alike voters have started to look elsewhere, like the Green Party! I kid you not, he says “growing support for the Greens” in addition to rising support for SNP and UKIP will make the first-past-the-post system untenable. Or how he claims that the 1970s produced the “most stable economic growth ever” along with a “staggering increase in living standards”. 

All in all, the author, just like most socialists, fails to understand the basic difference between capitalism and cronyism. To the typical champagne socialist there is no difference. Zingales, in the previous review, made an excellent point here – cronyism is the natural enemy of capitalism. It consumes it and takes on the worse form of capitalism – an interlock between vested corporate interests and the political elites undermining democratic order. A failure of democracy, so to speak. A socialist would argue that cronyism is a natural outcome of capitalism. I heavily disagree since cronyism is hardly limited to capitalist societies. In fact, cronyism tends to be highest and almost necessary in dictatorial societies, most of which are governed by socialist regimes. All in all, I wouldn’t recommend the book if you are already familiar with the standard champagne socialist bullshit. Pick another book instead. Like the next one.

Wilkinson, Richard and Pickett, Kate (2010) The Spirit Level. Why Equality is Better for Everyone? Penguin Books

Here is another left-wing piece of literature, however I find this one to be incomparably more convincing and persuasive than the previous book, despite the many issues I have with some of the arguments. Mainly it’s because the authors in most cases use real scientific studies to back their claims, and use actual data to support their main argument – that rising inequality is likely to be responsible for a whole number of negative outcomes depleting our social capital: from the rising lack of interpersonal trust, to physical and mental health problems, to violence, obesity, teenage pregnancies, and social mobility. The authors don’t prove causality (they correctly point this out) but do imply causality on several occasions, which is the biggest problem I have with the conclusions of the book.  

Both authors are epidemiologists and have done years of research in observing health outcomes in rich OECD economies, yielding a conclusion of rapidly deteriorating health levels of modern societies, linking many of these to the ills of inequality. Some of these links may be a bit farfetched (the evidence in favor of them is unconvincing at best), but some are quite fascinating and very likely to be true.

Which are the negative outcomes related to inequality then? First there is interpersonal trust, followed by a host of mental illnesses (including drug and alcohol addiction), then life expectancy, infant mortality, obesity, children’s educational performance, teenage births, homicides and violence, imprisonment rates, and finally social mobility. In a chapter-by-chapter analysis the authors present their case for each of these outcomes being somehow related to rising inequality. Their general conclusion when comparing OECD economies and US states is that more unequal countries (states) tend to have worse health and social outcomes. The evidence they provide is of a visual type – correlation graphs. Which is where the problem arises. Correlation graphs are filled with endogeneity issues – there is no way to use a series of correlation graphs to prove or disprove reverse causality or omitted variable bias. In simpler terms correlation does not imply causality, no matter how strong the links tend to be. Correlation can indicate a relationship, but that relationship needs to be proven with experimental research to make any inference of potential causality. Just placing a bunch of graphs that supports their general argument does not do the authors any favors.

However, a big part of the argument that supports the link between inequality and poor health and social outcomes comes from chapter 3 in which they cite the psychological reasons and rising anxiety tied with greater inequality. This is supposed to be the glue holding the later arguments together and tying each of them to inequality. The pure fact that we as humans tend to link our happiness not to our absolute wealth or living standards, but to our relative position in social and income hierarchies (the feelings of pride and shame), is the line of suggestible reasoning used by the authors to make their claims. I’m not saying this line of reasoning is wrong, I am only saying this part of the argument is left entirely under-researched in the book. The implication is there, but the proof is missing. 

I have paid careful attention in the argumentation where they cited actual research and where they didn’t, and the difference is obvious. For example, citing research on educational performance of children based on experiments proving how different social class affects performance are absolutely convincing in proving their argument. In this particular case they cite the experiment from World Bank economists who compared high caste and low caste 11 and 12 year old boys from India. When the groups were not aware of each other’s caste they performed almost the same in the tasks they were given (in fact the low caste group slightly outperformed the high caste one). But when they were made aware of the caste differences the performance of the low caste group significantly deteriorated. The same was found when comparing the performance of white and black students in the US when black students were told the test was a measure of ability. Or an even better one where a US schoolteacher used her students as test subjects by telling them that blue eyed people were much more intelligent than brown eyed and gave them extra reinforcements. The difference in outcomes was significant, not to mention the blue eyed kids asserting superiority, but it was all immediately reversed when she told the students she made a mistake and that it was the brown eyed kids who were actually smarter. Now the brown eyed took over. 

The authors conclude: “performance and behavior in an educational task can be profoundly affected by the way we feel we are seen and judged by others. When we expect to be viewed as inferior, our abilities seem to be diminished”. Neuroscientific research finds additional evidence in terms of hormones released when we are feeling confident and happy in oppose to those released when we feel threatened or stressed, all of which would boost or downgrade our performance. The inequalities resulting from social stratification and class struggle are obviously affecting poor performance of those at the very bottom of the social pyramid making them further entrenched at the bottom. This is indeed a big social issue. 

However in other examples, when the evidence was mixed at best, the authors tend to push the argument towards their own worldview. This is the biggest resentment I have towards the book, which is a shame since it had potential to provide a broad and unbiased argument on the topic, especially since it shies away from strong, subjective language and reasoning. One still can’t escape the fact that in some lines of reasoning it is bleak at best.

In particular in some cases the correlation between two variables, no matter how close it is, is probably not the consequence of causality between the given two variables (inequality and a corresponding social outcome), but possibly both are caused by a joint factor – something that increased both inequality and, say, led to the rise in obesity, anxiety or the lack of trust, simultaneously. We are therefore talking about a hidden factor causing both outcomes to arise, where they can further reinforce each other. I do believe that high inequality reinforces all the mentioned social problems, but I don’t think it is necessary the cause of each and every one of them. Some of them perhaps, but not all. 

Furthermore, most of the issues are actually heavily (although not exclusively) related to poverty. E.g. crime and violence, imprisonment, teenage pregnancies, some aspects of physical and mental health, educational performance (richer parents spend and invest more time with their children and are determined at helping them succeed whereas poor parents are more preoccupied with survival), etc. However the authors seem adamant in claiming that poverty alone cannot explain all of the negative social outcomes they link to inequality. They suggest that inequality brings an equal burden on to the middle classes as well as the poor. In fact more unequal societies have worse health outcomes across all income groups, not just the poor. The authors make a particularly strong case for this in chapter 13 by comparing the incidence of various diseases, life expectancy, and infant mortality in more and less unequal societies across all income groups. It does seem to show that less unequal societies are better across the board. But, and this is important, this does not prove that it is inequality that CAUSES these differences. Nor does it prove that poverty is the cause. In the same chapter (as well as in the postscript of the 2010 edition of the book) they pay closer attention to the causality issue and even though they admit that “association on its own does not prove causality and, even f there is a causal relationship, it doesn’t tell us what is cause and what is effect.” I couldn’t have said it better myself. But this doesn’t prevent them from imposing causality later in the book, particularly in the final chapter where they take their argument for granted by saying that “observational research can still produce a powerful science” and that the “relationship between inequality and poor social outcome is too strong to be attributed by chance alone”. 

The problem with thinking about correlation this way is not being able to think that both inequality and many of these negative social outcomes can perhaps be affected by a joint unknown factor that is causing both of them to increase in countries like the UK, US, or South Europe. Or perhaps they aren’t, we cannot know for sure. Or maybe all of these outcomes (inequality, poverty, poor health) are mutually reinforcing, so we have to establish what caused them to emerge. Not until we have concrete evidence (such as the research on educational outcomes related to social status) that inequality, poverty, or something else is leading to the rise of negative health and social outcomes in more unequal societies. For example, their aforementioned idea that anxiety due to our relative performance and social status makes us so sensitive to inequality which is why we react so negatively to it. Perhaps the causes of anxieties in more unequal countries are related with migration, the expansions of population and rapid urbanization of the post-WWII era where the feeling of being alone and worthless is likely to be amplified, particularly in large cities (which also, btw, reduces trust). This could reinforce all the health and social outcomes, which lowers social mobility and as an effect pushes inequality up. This is an idea out my head but it cannot be proven or disproven without concrete evidence. 

The authors' biased worldview disables them for thinking about these issues in much greater detail, which is unfortunate. At least that's the feeling you get from reading the book. It is a good read, and it does uncover some striking facts, but it fails to connect all of them in a more coherent way. It doesn’t prove what the authors think it proves: that inequality is the “common denominator” behind an array of negative health and social outcomes. It establishes very interesting food for thought, but much more research needs to be done to make this conclusion viable and correct.

Friday, 9 September 2016

Predicting the Croatian general election (again!)

This week my colleagues and I from Oraclum were focused on predicting the outcome of the forthcoming Croatian general election. We did the same thing last year and were not expecting to do Croatian elections again, at least until the local elections in 2017. However, the new government - formed after almost 2 months of post-election negotiations - survived in office for only 6 months. Last year there was no relative winner as the two main coalitions, led by the conservative HDZ and the social-democrat SDP both came tied with 56 seats (76 needed to form government). The biggest surprise was a centrist party MOST which grabbed 19 seats making it the kingmaker party, with a number of smaller parties entering Parliament as well. The new election is to be held this Sunday, and so we ran our unique BASON Survey (Bayesian Adjusted Social Network Survey) over the past week to feel the vibe of the voters and make our election prediction.

A little bit about the survey before we share its results. The BASON Survey is an experimental polling method with an aim to give a precise prediction of elections without worrying about the representativness of our sample. It rests upon our newly-designed Facebook survey, where we use a variety of Bayesian updating methodologies to filter out internal biases in order to offer the most precise prediction. In essence we ask our participants to express their preference of who they will vote for, and more importantly, how much do they think their preferred choice will get (in percentages). Depending on how well they estimate the prediction possibilities of their preferred choices we formulate their predictive power and give higher weight to the better predictors. (We used the same thing for the Brexit referendum, see here).

The results

The final results of our BASON survey predict a close relative victory of the People's Coalition (Narodna koalicija) led by SDP with 59 to 61 seats, just above HDZ with 52 to 54 seats. MOST would remain the third biggest party with a predicted 12 to 14 seats, while the biggest surprise of the election could be the anti-establishment Živi zid (Human blockage) with a potential of up to 8 seats (last time they had a single seat). Koalicija za premijera led by the Mayor of Zagreb Milan Bandić is estimated to get between 1 and 3 seats, while the new party Pametno (Smart) is estimated to get up to 2 seats. The two regional parties will remain within their usual seat allocations: IDS is predicted to get 3 seats, and HDSSB between 1 and 2 seats.

The general conclusion is that the result will be similar to the one from last year’s elections, with two important differences: the SDP-led coalition will get the largest number of seats (although still about 16 seats short of a majority), and last year’s big surprise MOST will cease to be the only kingmaker party – they will be joined by the anti-establishment Živi zid. This suggests another long round of negotiations to form a government. Furthermore, it is interesting to note the divergence of MOST’s political capital compared to the last election where they received a whopping 19 seats. We are again likely to get around 20 seats from voters positioning themselves against the establishment SDP and HDZ (not counting the regional parties), but this time in slightly different ratios. Živi zid will, according to our results, manage to take about 5 to 8 seats from MOST which came out bruised from their short-lived coalition with HDZ. However, a clear-cut conclusion as to who took the votes from whom is beyond the scope of our method.

Distribution of seats - minimum and maximum number of seats for each party

The novelty of this survey is the inclusion of so-called marginal seats (seats that can go to two or more parties at a given district - shown as half a circle in the map above). The following figure shows the probability distributions for each party in terms of total seats it could get. The People's coalition has a probability of gaining between 55 and 64 seats, with the greatest probability between 59 and 61 seats. HDZ could get between 49 and 58, with the greatest probability between 52 and 54. The seats for MOST vary between 10 and 16, with the greatest chance between 12 and 14. Živi zid could get between 3 and 10, but most likely between 5 and 8. The coalition behind Milan Bandić could get anything between 0 and 5 seats, with 1 to 3 the most likely. Pametno could get anything between 0 and 3 seats, IDS is almost certain to get 3 seats, while HDSSB has equal chances of getting 1 and 2 seats.
The x-axis measures the number of seats for each party. Each party has a
distribution of seats with the widest bar denoting the highest probability.
Comparing our survey to the others

When it comes to the relative precision of our survey, it is interesting to see how it compares to the other surveys done for these elections. We compare it to the surveys done for three national televisions, each done on the level of electoral district, as ours. The following table shows the total number of seats for all three surveys, including ours, however without marginal seats. The considerable differences from all three is that the survey done by IPSOS gives the People's coalition slightly less that the other three, while it simultaneously overestimates the chances of the Bandić coalition, which according to all three surveys vary from 0 to 7. The potential number of seats for MOST and HDZ are more or less equally predicted across all surveys. So are the chances of Živi zid which is estimated to be the biggest surprise of the election, even though they have a marginal seat in almost every electoral district, meaning they could easily under-perform as well as over-perform.

In conclusion, it is interesting to note that the results of our online survey are similar to the ones done by traditional surveys, despite a non-representative sample and a very biased pool of participants. This kind of a novel predictive online survey is therefore robust to the biggest problem of surveys in general - assembling a representative sample. In further iterations we will test the survey again on other elections (first on the forthcoming US elections in November) whilst improving its methodology.

Wednesday, 31 August 2016

What I've been reading (vol 9.) Economic history: Malthus and beyond

After the very intriguing part 1 covering two fascinating books whose contribution extends across a few scientific fields, this one lays out two books with a more contemporary historical emphasis. 

Clark, Gregory (2011) A Farewell to Alms: A Brief Economic History of the World. Princeton University Press

Clark’s book is first and foremost a wonderful economic history textbook. Although it carries in its title the word “brief” it represents quite a comprehensive overview of the patterns before, during and after the Industrial Revolution that can be accredited with having created the modern world. It is a good book, full of empirical data and a very detailed overview of the facts behind the patterns responsible for modern development. It is thus more a scientific work that a popular one (closer to Diamond’s Guns, Germs, and Steel, than Harari’s Sapiens).

The book is separated into three parts, each important in painting the picture of why and how the Industrial Revolution changed things 200 years ago. It begins by defining a simple model of the Malthusian economy – the state of the world since the beginning of the Agricultural Revolution 8000 years B.C. until 1800 A.D. A world that was, according to Hobbes, “solitary, poor, nasty, brutish, and short” (interestingly Hobbes wrote this in 1651 referring to the hunter-gatherer societies of the distant past, not knowing that his own living standards were hardly any better, even with technological progress of that age). The second part of the book looks at how the Industrial Revolution unfolded, what made it possible, and what were its long-lasting consequences on the significantly improved living standards we today take for granted. The final part focuses on its not so great consequences and what is known today as the Great Divergence, a phenomenon of rapidly increasing inequality between the world’s richest and poorest nations. The book is therefore not only a companion in economic history, but it also addresses the topic of economic development and between-country inequality. 

Clark summarizes his book into a single chart (I've used it already in an earlier text) that shows the levels of income per person during the three historical periods he examined. The most striking is the conclusion that for almost 10,000 years (actually even more considering the anatomically correct Homo Sapiens hunter-gathers originating from 100,000 B.C.) the global economy as well as its society was constrained by something called the Malthusian trap. For over 10,000 years living standards of the vast majority of the population haven’t really improved at all. Even the wealthiest of the people in 1800 weren’t significantly better off (in terms of things like life expectancy, height, calorie intake, etc.) than their foraging ancestors 10,000 years ago.
The quality of life was virtually unchanged: life expectancy was between 30 to 35 years (due to high levels of death during infancy or before the age of 16); quality of diet and exposure to diseases were even worse than during hunter-gatherer times (diet was worse in general for settled agricultural societies, and large population densities generated a fertile ground for the spread of diseases), stature was roughly the same, and work life was much easier during hunter-gatherer times. Furthermore hunter-gatherer societies were mostly egalitarian, whereas the world after the agricultural revolution was characterized by massive inequality. Most importantly social mobility actually went downwards as the rich had more surviving children than the poor (4-5 compared with 2), meaning that the offsprings of wealthier individuals had to descend down the social hierarchy as only the eldest son (or daughter) inherited the family fortune. 

The Industrial Revolution changed all that in a mere 200 years. Income per person simply skyrocketed, life expectancy doubled, people could earn, buy and own incomparably more than ever before, societies became much more dynamic, nutrition improved, more calories were consumed, people grew taller, and working hours declined making it possible to discuss things like work-life balance. But it wasn’t like that for all societies across the globe. In fact, many nations became poorer in the aftermath of the Industrial Revolution and were generally worse off than before it. As Clark says: “There walk the earth now both the richest people who ever lived and the poorest”.

The book is therefore interested in answering why was technological advancement so slow during pre-Industrial times; what was the reason behind incomes rising so rapidly after 1800; and why didn’t all nations experience this breakthrough? To give an answer, one first needs to understand the logic of the Malthusian economy and see how it evolved into creating the underlying foundations for the onset of the Industrial Revolution. This is arguably the best part of the book as it lays out a theoretical and empirical case for how the Malthusian economy operated. In a nutshell this is it: when birth rates exceed death rates, population growth increases, income will decline, as will material living standards (more people per fixed amount of land). As long as income is higher than its subsistence level, population growth will go up, and income will continue to fall. The only way to stop this decline of living standards is to push income back to its subsistence level equating the birth rate to the death rate. So the forces of the Malthusian trap will always push the economy back to its subsistence level of income as any increase in birth rates which leads to higher population growth will hurt living standards. In order to increase living standards and life expectancy in the Malthusian world, one had to limit birth rates or increase death rates. Which is why any technological advancement had no particular effect in the Malthusian world. Any technological advancement that did in fact occur throughout the old and middle ages only led to higher population and had no lasting impact on living standards: “In the preindustrial world sporadic technological advance produced people, not wealth”. It was a truly natural economy system, similar to the one in the animal kingdom. The book goes on to detail a whole plethora of empirical arguments to support this theoretical conclusion, all of which seem very convincing. 

Shortcomings: revolution within the Malthusian model? 

The biggest criticism I have of the book is that it all too easily dismisses the institutional argument and by using a very illogical set of assumptions as to what causes economic growth. This was particularly evident in chapter 8, which transcends over to chapter 9, where he presents his main reasons as to why the Industrial Revolution had occurred. He tries to overturn the argument that the Malthusian era had no incentives for economic growth, by presenting a series of data on taxation, price stability, public debt, security of property, and even social mobility. To my surprise he cites preindustrial England as a country with beneficial factors for accumulating economic growth based on very low tax rates or low levels of public debt. This is a very flawed argumentation given that preindustrial societies had no or very little public goods necessary to levy taxes for. Only democratization, that occurred in England gradually after the Glorious Revolution, increased the demand for government, and hence its spending levels, its taxation levels, and its public debt. The argument of price stability is even more absurd as comparing pre and post Industrial Revolution inflation is meaningless. For one thing, the post Industrial Revolution world is characterized by a significantly different financial architecture, and many more societies operating on these modern principles, implying that its rates of inflation and purchasing power are incomparable. More importantly, low inflation in pre-industrial times is a consequence of zero to minimum economic growth. Comparing the two is not only wrong, it is unacceptable and it is a clear example of endogeneity (most notably, the omitted variable bias problem). Finally the argument on social mobility is contradictory to the one expressed in an earlier chapter (ch.6). He states that peasants moved up the social hierarchy and how this was a sign of a growth-enhancing mechanism, but the entire previous chapter goes on about how the Malthusian trap implied persistent downward social mobility among the wealthier with more children. Out of the entire book this part is the most problematic of all – the great economic historian that Clark is, I am surprised he fails to account for the role of finance (credit) in pre- and post-Industrial world development, as well as the fact that there was no economic growth in pre-industrial times making modern economic indicators incomparable to the past ones.

Furthermore, Clark discusses four profound features on the economy within the Malthusian era that created the momentum for the Industrial Revolution to start by 1800s: 1) Interest rates fell to modern low levels by 1800 (again a huge comparison problem; supply was scarce and demand failed to materialize due to a lack of belief in the future), 2) literacy and numeracy became the norm (this did increase probably due to rewarding incentives for investment in skills as the author claims), 3) working hours rose to modern levels (this happened long before the Industrial Revolution), and 4) there was a decline in interpersonal violence. All of these changes gave rise to the middle classes within societies which later became the proponents of change.  

He claims that enhanced production of knowledge capital generated benefits throughout the economy, primarily through increased efficiency. But why did this happen in 1800s and not before? Why hasn’t any society been able to maintain modern rates of production growth over any significant time period? What was the change that broke this status quo and generated the Industrial Revolution? His partial answer is that this was all a result of a gradual, millennium-long evolutionary change, started after the arrival of first institutionally stable societies of the ancient era, and then these sets of institutions interacted to change the human culture. He cites millennia of stability that despite Malthusian constraints rewarded effort and hard work, fertility limitation, and encouraged the development of cultural forms (like time preference and family formation) that facilitated modern growth. The gradual adaptation essentially developed a more economically oriented mindset, and it affected not only England but all other preindustrial societies at about the same time. In fact Clark even goes so far to claim that the long Malthusian era had a profound biological impact through better adaptation to the modern world. However, little evidence (if any at all) is given to back up this biological argument. In other words, Clark states that the Malthusian world shaped the population to be more inclined towards accepting a capitalist system

I find this entire argumentation difficult to believe. It seems to rest upon the assumption that the Industrial Revolution was inevitable and that it was only a matter of time before the “wheel of history” turns in that direction. It actually pegs the Industrial Revolution as a necessary and an anticipated outcome of the Malthusian model. The biggest problem with this assumption is explaining why 1800s, and not before or later? Yet he does offer his explanation of four aforementioned factors that happen to coincide with exactly this period and have resulted in greater economic growth.

But just as the author correctly notes in one footnote on pg. 205 that close correlation between two variables must be that one causes the other, or that there is a single independent cause for both, so do I believe that all of the mentioned factors instead of causing higher economic growth, have had a series of common independent causes => the most important one being the rise of credit and the modern financial system. In addition there were also the following factors: the rise of demand for democratization started during the Glorious Revolution, the rising power of mercantilist merchants which have started to join the aristocracy and therefore demanded greater political clout (the demand for which can even be traced back to the Magna Charta), the Scientific Revolution of the 16th century and the great discoveries (in fact the great discoveries led to mercantilism which more than any other era provided certain underlying conditions for the Industrial Revolution), and finally, just like with the origin of life, chance played an important role as well. It was a series of political events that made England perfectly placed to take advantage of the Industrial Revolution. Had Netherlands not entered complacency after its ascent in the 17th century, and had Parliament lost its battle against James II., the Industrial Revolution would not have happened in England. Perhaps it would later, but surely not when it did.

What is therefore entirely lacking in Clark’s analysis is the political factor. He fails to take into consideration the extremely important political conditions that drove investment, innovation, and migration decisions throughout human history. Wars tend to be a more important explanation of altered human behaviour than any corresponding economic factor such as interest rates or working hours. 

Diamond, Jared and Robinson, James (eds.) (2010) Natural Experiments of History. Belknap Harvard, Cambridge, MA

This fascinating collection of articles edited by two great scholars Jared Diamond and James Robinson provides the reader with a great guidebook on how to perform natural experiments in the social sciences, or to be more precise, to use historical perturbations as settings for scientific experiments. One of the reasons I decided to read it, apart from the obvious (the authors and the title, duh!) was its message that doing proper science is not just limited to the natural sciences, laboratories, and highly quantifiable data, but that it can also be done using so-called “natural experiments”. Natural experiments imply observing two systems that are similar to a large extent (either by historical background, geography, culture, its people, etc.), but are different in the key factor that the researcher wishes to focus on. However, unlike laboratory experiments natural experiments in history aren’t triggered artificially so that we may observe how the outcome phases out by careful observation. They depend on a historical event that caused an initial difference that later unfolded and led to significantly divergent outcomes. Proving that a historical event triggered the divergence in outcomes (inferring a causal relationship) is obviously the hardest part of natural experiment studies.

The most common examples of natural experiments of history are South and North Korea, and West and East Germany. Same nation, same history, same culture, same heritage, same geography, same diseases, same people – but different economic fortunes, all as a result of an initial divergence (a post-war split). A similar example can be the divergence in outcomes between two countries living on one island – Haiti and the Dominican Republic (Diamond covers this case in Chapter 4 of the book actually). I called upon these and other examples as well, one of which was from Acemoglu and Robinson’s 2012 hit book Why Nations Fail – the city of Nogales, on the US-Mexican border. Same story – one city divided by a border, same people, same history, same climate and geography (this is on a small scale so the differences are really miniscule). One part however has much better living standards and economic outcomes – the US part of Nogales. The difference between them? Institutions. Same as with the two Germanys and the two Koreas.

But this book goes beyond these wide-known examples and delivers something more. It presents eight cases of natural experiments through history that give the reader a very detailed overview of how these should be performed. It even finishes with a step-by-step guide on what practitioners of history and other branches of social sciences should pay attention to while attempting to utilize a natural experiment. Quite useful.

As I mentioned, the book is organized into eight articles. The first four are presented from a standard historical, non-quantitative, narrative approach, while the other four are quantitative statistical studies more familiar to other social science departments, not so much to the history scholars (apart from cliometrics of course – praise to them!). Naturally, I was more interested in the quantitative studies. Don’t get me wrong, I like a good narrative as much as the next guy, but I too fall under the impression that for serious science there must be some numbers involved (this doesn’t make me one of those model-everything freaks, I just tend to be more suspicious towards a narrative if it isn’t backed by quantifiable and testable data).

Anyway, the first study, done by Patrick Kirch, looks at three Pacific islands colonized by ancestral people and why history unfolded differently in each of them. The second, done by James Belich, observes several frontier societies (like the US West, or Australia, or Siberia) and how they achieved different outcomes despite having awfully similar initial cycles of development (population growth, imports boom, subsequent bust leading to bankruptcies and declining growth, and a rescue in terms of exports). The third study, by Stephen Haber, looks at the origins of banking systems in the US, Mexico and Brazil, explaining why they developed differently in each of these countries. The fourth, done by Diamond, observes the aforementioned differences between Haiti and the Dominican Republic (the differences can be traced to different colonization patterns – Haiti by the French, Dominica by the Spanish), while the fifth, also by Diamond (first quantitative), looks at the environmental causes of deforestation in pre-colonization times of 81 Pacific islands. 

It gets more interesting from here. The sixth study quantifies the relationship between African slave trade and Africa’s current stages of development. The author, Nathan Nunn proves (read his QJE paper) that the differences in slave exploitation across Africa caused African countries to develop differently in the subsequent four centuries. In other words, former slave exporting countries are poorer than non-slave exporting countries, and it was the slave trade that caused the initial divergence. Without it, Africa’s poorest countries would not have been as poor as they are now. They would be the average of the developing world. The seventh study, done by Banerjee and Iyer, looks at the difference in British colonial rule in India based on different land tenure systems imposed by the British. Areas that were put under control of the landlords today lag behind in the provision of public goods like schools and roads, compared to areas where land ownership rights were more decentralized. The final study, done by Acemoglu, Cantoni, Johnson and Robinson tests the impact of institutional reforms brought upon Germany’s territories after the invasion of the French Revolutionary armies and later Napoleon. In every territory they conquered the French brought massive institutional changes (introducing the Code de Civil, abolishing guilds, initiating land reform and abolishing serfdom, and emancipating religious minorities – in this case, the Jews) that were aimed at repealing the old feudalistic regime and set the stage for the origination of capitalism. The authors stress that areas which accepted these changes, and crucially - haven’t repealed them after the French retracted, embraced the Industrial Revolution which set them on a positive growth and development trajectory over the next century. Those that repealed the French reforms and re-introduced the old regime institutions resisted change and had consequentially worse off economic outcomes.

A quick guide on how to test natural experiments 

So what are the lessons a social scientist must infer from a book about how to do natural experiments? First the author must resolve the issue of selection of perturbed areas over the non-perturbed ones (distinguishing between the treatment group and the control group). For example, was the reason why Napoleon attacked the particular German areas because of its economic potential (which could have affected its long-term trajectory), or was it due to something else (in other words – was their selection random with respect to the outcome we are observing)? The answer is clearly the former – Napoleon attacked those areas due to proximity and a strategic advantage in combat, not because of their better economic potential over other areas. This issue is the most important one in determining whether or not a natural experiment satisfies all the conditions of an experiment.

The second condition is that the outcome could be delayed by decades or even centuries (as the examples of African slave trade, or Haiti and Dominican Republic tell us). This is normal for societal changes – it takes a long time for an institutional reform to fully yield its desired outcomes. More time than the voters are prepared to wait, actually, which is why such reforms are difficult to engage in today’s democracies. In addition to the outcomes being delayed, they could also be indirect (as the Acemoglu et al paper shows – these reforms by themselves did not cause better outcomes, they just made it easier for the industrial revolution to be introduced).

The third lesson is to be careful about omitted variable bias (when other, unobserved variables are actually affecting the outcome, not the ones we think – this means that the error term in the equation would be correlated with the dependent variable, yielding a biased estimate and implying wrong conclusions of our study). Another is to worry about potential measurement errors, and more importantly – reverse causality. Essentially, an experimental setup should help the researcher get rid of these concerns, which is why defining the experiment is the most difficult job for a social scientist.

Finally there are also a few good points on complexity vs clarity (don’t throw in too many variables in the pot), on the difficulty of measuring some social phenomena, and on precisely quantifying the variable of interest. None of these is ever straightforward in natural experiments, but that’s what makes them challenging in the first place.

Thursday, 25 August 2016

What I've been reading (vol 8.): Economic history

As announced in the previous blog post the next two book reviews will cover four very interesting history books (well, history to some extent). The first one is actually all about geography and anthropology, and little bit about history - the Pulitzer winning book by Jared Diamond: Guns, Germs, and Steel. It has long been on my reading list and I am finally happy to have read it, and I have to say - it hasn't disappointed. Far from it actually. I can see why it was an instant success. The second is a more recent book, Harari's Sapiens. Another bestseller with an overreaching arc that extends from the biological knowledge about our ancestors all the way to the modern technological revolution that has the power to destroy our very species. In short, two brilliant books! Let's begin. 

Diamond, Jared (1997) Guns, Germs & Steel: The Fates of Human Societies. Norton, New York.

In this Pulitzer Prize-winning book, Jared Diamond, a noted polymath (made contributions in the fields of anthropology, biology, ornithology, ecology, history), delivers his unique and comprehensive theory of how societies evolved over the past 13,000 years, ever since the start of the agricultural revolution. He explains in amazing detail the multitude of factors that led to the dominance of the Eurasian civilization over all others. Most importantly he successfully discards the intellectual, moral, and genetic superiority arguments and instead proves how the initial geographical differences led to the huge technological gap between Eurasia (Old World) and the rest of the conquered (New) world. 

The essential question that he aims to answer is why history unfolded so differently on different continents. Why hasn’t it moved in the other direction, i.e. why haven’t indigenous Americans, Africans or Aboriginal Australians conquer the Europeans and Asians? Why are some parts of the globe so much better off than other parts? Why did civilization manifest itself differently in different places? Why did writing, technological progress, and organized governments originate in the Fertile Crescent (ancient Mesopotamia) first and not anywhere else? Why did the Spanish conquerors of South America had guns and swords, while the indigenous Aztecs and Incas only had wooden tools that were no match for the conquistadors? Even more interestingly, how did the Spaniards led by Pizzaro against the Incas, and Cortes against the Aztecs, managed to overcome these civilizations by only a handful of soldiers compared to the tens of thousands of Incas and Aztecs? 

The simple answer is embedded in the title of the book: the Eurasian conquers had the obvious advantage of guns, germs, and steel. Germs are the surprising addition to the usual advantages in military technology, as more indigenous peoples died from being exposed to diseases the Eurasian conquers were resistant against, than from their guns and swords. Additional factors that helped the Eurasians in their conquests were the technological innovations in maritime technology (enabling them to build large cross-ocean ships), their domestication of horses (a big advantage in warfare), the centralized political organization of their domestic states (that enabled the financing of explorations) and writing (for the quicker spread of information). These, however, are only proximate factors. They explain why the European conquers from Spain, England, Portugal, France, Netherlands, etc. managed to easily overcome the indigenous tribes and supposedly “primitive” civilizations, but they don’t tell us anything about how the Europeans got to these tools and advantages before the Americans, sub-Saharan Africans, and Aboriginal Australians. 

The ultimate causes of these inter-continental differences are what this book is about. It identifies several constellations of environmental factors that provide a large part of the answer to the initial question: why did history unfold differently in different places? 

All the factors are so diligently presented in the following diagram: 

The first major ultimate cause was the domestication of plants and animals, i.e. food production. This created food surpluses and consequently food storage. Having surplus food meant that there was no need for everyone to work in agriculture anymore, and that others within a society could specialize to do other things (like become bureaucrats, soldiers and rulers) and that these non-producers could be fed from the surpluses created for the whole society. This crucial factor of more food production enabled the growth of early population and further encouraged sedentary life-style as well as large and dense societies. This was the starting point for the origination of political and religious organizations, both of which were crucial in enabling cooperation between unrelated individuals in large societies. One of the underlying tasks of the political organization was to protect the food surpluses by organizing armies. Thus the first soldiers emerged, all loyal to the ruler who further strengthened his rule by assigning himself divine characteristics (which is where religion comes in as the first form of propaganda). Having surplus food, dense societies and political organization, writing was another factor crucial to sustain these relationships. Initially, writing developed as a way to note who owned stuff to whom. It was all about accounting. Only later did it evolve to support myths, religious stories, and propaganda. The origination of early political organizations also gradually developed into obtaining the technology for warfare (guns and swords), and a whole range of other activities. Finally, the very domestication of animals led to the development of new types of diseases carried to us from animals we lived close to. The bodies of Eurasians developed resistance towards such diseases over thousands of years, whereas the rest of the world never had any exposure to them before, primarily since they had no exposure to large mammals suitable for domestication. The Agricultural revolution, generating the ultimate causes, was thus arguably the most important condition behind explaining the proximate causes of societal differences and hence the development of Western civilization.

To understand this entire mechanism in more depth, I do recommend reading the detailed evidence so eloquently explained in the book. I could write pages and pages of comments on this, but I have to be concise in this review (which is, in this case at least, an impossible task).

How has the domestication of animal and plant species occurred in the first place? And why did it happen differently in Eurasia then the rest of the world? The answers to those questions are in my opinion the best part of the book, and the biggest contribution that Diamond’s theory has made. Here is where geography kicks in

The first reason Eurasians were able to domesticate wild species of animals and plants were the huge number of such species available for domestication in the first place. Food production developed in the early ages in only a few places around the globe, ecologically and geographically suitable for food production (at different times obviously): the Fertile Crescent (Mesopotamia), China, Mesoamerica, Eastern United States, the Andes, and possibly also West Africa, Ethiopia, New Guinea, and the Amazonia (it is inconclusive weather these areas developed food production on their own or was it influenced from other centers). What made these areas suitable for food production and why have the areas in the Fertile Crescent and China developed food production differently than elsewhere?

Jared Diamond, the explorer in his 'natural habitat'
First of all, food production was not discovered or invented. Its origination was purely random. The choice between the hunter-gatherer lifestyle and the sedentary food production lifestyle was a gradual, unconscious occurrence. There are five contributing factors that made the gradual switch from hunter-gathering to food production. The first was a decline in the availability of wild food. Both plant and animal species (e.g. in the Fertile Crescent, the decline in the abundance of gazelles, a major food source for hunter-gatherers, encouraged animal domestication). The second factor was the increase in the domesticable wild plants that made domestication more rewarding (partially as a result of climate change). The third factor was the development of new technologies for collecting, processing and storing food. These included early blades for harvesting, baskets for carrying crops, underground storage pits, etc., all available in the Fertile Crescent by about 11,000 years B.C. The fourth factor was the positive feedback loop between a denser population and the rise in food production. All of these factors explain why did food production begin when it did (cca 8,500 years B.C. and not earlier). And fifth, more denser populations of farmers quickly displaced or killed the remaining hunter-gatherers. 

Why the Fertile Crescent and not anywhere else? Many areas around the globe had a similar Mediterranean climate, but it was Mesopotamia where food production started first, whilst in other areas with similar climates (like California, Chile, South Africa, or Southwest Australia) it never did (until the colonizers came). The Fertile Crescent possessed several advantages over all other areas for the successful development of food production. First, and most important, it was the largest such area, and it contained by far the largest amount of large-seed plant species (with suitable characteristics for easy domestication), as well as the largest diversity of animal species. Second, it provides a wide range of altitudes with a short distance corresponding to the variety of environments (mountains and lowland rivers, flood plains and deserts suitable for irrigation) and consequentially a wide diversity of plant and animal species. This also implied staggered harvest seasons as plants at higher elevation produced seeds later than plants at lower elevation. It meant that the hunter-gatherers did not need to be confined to a single area initially. Third, it experienced the greatest variation in climate from season to season which favoured the evolution of the largest amount of annual plants. For example, the Fertile Crescent contained in total 32 suitable large-seeded plant species, whereas North America contained only 4, Mesoamerica 5, South America 2, East Asia 6, and Sub-Saharan Africa 4. The particular regions with Mediterranean climate like California and South Africa had only 1 such species, and Australia not a single one. The exact same story is true with animal species. There were virtually no large mammal species suitable for domestication in other Mediterranean zones of the world, whereas Mesopotamia enjoyed the simultaneous existence of four big mammal species – goats, sheep, pigs, and cows. In fact there were only 14 animal species suitable for domestication, almost all of them (13) exclusively tied to the Eurasian continent, and only 1 in the Americas. This alone goes a long way in explaining why food production and plant domestication started in Mesopotamia. In addition to having the most species, Eurasia also had the most (almost all, in fact) plant and animal species suitable for domestication.

The final geographical advantage of Eurasia over all other continents was the ease of spread of such species across the Eurasian landmass, due to its east-west axis. The Eurasian landmass is oriented east-west, whereas the Americas and Africa are oriented north-south. Axis orientation is very important for the spread of species, particularly for plants. An east-west orientation offers the same latitude, the same day length, and the same seasonal variation. These all imply the origination of the same diseases, temperatures and rainfall, which give rise to the same type of species across the landmass. This was crucial for the rapid spread of crops from the Fertile Crescent on to Europe, as well as from China to the Indus Valley. Animals and plants enjoyed similar climate conditions and could have easily adapted to new environments across the Eurasian axis. In African and American north-south axes this was much harder due to geographical obstacles unsuitable for agriculture such as tropical rainforests or desserts, not to mention different climate conditions in the far south versus the far north. The benefits of Eurasia’s east-west orientation were not only confined to plants and animals. It later became even more obvious with the spread of inventions such as writing or the wheel. In contrast the wheel invented in prehistoric Mexico never spread south to the Andes (in fact, the civilizations in Mesoamerica were unaware of each other). The same is true for writing. Finally, the east-west orientation was extremely beneficial to the development of early trade – exchanges of crops, livestock and technologies were driving the Eurasian civilizations forward at a pace unimaginable in hunter-gatherer times.

Harari, Yuval Noah (2011) Sapiens. A Brief History of Mankind. Vintage Books. 

Harari’s Sapiens is a book about us – humans. How we evolved from the primitive animals to hunter gatherers and sedentary farmers, how we moved to top of the food chain to dominate all other species, how we learned to plough fields, how we invented an imagined social order and social conduct, how we unified behind our imagined constructs like money, empires, and religion, how we used science to grow even stronger, so strong that we are even capable of destroying our entire species and our planet. Sapiens is the ultimate story about us. 

Harari takes the reader through a fascinating historical journey. The book is divided into four parts, each corresponding to a historical era, but also to different stages of human progress. We begin with the Cognitive revolution and how the homo sapiens evolved from an early primate (i.e. our common ancestor), explaining how the life of hunter gatherers looked like and how our species began settling the vast open spaces of our planet. Then the story moves on to the Agricultural revolution (which the author dubs the biggest fraud in history) presenting a fascinating theory of our imagined order. It then furthers this argument even more by explaining in the third part (The Unification of Humankind) how money, empires, and religion tied us together and enabled us to cooperate as a species. Without these three great unifiers there would be no civilization as we know it (or any civilization at any point of history, from the early Middle Eastern empires, to China and India, to Rome, to Western Europe, and even to the Mayas, Aztecs and Incas). Finally, the story unfolds in the Scientific Revolution – the final step that made us the deadly creature that we are today, with a slightly worrying conclusion about the possible future of our species. 

The first part, the Cognitive Revolution, starts from the origin of our species and how it ascended to dominance over all other human species that existed on Earth. It summarizes well the standard evolutionary biology arguments on the importance of starting to walk upright, handle fire, and cook food, all of which contributed to the development of a larger brain. This development (walking upright) also affected the shortened pregnancies of women and consequentially the necessity of more than one person to raise a child, thus increasing social behavior and cooperation among early tribes of our species. Because of this fascinating evolutionary trail, humans developed much closer social networks amongst them. Single mothers couldn’t survive on their own, as they could not gather enough food for themselves and their child. They became dependent on their tribe (consistent of family and neighbors) for food and protection. “Evolution favoured those capable of forming stronger social ties.” Cooperation made the early humans survive.

But what really made us unique as Homo Sapiens was our ability to develop a unique language. We developed language possibly as a consequence of our increasingly social behaviour. Language developed as a form of communication, but not necessarily for warnings against other animals – language evolved thanks to gossip! People living closely together loved to share stories about each other (as we still do). Social cooperation was crucial for early humans in cases of both survival and reproduction. Knowing who sleeps with whom, who is lying, who is not, who is a hard worker and who is a freeloader, who we hate, who will love – is a very important initial character trail of early humans which provided the evolutionary demand for developing a means of communication. By being able to communicate more effectively than all other animals, the Sapiens species was able to develop even more sophisticated types of cooperation. Even more so the development of language during the Cognitive Revolution enabled the humans to spread legends, myths, gods and religion among themselves. The rise of language gave rise to fiction, and fiction gave rise to almost everything else. Religious fiction was extremely important in further strengthening the social ties and cooperation motives between early humans. Later, religion and the nation state (both products of our imagination) will enable humans to cooperate even with complete strangers. Our fiction, our ability to imagine order, has enabled us to move beyond the small tribe and, over thousands of years, become the cosmopolitan creature we are today. 

What does the 'imagined order', the key factor of Harari's theory, exactly mean? Given the development of language and the broadening of early tribes, the largest size of a tribe that can be held together by gossip (and intimate knowledge about one another) is around 150 members. The only way this threshold was to be surpassed into building even larger tribes of humans is by fiction. Only if a large number of people collectively believe in the same fictional authorities (either religious or that of a state), can they successfully cooperate. This is why the early development of religion and beliefs in common myths and legends proved to be pivotal in further evolution of cooperation among early humans, which later fostered their expansion and growth. 

Harari goes on to defend his imagined order hypothesis in great length. Everything we have developed as a social construct is by definition an imagined order. As opposed to a river, a forest, a mountain, the sun, the food we eat and the clothes and shelter we have; the state, the monetary system, corporations (as legal entities), the legal system, human rights - all of these are fiction; figments of our imaginations. They are important to maintain our social conduct, but they were all invented by us. In other words they do not originate from a natural order, but an imagined one. Their existence depends on us telling stories and convincing others to believe in them as well. We hear stories about gods when we are young and choose to believe in them and worship them. We hear stories about our nation and choose to believe in it, love it, and, if necessary, defend it against enemies.  Later when we grow up we hear stories about our money, our currencies and what makes them stable, and banks, buildings that we trust to keep our money on hold for us. We also learn about the legal system through stories. We feel protected by it as we hear stories about how it protected others. We believe a company is good and that it produces good products also through stories they tell us. They convince us that their product/service is necessary and better than other similar products/services. We hear stories from other people buying the product and liking it and we believe them and buy it. Storytelling, developed in the earliest phases of the cognitive revolution, is what makes us humans. It enabled our cooperation and our imagination. It enabled our society to operate as it does today, under a dual reality – the real and imagined objects around us.

In the second part of the book, the Agricultural Revolution, Harari tells an interesting story of how evolution played an important role in switching the Homo Sapiens from forgers to farmers. “The currency of evolution is neither hunger nor pain, but rather copies of DNA”. So the higher the number of humans, the more successful the species. Our basic reproductive instincts changed since we settled down. Farmers living a sedentary lifestyle could give birth to more babies and in a shorter time span than nomadic hunter gatherers. This implied growth of population and considerably higher tribes of settled farmers than nomadic forgers. Furthermore, sedentary lifestyle brought innovation in terms of tools, and with the origination of food surpluses, stronger incentives for protection (and the rise of the first organized armies). Furthermore, sedentary lifestyle contributed to humans becoming even more territorial and protective of their fragile food supplies. This change brought to one very important difference in human behaviour – thinking about the future! They had to learn how to plan ahead, how to manage to grow enough food to keep everyone fed through the winter, and most importantly how to adapt to nature’s uncertainty regarding agriculture. This encouraged innovation and increasing adaptive behaviour, but it also made the people feel more protective of their food supply. Hence the demand for the first types of proto-governments (as already described above). 

From here the books goes on in discussing the importance of writing to sustain the imagined order around us as well as to spread myths and create a hierarchical social order that is responsible for a multitude of class, racial and gender struggles our civilization faced. In the third part the author discusses the great unifiers of mankind: money, empire, and religion. All are imagined, but were crucial in the development of our society. For traders, the world is a single market, for conquerors the world is a single empire, for prophets, there is one truth and all the people are potential believers in it. The final part of the book is about the last piece of the puzzle in the pattern of human history, the one that made us so powerful that we are now able to eliminate our entire species and our entire planet by one single blow: the Scientific Revolution.

Harari here takes a slightly different approach to standard economic history analyses, and attributes the scientific revolution instead of the industrial revolution to the huge increase in human living standards. He cites 1500 as the approximate year when things started to change and evolve into the political and economic order we have today, by comparing the relative variables of living standards then and now. I disagree with this approach, as living standards were marginally better throughout the next 300 years, until the 1800s. Yes, great discoveries were made, new inventions too, Europeans were conquering and colonizing the New World, the enlightenment was responsible for huge advancements in many scientific fields, but the very pinnacle of human development, the very best of inventions that we today take for granted (like electricity, the engine and its subsequent vehicles, machines and telephones, computers and the Internet, etc.) were all invented as a consequence of the Industrial Revolution. 

In fact, the Industrial Revolution set the stage for humans to abandon the subsistence-based Malthusian economic model (more on that next time), and evolve into the dynamic capitalist system we know today (the author describes this mechanism very well actually). This evolution was not without its faults, as the early industrial societies were extremely unequal and, due to them being based on an imagined hierarchy, discriminative. From the early industrialization evolved the differences between the rich and the poor, similar to the ones classifying the ruling nobility and the peasants during feudalism. The era of new discoveries after 1500s uttered the rise of mercantilism, an economic order still bounded by the shackles of the Malthusian trap, which failed to offer many benefits to the majority of the population, but only to the elites and ascending merchants. Industrialization (as a consequence of the rising power of merchants) continued in the same fashion, but with the simultaneous rise of power of the population the old elites were forced to give concessions (first to the selected few as in England, which slowly evolved into introducing democracy to the rest of the population), or were being replaced and killed (as in France and Russia). So it was from the trails of the Industrial Revolution, not mercantilism (which tied together scientific explorations and imperial visions of dominance), that democratization was later attainable. Without the significant increase in living standards it would have been hard to imagine for some underprivileged groups in society to get hold of economic and political power and hence challenge the old elites.

I do however agree with his glorification of the Scientific Revolution that enabled us to make an evolutionary leap no other being was ever capable of in the 4 billion years of the Earth’s existence – no other animal ever managed to leave the earth’s atmosphere and land on another planet. No other animal is capable of leaving the Earth at some distant point in the future by colonizing other solar systems. And finally, no other animal ever developed the power to destroy the Earth and end history. Only the Homo Sapiens did.