Skepticlawyer

Economist Earl Thompson (1938-2010) developed a theory which (pdf) postulated that defense externalities are what made (pdf) taxing imported consumer durables such a common tax policy. The idea being that build-up of local capital made a taxing-jurisdiction more of a target for aggression, so taxing such goods and various forms of capital adjusted for the increased danger; it internalised the costs of said danger. A “coveted capital” theory of taxation. A theory extended to postulating the role of guilds (pdf) as limiting capital formation to reduce the “coveted capital” defense externality, providing a city defense force and a source of emergency war finance.

Easy tax targets

As someone conversant in Australian political history (pdf), and aware of how well Ronald Rogowski’s application (pdf) of the Stolper-Samuelson theorem and Heckscher-Ohlin analysis (abundant factors of production favour free trade, scarce factors favour protection) explains patterns of C19th trade policies, I find the thesis on the levying of tariffs deeply unpersuasive. (Do we really want to postulate that protectionist Victoria felt more vulnerable to aggression than free trade New South Wales or Western Australia?)  This is not helped by Thompson’s fantasy economic history which sees competition for productive individuals as a fundamental driver of historical taxation strategies.

Earl Thompson

Firstly, the classic response to serious competition for productive individuals–that is, labour scarcity–was bondage; serfdom or slavery. Serfdom if the targeted population was local (it required less effort than slavery and did not affect fertility), slavery if the labour needed to be imported (as they were stripped of any connections–enslaving was “social death”, typically in situations where actual death was the alternative–it was easier to make people property and they could be replenished by further imports).

Moreover, consumer durables are an easy taxation target (hence export or import tariffs being levied on them at different times and places). Given the historical importance of administrative costs in driving policy (particularly tax collection), no further explanation is needed for taxation to target high-value, relatively easily spotted, goods. Particularly as, before the Industrial Revolution, land and trade were the dominant (pdf) revenue sources and the dominant targets of aggression. (Nomad peoples had their herds, but they were difficult targets except from other nomad peoples.) Any accumulations of capital were overwhelmingly trade-derived. Thus, accumulating consumer durables and fixed capital were by-products of much more basic targets for aggression. People did not think folk magically acquired wealth. Walls around cities not only protected residents and their wealth, they also protected the trade-nodes, and provided a base to dominate the farm lands, which generated said wealth.

Hoping to acquire some moveable wealth

To the extent that Thompson has a point, it would make rather more sense to say that taxing imported consumer durables, or structuring your tax system so as to target wealth concentrations, is aiming for an optimal trade-off of where the revenue is most accessible and who has most to lose from successful aggression against the state and its trading interests (internal or external). One does not have to postulate some extra defense externality, given that defense and public order are already public goods. Especially as states were generally keen to grab what trade or land income they could. Indeed, the revenue value of trade and land generally dominated fixed capital or moveable wealth quite strongly for those organised to extract same. Thieves, raiders and looting soldiers would be more attracted by moveable wealth (rather than the fixed capital that Thompson focuses on), but that goes back to who had most to lose.

Missing the past

Since Thompson claimed his original insight came from looking at the American tax system, he may have simply failed to grasp how relatively unimportant capital was as a source of wealth and revenue in pre-industrial societies compared to capital’s post-Industrial Revolution dominance of both. He certainly does not seem to have grasped the importance of the labour/capital ratio for wage levels, given his speculations about (pdf) wages possibly heading back to subsistence levels. ([Regarding labour/factor ratios,] bondage systems<s>, for example, a</s>were typically attempts to evade the return-to-labour implications of high land-to-labour ratios and/or trade effects driving up the value of easily-supervised labour.)

As for competing for productive individuals via tax policy; where competitive jurisdictions operated, far more basic matters of protection of person, property and commerce were typically much bigger factors in policy competition than mere tax policy. Indeed, places which offered the best protections of person, property and commerce could typically tax significantly more than places which did less well at such. Hence parliaments provided a taxing advantage (pdf) as they allowed negotiation of higher tax-benefits trade-offs. The extreme example being the United Kingdom at the time of the Opium Wars squeezing close to fifty times more (pdf) taxes per head out of its population than did Qing China–taxing a richer population (itself not an outcome independent of Parliamentary mechanisms) about nine times the Qing rate per head–such that the central government of the United Kingdom had four times the gross income as did the central government of Qing China.

Guilding the lily

Thompson seems to regularly fall into a trap that is perhaps natural for modern analysts–to discount how pervasive and basic concerns for internal public order, and how constraining administrative costs, were for past societies. His discussion, in his analysis of the defense role of guilds (pdf), of the length of time apprentices were bound to their masters misses the point, for example, that young men without family or property attachments were, quite reasonably, regarded as prime threats to social order. Legislating to bind them to their masters until they were 25 might indeed have provided a pool of military manpower for a town or city (though surely not a particularly large one; the role of craftsman in city defense extends well beyond just apprentices) but it also acted as a mechanism of social control. While standard periods and ages for indentures reduced transaction costs for enforcement in societies where enforcement was a serious issue.

Guild members using their fixed capital

There is also something of a tension in arguing that guild restrictions reduced the “coveted capital” defense externality by reducing capital formation (internalising the increased defense risk) while also claiming that guilds were a key source of emergency war finance. (A role which, along with the contribution of apprentices to city defense, is postulated but never quantified; even for rough orders of magnitude.) In the medieval period, general tax levies and bankers were the dominant sources of war finance. The most obvious exception being Venice developing the first bonds, the prestiti, in 1171. That in a city with, as Thompson notes, a strong guild system.

Moreover, indentureship was a widespread mechanism across complex societies which had the normal effect that binding to a workplace did–it reduced the cost of labour. In the case of apprenticeships of various forms, it helped to generate a more reliable return from training. Arguing, as Thompson does, that the negotiated upfront lump sum used to purchase an indentureship blocked the effect misses the role that the lump sum played in compensating the master for risks involved in the untested aptitude, character and commitment of the (very) young apprentice-to-be. After all, if the upfront lump sum used to purchase the indenture could deal with the return-to-training-effort, why bother with any set indenture time at all? Conversely, if time-required covered the risks, why bother with the upfront lump sum? (There is some analogy here with charging both a base fee to enter a network plus a fee for usage.)

Even for training systems aimed explicitly at training warriors, time-serving requirements seem to have been dominated by return-for-effort considerations. The page-squire foster-training system of the knights was less time-serving constrained than apprenticeship typically was because part of the trade-off was establishing connections between knightly families (and the knight provided training but not their squire’s equipment). Conversely, slave-soldier systems (notably mamluks) were (far) more time-serving constrained than apprentices (mamluks stopped being slaves once trained but their obligation to serve continued) as the cost of training and equipping a mounted armoured warrior was so high and there were typically no outside connections to trade-off against (precisely the attraction, but also the danger, of such warriors).

Guild heraldry showed who they were protecting

The most curious absence from Thompson’s analysis of guilds as the apparently absolutely militarily and economically crucial institution from the early medieval period to as late as 1900 in Russia is; what was in it for the guild members? As Thompson points out, guilds typically set maximum prices and minimum quality standards (the reverse of what a conventional monopolist would do) and limited the ability of masters to expand their operations. Since guilds only made sense if they helped their members, surely the first place to look is to ask what benefit such provisions provided to guild members.

Limiting the scale of operations spread the commercial joy, making it easier to cooperate, and increased the number of masters (and journeymen), giving them more collective weight in city affairs. (Unions make similar trade-offs when, for example, teacher unions agitate for limits on class sizes.)

Moreover, a guild could not be a conventional monopolist because it was not a single firm but a collection thereof. Any restrictions had to benefit all the members without requiring excessively costly negotiation of distribution of gains or enforcement costs; a guild was at best a cartel rather than a conventional monopoly. One, moreover, that could not ensure complete exclusion of outsiders, as city authorities could, and periodically did, grant the “freedom of the city” to crafters refused guild membership. Maximum prices and minimum quality standards provided positive branding for guild members and had much lower enforcement costs than did the reverse. This gave guilds standing, which made them much more effective as political organising and protection devices for their members. Highly desirable to have in a medieval world of expanding trade and complex jurisdictional interactions.

Guilds were first and foremost embedded in the commercial life of cities, and it is there that analysis has to look first to to explain their characteristics; not the taxing of postulated extra defense externalities which also contradict their (completely unquantified) alleged value as sources of emergency finance. Especially as church and merchants were more important concentrations of urban wealth than crafters.

Thompson is also quite wrong to claim that tax levels rose to tax away (pdf) the labour scarcity effects of the Black Death; the later C14th and C15th were periods of sustained higher incomes for peasants and workers across most of Europe. (Not so much in Spain [pdf], but that was because it disrupting trading networks in what was already a labour-scarcity economy.) Neither the standard “labour trapping” techniques of bondage or walls were employed–likely not the former because European states lacked the military incentive to support re-introduction of bondage while the latter was not a practical option. So competition for labour drove wages up.

Missing the present

Even on contemporary dynamics, Thompson’s characterisation of the Western victory in the Cold War as reducing competition for (pdf) productive individuals also seems wrong-headed. Yes, it has weakened the bargaining position of states vis-a-vis the US and Western-supported international organisations, but competition for productive individuals seems to have, if anything, become more intense; it is just that the effect has been more than counteracted by the massive broadening of labour supply for globally-traded goods. Contra Thompson, in explaining the US experiencing prolonged economic expansion in the 1990s without median wage growth, December 1978 is a much more important date than November 1989 or December 1991.

Similarly, his suggestion that (pdf) US support for policies which produced the German and Japanese economic miracles were a form of “hostage” wealth rather misses the point that it was in the US interest for countries bordering Command economies (West Germany, South Korea, Japan, Taiwan) to do as well as possible to sharpen the competition and that there was an explicit US defense guarantee for all four countries precisely because they were border states. (The outbreak of the Korean War being a salutary lesson in what happens when one fails to be explicit about such matters.)

Missing both

The first time Thompson’s economic history annoyed me was when he characterised China as (pdf) having been on the gold standard. Apart from the southern Warring State of Chu, gold has not been (pdf) a significant monetary metal in China. Silver was often a medium of account in Chinese history, but characterising that as a “gold standard” for definitional simplicity is to feed the way overdone mystique of gold.

Thompson dismisses free rider issues with remarkable abandon when convenient, treating notions of collectively-acting ruling classes and providers of “ideology” as unproblematic. Given the challenge the work of Mancur Olson posed on the difficulty of collective action, the work of Elinor Ostrom on what is required for effective management of common property, and the work of Peter Turchin (building on the original insights of Ibn Khaldun) on the difficulties in generating and maintaining asabiyyah (common feeling or group coherence), this is not a persuasive way to proceed. Moreover, Thompson treats the issue of the power of “ruling classes” over policy and institutions as unproblematic whenever convenient but it suddenly becomes contestable when that is convenient. Indeed, Thompson’s notion of (pdf) “poison pill” asset bubbles designed to forestall revolution descends into history-as-conspiracy. (Just think about the information control requirements, let alone the wider coordination issues, for such a putative policy.)

Given that autocracy has been historically the most common political form, the principal-agent problems all have rulers faced, and how contested political power perennially is within and between power groups, Thompson assumes away much of the stuff of history–particularly in the evolution of institutions and public policy. It is one thing to analyse, for example, status behaviour as a club good; quite another to postulate high levels of collective action in situations of intense competition for power (or, for that matter, intellectual prominence). Some of the analytical consequences of doing so, such as his “bad economic theory” explanations (pdf) for the collapse of the (Western) Roman Empire and French Revolution, are just bizarre. Thompson’s apparent notion that laissez faire free trading views have been the prime significantly policy-distorting beliefs (apart from what he calls Hellenism*) is not much better.

Thompson’s use of democratic and democracy is also unfortunately loose; he applies the labels to times and places which were not remotely democratic in any serious meaning of the term. Thus, when C19th thinkers argued that democracies could not manage, let alone survive, great crises (such as wars and civil wars), the success of the United Kingdom in its Second Hundred Years War with France was, quite reasonably, not counted as a counter-example. Thompson calling the 1688 Glorious Revolution ”democratic” is, to put it mildly, a stretch. Using the far more accurate term Parliamentary might have productively expanded Thompson’s concern for coordinating mechanisms. While referring to (pdf):

Byzantium‘s unique form of democracy (p.162)

is simply bizarre. Referring to (pdf):

an early-ninth-century renaissance in ancient Chinese religion and effective democracy (p.1)

is hardly less so. Whatever he meant by the term, it does not have much connection to anything resembling normal usage.

I am also not much impressed by claims such as that his brilliant insight on taxing to deal with defense externalities was rejected because (pdf) it upset the preconceptions of, and demand for, economists. The Austrians play this game about why economists in the 1930s, after a brief surge of interest, rejected the Mises-Hayek Austrian business cycle explanation of the Great Depression. However flattering it is to the adherents of the theory (“we are so much more public-spirited than you lot”) I find a much simpler explanation to be that neither theory is a persuasive explanation of what it purports to explain. And my income or potential income does not depend in the slightest on whether I agree, or disagree, with either theory.

Earl Thompson is fondly remembered by various prominent economists, was clearly an original thinker and his papers on monetary matters (pdf) in particular (pdf) can be read with profit (pdf); though I prefer David Glasner’s reworking of Thompson’s discussion of classical monetary theory. Thompson also has a rather delicious (pdf) rational expectations and efficient market analysis of the 1630s Dutch Tulip mania. Thompson’s more general economic history is, however, not to be relied upon. He seems to have become far too wrapped up in his “coveted capital” theory of taxation, the explanatory power of its alleged defense externality and the analytical presumptions needed to make it all hang together.

Note

* Hellenism (pdf) (the curse of Plato, Aristotle and Socrates):

… gives a social thinker a hubristic, unrealistically positive, self-image, and a similarly unrealistic image in the eyes of a similarly educated employer … Its effect on bureaucratic decision making has been to give bureaucrats a license to interpret facts so as to benefit the classes of people they consider most deserving. In particular, a bias against successful investors is observed among Hellenists (p.152).