November 2007

Leonard Woolf, 1939

The book is not about the story of the leveraged buyout of RJR Nabisco, what I intended to borrow. But it turned out a worthy mistake. Virginia Woolf's husband, in this thin book, examined threats to civilizations from the barbarians. He did not approach the topic with prejudice.

Some interesting quot. The Athenian army arrived the island of Melos and attempted to reason a surrender by this argument: "Well, we are not going to trouble you with any fine words or long speeches to prove that it is only justice that we should rule, because we overthrew the Persians, or that we are attacking you because you have injured us. You know as well as we that in human affairs there is no question of justice except between equals, and that the wrong do what they can and the weak suffer what they must."

When the Melians said they would resist and trust the eternal justice of Heaven, they were told: "So far as the gods are concerned, we do not think that we shall get less of their favor than you…we believe that the gods, and we know that men, by an inexorable law of nature rule wherever they can. We did not make that law and we are not the first to make sure of it; we found it in existence and we shall leave it to exist for ever after us; we merely make use of it, knowing that you and everyone else, if they had our power, would do the same." Classic power politics argument, and I think, very true.

The Athenians' argument was echoed close to two thousand years later by what the Nazis said to the German people: "This shameful peace was imposed upon us by the naked power of the victorious Allies; it can only be set aside by power, by Germany becoming so strong that she can tear it up; if you give us the power in Germany to make her strong again, we will set aside the Treaty of Versailles."

Woolf interpreted why Hitler came into power: "The capitalist system in Germany, as in Italy, seemed to be in real danger of a revolution on the Russian lines. The Nazis called themselves National-Socialists, but they were the bitterest enemies of both the Socialists and the Communists. For that reason they were supported and financed by the great capitalists. The objects and hopes of the financiers and industrialists were clear: Herr Hitler was to be their instrument for protecting the German capitalists from the German Communist."

There were clear influences of Karl Marx. "Civilization always starts with this conflict between the class structure of society and its own fundamental principles and ideals; it is always faced with the dilemma of either destroying the class privileges and class structure or of destroying itself, by abandoning its aims and standards of value. There have been many instances in which civilizations have expanded and the demand from large classes of the population to be admitted into its precincts has been conceded; but almost every such extension has involved a struggle between the privileged and the unprivileged, and there has never yet been a society in which the final step has been taken of converting it into an association in which the freedom of each is the condition of the freedom of all."

Another interesting argument by Mr. Churchill when asked "if it's possible to combine the reality of democratic freedom with efficient military organization." He answered: "The essential aspects of democracy are the freedom of the individual, within the framework of laws passed by Parliament, to order his life as he pleases, and the uniform enforcement of tribunals independent of the executive. These laws are based on Magna Carta, Habeas Corpus, the Petition of Right and others. Above all, they secure the freedom of the individual from arbitrary arrest for crimes unknown to the law, and provide for trial by jury of his equals. Without this foundation, there can be no freedom or civilization…"

Toward the latter part of the book, I realized this book is really a dictionary and not suitable for a quick reading. It is impossible to obtain a clear picture of the development of economic ideas, as I had originally hoped. The ideas were too broad and too complex to summarize, and they did not develop in a linear fashion.

Here is the quick rundown from mercantilism. Immediately followed was the classical tradition, pioneered by Adam Smith. Other prominent figures included Jeremy Bentham, Thomas Malthus, David Ricardo, John Stuart Mill and Karl Marx. Then there was the marginalists and opponents theory represented by Alfred Marshall, Max Weber and others. Finally, it came to contemporary economics with luminaries like John Maynard Keynes. Published in 1959, it did not include Milton Friedman, whose influence was minor then.

Though the history of economics remained a blurry picture, I came to realize several things unrelated to economics. First, Karl Marx. His theory appeared peculiar and out-of-place among all other theorists. Yet reading the chapter about him was the easiest for me. Thesis, antithesis, synthesis; base, superstructure, class struggle, surplus value, negation of negation, change of quantity into quality – I grew up with these phrases, and this system was adopted to interpret history, politics, sociology, international relations. And Marxism was the only philosophy we learned.

I now remember those exact paragraphs in which class struggle was the sole explanation of a social change. How during the Ming dynasty, preliminary capitalism emerged in China and was supposed to negate feudalism. How social development followed the progression of slavery/serfdom to feudalism, to capitalism and finally socialism – the ultimate human destination. Even out of classrooms, people talked about superstructure and debated how soon socialism would negate capitalism. Everyone knew the evil of capitalism by heart, though no one ever stepped into capitalist land. Marxism was THE truth. There was nothing else. But how absurd! Marx was only one of the hundreds or thousands of theorists, and his ideas were peculiar at the least. How cruel it was to enslave, poison, distort the mind of a whole nation by one doctrine!

John Stuart Mill's story inspired a different thought. His father, James Mill, educated the younger Mill by exposing the child to good associations and protecting him from bad ones. Greek at 3, Latin at 8, logic, philosophy and political economy at 12. When he was 14 years old, before he set out a tour to France, his father warned him "he might find that he knew things his contemporaries did not know." His father also warned there was no reason for pride because it was the result of his superior education. Any other child would do just as well if he was raised the same way.

The superior training brewed crisis. In his early twenties, Mill struggled to find meaning to life: "it occurred to me to put the question directly to myself: suppose that all my objectives in life were realized; that all the changes in institutions and opinions which you are looking forward to, could be completely effected at this very instant: would this be a great joy and happiness to you? … an irrepressible self-consciousness directly answered: No! At this my heart sank within me." I've heard several stories of prodigies who did not fulfill their promises and ended sadly. It seems the foundation of life should be a healthy and natural psychological development. Any attempt to "mold" mind would fail.

Another somewhat shocking comment to modern readers: "To him (Adam Smith), all European countries, except Holland, and the entire reminder of the world, except China, were underdeveloped." In the late eighteenth century, China was perceived as developed. What a strange idea! Another ancient civilization in Asia, India, had been falling under the control of the East India Company. But in the early nineteenth century, Joan Stuart Mill wrote that if China was to improve further, "it must be by foreigners." Mill was no prophet. China was ready for grabs after being defeated during the first Opium War, and since then "confidence" was to be out of the Chinese dictionary.

Robert Lekachman, A History of Economic Ideas

Robert Lekachman, 1959, McGraw-Hill Book Company

The last time this book was borrowed was 1994. This treasure has been standing on the library shelf for 13 years alone. 13 years!

By looking at the content, it appeared interesting. From Greek and Roman economics to the classical tradition, then marginalists and opponents, and finally contemporary economics. The first two chapters occupied roughly one fourth of the book. The last two took most of the pages as economic ideas became extremely complex (and boring).

Around 400 to 300 BC, the likes of Plato and Aristotle believed money created neither happiness nor wisdom and manual labor was servile, suitable only for slaves. Plato proposed the idea that governors were made of gold, soldiers made of silver, husbandmen and craftsmen of brass and iron. The species would be preserved in the children so that each person should accept their fate and act accordingly.

Aristotle favored private property, "for when everyone has a distinct interest, men will not complain of one another…" He also recognized the distinction between value in exchange and value in use with an example of "a shoe." He categorized the use of money as a medium of exchange, a unit of account and also a store of value, and uncompromisingly opposed to charging interest.

Roman economics continued the denouncing labor "as producing moral and mental degradation." A free man working for wages was scarcely better than slaves. These would change with the arrival of Christianity that brought the idea of universal brotherhood of men, the sinfulness of slavery and the desirability of universal sharing.

Hence began the medieval economics. From 1079 to 1279, the habitable houses in Cambridge increased from 325 to 534, growing one house a year. However slow, population grew and towns emerged as the center of change. By the fourteenth century, various guilds came into being and exerted great force on trade. Three types of guilds, social and religious guild, merchant guild and craft guild, regulated trade and protected members.

But Church was the all encompassing power above all. It offered the source of spiritual solace in this world and external salvation in the next, and "it issued orders to sovereigns and nobles, owned rich lands and collected taxes and tithes… The Church collected rents, owned villeins or serfs, sold privileges to towns and occasionally loaned money."

During Medieval times, men were compared with human body. Leaders were heads and its subordinates various body parts. The basic teaching was a good Christian should be content with the role life assigned him. Any effort to change that role diverted him from the road to salvation. Thus the debate on whether making a profit or charging interest were moral became the most contentious issue.

St. Thomas Aquinas thought "to sell dearer or to buy cheaper than a thing is worth is in itself unjust and unlawful," which is exactly Ben Graham's teaching today. Another popular idea was that money was barren, therefore usury was sinful. Similarly, tradesmen should not overcharge, sellers should not deceive buyers, renters should not keep more than what's enough to sustain the family. Of course, the rules were made to be broken. Records of undisciplined guild members and trade disputes were plenty. Of course, there was the Church.

Mercantilism followed and struggled to break the universalism of the medieval age. It succeeded "far better in destroying the universal church than it did in abolishing local tolls, local system of weights and measures, local tariffs…" Its ideas, though across centuries and quite different, included the following: money (particularly gold and silver) was valuable, workers should be used to gain wealth for the state (their condition should remain miserable), the statesman should "control and direct individual egoism."

It was this time when the English Corn Laws existed. It reflected the mercantilist's idea that a country should aim to increase precious metal holdings through minimizing imports. Also at this time colonies were established to supply the raw materials for manufacturers at home and then as a market for exporting the finished goods.

A caveat for this generalization: mercantilism ideas were not uniform. William Petty was sympathetic to the poor. "It is unjust to let any starve, when we think it just to limit the wage of the poor, so as they can lay up nothing against the time of their impotence and want of work." He also discovered to use labor as the unit of measure for value. "If a man can bring to London, an ounce of sliver out of the earth in Peru, in the same time that he can produce a bushel of Corn, then one is the natural price of the other."

Dudley North was another thinker who made new progress. He believed in the strength of self-interest. Laws should not regulate trade. The state should not interfere with the free flow of money. David Hume discovered the marginal utility of money, the basic premise of progressive taxation.

(To be continued)