Railroads, The Box, and Scale

Having just finished Marc Levinson's The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, I thought I would check up on a few notes he makes at the beginning regarding the place of the railroad in history. I made a start at this topic in this post, which I originally wrote in reaction to Kevin Carson's first chapter in a book on anarchist organizational theory. Specifically, Levinson notes that W. W. Rostow asserted the primacy of railroads on economic development in his Stages of Economic Development: A Non-Communist Manifesto. However, he notes that Chandler assigns a different role to railroads, and that both Robert Fogel (Railroads and American Economic Growth) and Albert Fishlow (American Railroads and the Transformation of the Ante-Bellum Economy) reject Rostow's view.

Rostow's book is an attempt to argue that Marx's principles were wrong. Rather than all social, economic, and political order following from the economic order, Rostow argues that there is a dialogue among those institutions. He identifies stages of growth from a traditional society through take-off into maturity and high consumption. It is in the preconditions for take-off and take-off phases that we are interested because there he claims that railroads are important.

First, Rostow claims that society's attitudes about (1) fundamental and applied science, (1) initiation of change in production methods, (3) risk taking, and (4) conditions and methods of work must all change. Then he notes two problems: you need an increase in the productivity of agriculture and extraction, and you need "social overhead capital". The productivity in agriculture and mining are necessary for 3 reasons: (1) you need to feed everyone that moves to the city, (2) you need to drive demand for goods (both consumer and equipment), and (3) you need to provide surplus capital to be saved/invested. Rostow claims that the social overhead capital has three characteristics (yes, he likes to have concise lists of everything, an unfortunate trait that I share and sometimes wish I didn't): (1) they have a long payoff period, (2) they have to be delivered in complete packages (i.e. a railroad from Chicago to San Francisco is no good only half complete), and (3) the returns to the community through "indirect chains" are greater than the returns to the entrepreneurs. About this, he concludes,

"Taken together, these three characteristics of social overhead capital -- the long periods of gestation and pay-off, the lumpiness, and the indirect routes of pay-off -- decree that governments must generally play an extremely important role in the process of building social overhead capital; which means governments must generally play an extremely important role in the precondition period." (p. 25)

In support of this, he cites the period 1815-1840 which saw the support of the Erie Canal by the State of NY and "great American continental railway networks [which] were built with enormous federal subsidies in the form of land grants."

Later, when discussing the actual take-off period, Rostow returns to the emphasis on the railroad.

"The introduction of the railroad has been historically the most powerful single initiator of take-offs. It was decisive in the United States, Francee, Germany, Canada, and Russia; it has played an extremely important part in the Swedish, Japanese, and other cases." (p. 55)

As usual, he finds three kinds of impact: (1) by lowering transport costs. railroads (performed the Smithian function of widening the market" (p/55), (2) railroads were a prerequisite to the development of the export sector (which is necessary to provide further expansion capital), and (3) railroads required the development of secondary sectors of coal, iron, and engineering.

I have (you guessed it) two comments on this. First, Rostow is looking back at the process and deriving ought from is (was). That is, he looks at the American and other national movements toward industrialization and "maturity" and sees the railroads, notes the importance of railroads and the government aid to them, and determines that this was necessary then and will be for any other country to achieve that same results. Note that he does not say, "governments played an important part", but rather he says, "governments must play an important part." Rostow does not acknowledge the fact that prior to railroads many turnpikes were privately operated and owned, nor does he account for Hill's Great Northern which received no federal subsidies. In fact, the first two of the three characteristics of social overhead capital are false: short haul railroads were very useful, it was the federally subsidized transcontinentals that were the problem. As Hill noted, the Union Pacific was an apple tree without branches, built that way because that was what Uncle Sam was buying (mostly because the North wanted California on their side). All of the other railroads were built in small bits to serve farmers and miners along the way, only being put together later. The third characteristic, that they paid the entrepreneurs off indirectly, is simply bizarre. Last I understood it, Vanderbilt and Hill were very wealthy men.

Second, Rostow is engaged in circular reasoning. Is he really saying that in order to bring about a capital-intensive social, political, and economic arrangement, we must have capital intensity arranged by a state designed to marshal capital? It begs the question,- why do we want such a society? That he is suggesting that requires no guessing. He specifically says that he wants workers moving to the city, which requires advances in agriculture in mining. Those advances are capital-thirsty in nature. And once you have the population in urban areas, it requires capital investments (wagons, rails, warehouses, stores) to get the food to them. And what are the workers going to do in those cities, by the way? Operate machinery. So yes, it does require capital in order to create a capital-intensive society, by but he never directly confronts why we would want to do that in the first place; at best, he makes the point that real incomes rose during the take-off and subsequently. But even if we want a capital-intensive society, why must the state be involved? He only seems to be saying it should because it did.

In the next post, I'll comment on The Box and its relevance to this argument.

Taking exception with Hirschman

In Exit, Voice, and Loyalty, Albert O. Hirschman discusses the particularly American bent towards "exit" as a means of correcting institutions that stray from producing high quality goods and/or services. As evidence, he points out that Americans exited Europe rather than stay and agitate for reform in Europe; later, they had the Western frontier as exit. He says, "The curious conformism of Americans, noted by observers ever since Tocqueville, may also be explained in this fashion," and cites Frederick Jackson Turner's thesis that the closing of the frontier closed off exit, leaving Americans with a need for "voice". The result was the Progressive Era and the New Deal.

Now, Hirschman's grasp of history and culture is wide and deep, but I think he has overlooked two bits of evidence, and conflated two streams of history. The first bit of evidence is Hannah Arendt's brilliant essay, On Revolution, in which she explores the differences between the American and French Revolutions. Beginning with a wide-ranging search for the meaning of revolution, she finds that one is that people wish to obtain a public outlet for their grievances. In France, they had none prior to the Revolution, so once they had the control of the government and Robespierre elevated "the people" (singular) as the source of government, they were not going to let it go again. In America, the people had long been used to exercising public happiness in townhall meetings since the first colony was established. Thus, they were not offended when Adams, Jefferson, and Madison located the source of government power in "the people" (plural), who understood that they retained powers and rights that were prior to the federal government. In other words, the people already had "voice", exercised through local government:

Even at this point, the difference between the Europeans and the Americans, whose minds were still formed and influenced by an almost identical tradition, is conspicuous and important. What was a passion and a 'taste' in France clearly was an experience in America, and the American usage which, especially in the eighteenth century, spoke of 'public happiness', where the French spoke of public freedom', suggests this difference quite appropriately. The point is that the Americans knew that public freedom consisted in having a share in public business, and that the activities connected with this business by no means constituted a burden but gave those who discharged them in public a feeling of happiness they could acquire nowhere else. They knew very well, and John Adams was bold enough to formulate this knowledge time and again, that the people went to the town assemblies, as their representatives later were to go to the famous Conventions, neither exclusively because of duty nor, and even less, to serve their own interests but most of all because they enjoyed the discussions, the deliberations, and the making of decisions. What brought them together was 'the world and the public interest of liberty' (Harrington), and what moved them was 'the passion for distinction' which John Adams held to be 'more essential and remarkable' than any other human faculty: 'Wherever men, women, or children, are to be found, whether they be old or young, rich or poor, high or low, wise or foolish, ignorant or learned, every individual is seen to be strongly actuated by a desire to be seen, heard, talked of, approved and respected by the people about him, and within his knowledge.'

The second bit of evidence comes again from de Tocqueville, who noted that Americans had a tendency to establish associations any time they had a project they wanted to pursue and either wanted or needed the aid or participation of their neighbors.

Americans of all ages, all conditions, all minds constantly unite. Not only do they have commercial and industrial associations in which all take part, but they also have a thousand other kinds: religious, moral, grave, futile, very general and very particular, immense and very small; Americans use associations to give fêtes, to found seminaries, to build inns, to raise churches, to distribute books, to send missionaries to the antipodes; in this manner they create hospitals, prisons, schools. Finally, if it is a question of bringing to light a truth or developing a sentiment with the support of a great example, they associate. Everywhere that, at the head of a new undertaking, you see the government in France and a great lord in England, count on it that you will perceive an association in the United States.

In America I encountered sorts of associations of which, I confess, I had no idea, and I often admired the infinite art with which the inhabitants of the United States managed to fix a common goal to the efforts of many men and to get them to advance to it freely.

I think that Hirschman overlooks both of those as evidence that the American people prior to the Progresive Era had always had a mechanism for expressing voice, even though that was through informal, ad hoc, decentralized institutions. Mutual Aid Societies come to mind as a more complex institution in which the members were officers as well as consumers. And those were just the institutions that Croly and the Progressive movement wiped out. Where some might see an invisible hand, creative destruction, or spontaneous organization at work, the Progressives saw chaos, disorder, and such corrosive horrors as "rugged individualism". They sought to replace that with centrally planned, controlled, scientifically managed order. This all happened concurrently with the closing of the American West, so it's easy to see how Hirschman might have conflated the two currents of activity. However, it does seem inexcusable that he overlooks the fact that the Progressive Movement sought to replace spontaneous order, in which voice and exit were effective means of maintaining high quality, with planned order, in which educated bureaucrats would scientifically determine what the people needed, and in which voice and exit were specifically forbidden. Hirschman repeatedly expresses admiration for Ralph Nader, though he never says exactly what Nader accomplished, nor does he ever recognize that Nader was merely the velvet glove on the iron fist of the regulatory state.

Despite these oversights, Exit, Voice, and Loyalty does contain a number of remarkable insights. I intend to dive into more of Hirschman's work when I can.

Random thoughts on minimum wages

Given that the minimum wage is going to be hiked soon, I was thinking about what other levers work in conjunction with it. Tyrone writes that the minimum wage is a good program that promotes self-help and therefore reduces the amount of transfer payments generally. I reply that almost every program could be justified on those grounds.

Rush Limbaugh is the annual generator of a couple of simplistic arguments:

1) If raising to $7.25 is good, why not raise it to $20? I'm not sure how clearcut the case is at $20, but let's tell Rush, heck, why not $100? At that point, we can clearly say, "because they aren't worth it. Nobody else is." Okay, now we have a negotiation: everyone can agree that even the laziest or least knowledgeable employee is worth between $0 and $100, so the answer is where exactly to draw the line. The economic theorist's answer is to set wages equal to marginal output. The problem there is that we really don't know what it is. Not knowing is not a good argument for either raising or standing pat.

2) Rush's other argument is that some jobs will be lost. That sounds good, and comes directly from Econ 101, but we generally learn by Econ 401 that a number of assumptions were made to arrive at many of Econ 101's lessons, assumptions that don't hold in the real world. Those include things like perfect knowledge and competition.

Still, people arguing for minimum wages must also acknowledge that many people are employed by small businesses (about 11% were employed by businesses with less than 10 employees in 2003 (15.9 million (census stats) of 146 million were employed that year (more) and 25% more in the range between 10 and 99 employees (referenced here)), and that some of those small businesses operate on razor thin margins (I think 2-3% profit is the norm for restaurants). Suddenly, you increase their major cost by 40%. That's a relative advantage to large employers, so don't let me hear you whine about Wal-mart taking jobs while simultaneously asking for yet another pro-large business policy.

But I think I spy another puzzle:

Given that only about 2-3% (the percentage varies) makes the minimum and about 2-3% more make wages between the current and proposed minimum wage (EPI says that 5% of the employed workforce makes less than $7.25/hr). That means that 97% of businesses pay more than the legally mandated minimum, proof enough that the overwhelming majority of businesses don't screw their employees, that they compete for employees and pay fair wages. Overnight, that number would drop from 97 to 95% (though most will obviously remain compliant by raising wages).

Of course, this says nothing about the number of people who want jobs but can't have them because their skills and the demand for them are such that they would earn less than minimum. They simply aren't allowed into the workforce, thus letting everyone in favor of a higher minimum wage pat themselves on the back for helping 5% of the workforce without having to acknowledge the anonymous unemployed that were harmed by the change. If you're first thought is not, "Oh, well, screw them," then perhaps we can agree that this is yet another argument against utilitarianism?

Some notes about the demographics of the minimum, i.e. wage vs. age: Do you think, as Rush does, that it's mostly teenagers making it? EPI says that 80% of those making minimum wage are adults (they define it as anyone over 20). I would be more interested in knowing how many of them are working their first job.

There is an argument in favor of the minimum wage that says that employers ought to hire people and then invest in training them (up-skilling) to make them worth (i.e., earn) that wage. However, there is no guarantee that they will ever get to that level of skill, or that they will stay on with the employer who trained them when they do (thus, the argument overlooks two market failures, which would be enough in some circles to doom it, but nobody scrutinizes policies for market failure-like mechanisms). Employers thus take a risk on inexperienced employees. How much will they risk? That depends on the potential cost. Given two employees, one who costs more to gamble and the other less, the employer will be more likely to gamble on the cheaper one. The same is true in time, too: today, recruits cost less to gamble on than they will after the minimum wage is increased.

The safety net here is that employers can let most of these workers go at will. That is, if the gamble is starting to look bad (remember: when they are first hired, they all look the same, but employers ought to be able to judge results within a few days or hours), they can fire them and try another one. If you remove that safety valve, employers will take even fewer chances, since this effectively increases the cost of the gamble (because you will be stuck with a bad employee until he quits).

Employers as law consumers are going to be willing to tolerate a mandate for either an increase in wages or an increase in job security, but not both. We have chosen wages over security.

Voice in schools

I'm about halfway through Albert O. Hirschman's Exit, Voice, and Loyalty and noticed something that I've seen to be true whenever his work is invoked against voucher programs -- or any privatization, for that matter. Since there is still another half left to go, I'm holding out hope that he will address it, but I didn't find anything promising in the index, so hope is running out for him ... and his little dog, too.

The main emphasis of the 1970 book, so far, is to (1) describe two mechanisms which consumers have recourse to when the quality of a firm or industry deteriorates, and (2) emphasize how little attention has been paid to these, by political scientists and especially by economists who had begun to colonize the other social sciences. The two mechanisms are exit (as in leaving one business and going to another) and voice (as in expressing your displeasure). Hirschman correctly notes that exit is not so automatic as economists have tended to assume, nor is voice so silly an alternative.

Hirschman levels the charge of bias against economists with a quote of Milton Friedman's original voucher proposal from 1955. When he returns to education later in the book, I got the impression that he was intentionally trying to create a tool for defending public schooling. In any case, having created the tool, I think he forgot to investigate whether it worked as well as he thought for that particular application.

The anti-voucher argument can be summed up in this statement.

... those customers who care most about the quality of the product and who, therefore, are those who would be most active, reliable, and creative agents of voice, are for that very reason also those who are apparently likely to exit first in case of deterioration.

But in applying this, both Hirschman and those who draw on him to argue against school privatization take this as revealed truth. Their argument relies on several assumptions that are mistaken in my estimate:

Poor parents are less effective at voice. First, poor does not mean stupid or incapable, and this is frequently the implication of this claim! Poor parents are sometimes the most vocal because they understand first-hand the value of an education. Second, it is true that voice is more expensive to poor parents because of the time required to research, meet, debate, and follow up on ideas, time which they don't have which wealthier parents do (professionals can take time off, one spouse may not have a full time job, etc.). Parents who stay in the public schools will thus have more resort to voice the wealthier they are. Forcing them all to stay ensures that the school will be more responsive to wealthy parents than to poorer parents. If the wealthier parents had the option of exiting, the poorer parents remaining would have greater effective voice as their share of representation goes up. Which leads to ...

The only parents staying in the public system are poor parents. This assumes that voice is less expensive than exit. But Hirschman himself points out the opposite only a few pages before:

In fact, in addition to this opportunity cost [that of foregoing exit], account must be taken of the direct cost of voice which is incurred as buyers of a product or members of an organization spend time and money in the attempt to achieve changes in the policies and practices of the firm from which they buy or the organization to which they belong. Not nearly so high a cost is likely to be attached to the exercise of the exit option in the case of products bought in the market - although some allowance should be made for the possible loss of loyalty discounts and for the cost of obtaining information about substitutes to which one intends to switch.

Hence, in comparison to the exit option, voice is costly and conditioned on the influence and bargaining power customers and members can bring to bear within the firm from which they buy or the organization to which they belong.

In fact, it is in the status quo, where "free" public schools appear to be less expensive than non-free private ones and exit has a cost on that account, that poor families have no recourse except voice and that wealthier ones have both more recourse to voice and exit. In a system in which "free" public schools are no different than voucher-subsidized private schools, exit would be a lower cost means of responding to lower quality than is voice, if Hirschman's claims immediately above are correct. Either he is right in saying that the wealthy will leave them behind, in which case their comparative voice increases, or he is right in saying that exit is the lower cost option, in which case vouchers give an additional option to the less wealthy.

Voice will be effective at effecting change in public schools. But the people making the voice/exit argument against vouchers are usually the same group of people insisting that there is no problem with public schools - the quadrupling of real, per student expenditures is worthwhile, the flat standardized test scores mean nothing, criticisms of public schools are groundless, all they need is more money and a new alphabet soup of programs to plug other gaps. Consider, for example, Rothstein: "Despite careful admissions restrictions, magnet programs attract the most highly motivated students, draining neighborhood schools of students and parents who could spur higher achievement levels." They are offering a false double bind: claim there is no problem, in which case you don't need those with an effective voice, and claim that the system will collapse if it is changed because problems will not be addressed. Note that Rothstein craftily avoids saying "correction" and instead says, "higher achievement levels;" other voucher critics aren't this clever.

Parents voice will be equal to or greater than that of teachers, administrators, and patronage granters. This is a surprising oversight by Hirschman. He even cites Mancur Olson's The Logic of Collective Action, so he cannot be unaware of the problem. Parents are interested in their children's education for at most 18 years (after which they get to access the public/private arena of college, where competition has apparently not had the deleterious effect), while teachers are looking at careers of 35 years or so. Parents' interest are varied (math, literacy, warehousing or baby-sitting, athletics, arts, and so on) and contradictory (I don't care about football, I want math and science, while someone else wants football, and someone else wants money spent on arts), and parents' knowledge is limited (they gather most of it second hand from mostly non-cooperative agents, which anyone who has ever been or raised a teenager will know), while teachers interest is focused (secure, high-paying jobs in a low-stress environment) and their knowledge direct. Administrators of the schools and patronage systems likewise have an advantage. Moreover, the parents' gains are likely to be shared and spread among others, while teachers' gains are going to come directly back to themselves. As a matter of fact, there is proof that teachers -- or more precisely, teachers' unions -- think the voice option works in their favor: they oppose vouchers and pay to lobby against them even though this would increase their exit options as employees!

Furthermore, Hirschman says "voice plays a more important role with respect to organizations of which an individual is a member than with respect to firms whose products he buys..." - I think even Hirschman would admit that the increasingly centralized, almost national school district has eliminated the possibility that parents are a member of the organization.

Incidentally, I am not a strong fan of vouchers. I fear that voucherization would be a Trojan Horse for regulation of the few remaining private schools. A much better solution, I think, would be to charge means-tested tuition for public schools, the same way you pay park fees. For one thing, the free breeders out there would have to carry more of their share of the load. For another, private schools would spring up as an alternative, no subsidies required. For a third, public schools would have increased budgets (or the state and local governments could offer tax breaks or redirect tax moneys).

[UPDATE] Haha, sure enough, he provides an argument on the very next page, and takes it up again later in the book. I swear I looked in the index.

Anyhow, Hirschman provides an elegant graphical proof of what happens when two consumers, one sensitive to quality and the other to price, encounter a deterioration of quality in a market which has both a higher priced, higher quality alternative as well as a lower priced, lower quality alternative. Sure enough, the quality sensitive consumer bails early. Unfortunately, he doesn't explore the situation that arises when the alternatives are both lower priced and higher quality, which is a common case with private schools. The outcome of that very distinctly depends on the assumptions, since both types of consumers stand to benefit.

Another problem I have with the analysis is that he begins with a discussion of a consumer who has greater consumer surplus and then treats this person as if they were the fastidious consumer (the implication that wealthy = quality minded, not wealthy = don't care about school quality). I think that is a mistake (a mistake I propagated above), the same mistake in fact of justifying patient waits because the doctor's time is more valuable than the person in the waiting room. Somewhere in Marshall's Principles (drat, can't find it right now), I remember that he warns that a demand schedule is not precisely the same as utility. Given the anti-voucher PR machine that operates in urban environments, graphs like the one below tell me that poor education consumers have a strong utility for education (stolen from Creative Destruction after finding it searching on something unrelated).