Saturday, July 26, 2014

No. 000057 Criminal Gangs, Written Constitutions, Hole in One Insurance, and Debt: The First 5000 Years

Rhett Butler softening his sentence by playing poker with his Guards.

Yesterday, David Andolfatto shared his thoughts on David Graeber’s Debt: The First 5000 Years.  It is always interesting to see Economists struggle with the facts of history, anthropology, and sociology (they wholly lack the tools to gain insights into economics from the Law) for such exposes the macro economic learning for what it is: thought experiments supported by data cherry picked for a favored outcome rather than science. Graeber's book does this.

What makes this post particularly worthy is that Mr. Andolfatto has taken this lesson to heart. Everyone should read this blog for its honesty and self-reflection on the shortcomings of macro economics. In contrast to our other St. Louis economics blogger, everyone can learn from every word penned by Mr. Andolfatto.

I thought this post worth of comment for what it doesn't discuss, in two ways.

First, it doesn't deal with the chicken and egg issue as to who invented debt (including does the chicken and egg issue matter)?

Who asked for Religion?

Who asked religion to enforce promises and debt? Was it Don Trump the 1st who went to his uncle and said, “Next sermon, can you add a few sentences in your talk to the Congregation to the effect that if you don’t pay your debts Gods Nos. 3, 5, 7, and 9 will make your afterlife a tough one?  I am going to be asking Old Joe to let me have 4 goats on credit that I can take up to the new mountain meadow this Spring and I don’t want to give any collateral, that is for my loan with Bill for using his two slaves to build a rock wall for my goat auction house. Or, was it Old Joe who said to his Brother. I am too old to take my goats to the new mountain meadow this spring. Can you add a few sentences in your talk to the Congregation to the effect that if you don’t pay your debts Gods Nos. 3, 5, 7, and 9 will make your afterlife a tough one?  Next week I am going to ask Don Trump if he would like to try his hand at goat raising.

As we can see, both creditor and debtor benefit if religion enforces debt so who knows, nor does it matter who first thought of the idea. That is the great insight here. 

Once you figure all that all life is negotiation none of this matters. There is nothing a priori going on except that, contrary to what the Austrians or Libertarians teach, every human institution, public or private, is subject to being rigged and manipulated by all the participants for their own ends as a part of the unfolding negotiation of life as we each struggle to control it on our own terms.

There is no escaping this fundamental axiom of life. Music men or women who sell simple solutions are doing nothing more than attempting to rig negotiations to their favor. Economists who sell “the gold standard,” or the “Taylor Rule,” or that “deficits matter, but for buying the F-35,” are merely descendants of Don Trump the 1st engaged in a different gig.

Can you tell the Players without a Scorecard?

Further, one sitting in the audience never knows by whom you are being played. If you were present for the first debt sermon it might appear to you in the audience as a divine revelation. Merely because you are there and witnessed something doesn’t mean you know what happened. Truth be known, who is to say that wily religious leader wasn’t playing both sides against the middle!

“Government” emerged to deal with real life promises.

This thought experiment also permits us to see the role of government and the Law emerging. Creditors may offer (or debtors demand) consequences in this life, and not the afterlife, for not paying one’s debts.

In the Law this is a mere evidence problem. Oral promises to pay debt are easily enforceable when there are numerous witnesses or when custom and usage are well know and established.

But, She Who Must be Obeyed (whomever she is) must always be obeyed. Thus free riders and worse will always plot against custom and usage:
Other golfers admit to fearing the wrath of a spouse if they treat the clubhouse, and therefore having agreed with golfing buddies to slip away quietly without telling the clubhouse if anyone scores a hole in one. It’s a rather sad result of the tradition -- instead of celebrating a hole in one like the once in a lifetime accomplishment that it is (the odds of getting a hole in one, very roughly, are 12,500 to 1 for an amateur and 7,500 to 1 for a professional), it pushes golfers to slink away like they crashed a golf cart in a sand trap.
Thus, even when custom and usage are well established, people (for their own purposes) will avoid customs and usages.

A solution, in  Japan, is hole in one insurance for golfers.

Knowing this, we again have a chicken and egg problem.

Debtors are being refused credit because creditors are being stiffed by debtors who are buying silks for their spouse to keep peace at home instead of paying their debts. Thus, was it a debtor who first said, if I don’t repay my debt when I return from the mountain meadow this Fall, you can put me in the clink for 30 days or was it a creditor who made the demand? The debtor, in the spirit of Rhett Butler above, may not have feared the clink. He may have been thinking, Old Joe won’t put me in the clink for he would have to build one and he would have to feed me, give me water, and clean up my muck.

Bad Guys and Written Constitutions

One of the more amusing moments in law school are the cases on illegal bargains. It does not occur to many that those with enough chutzpath will ask a court to enforce an illegal contract or bargain. In fact, among the hardest cases for judges as flawed services cases against non-lawyers who have proved legal services to a consumer who knowingly hired a non-lawyer to draft a will or contract.

Colonel John Boyd, The Strategic Game of ? and ?

This leads us to Criminal Prison Gangs and Written Constitutions. 

People badly confuse the familiar with the necessary. They believe that merely because there are people and countries in most places on earth that we are not forming new cultures and societies which can be observed at the moment of formation. That is not true. Open a new prison and you have formed, in effect, a new country. Watch what happens inside that prison and you will see the formation of a new society or culture to survive, on ones one terms, or to improve one's capacity for action.

One of the common features with people is that, as soon as they need or see the benefits of collective action, they will form a new government within a prison, using the tool of a written constitution. 

Prison is not a place where you find strong beliefs in the evils that will befall us in the afterlife and so existence of a government is very important.

David Skarbek has explored this in his new work, The Social Order of the Underworld: How Prison Gangs Govern the American Penal System:
When most people think of prison gangs, they think of chaotic bands of violent, racist thugs. Few people think of gangs as sophisticated organizations (often with elaborate written constitutions) that regulate the prison black market, adjudicate conflicts, and strategically balance the competing demands of inmates, gang members, and correctional officers. 
Thomas Schelling, Nobel Laureate in Economics (2005) writes in his review:
"This is a fascinating study of what the title suggests. It is also a remarkable study of a "natural experiment" in the evolution of government. Put a couple of thousand men, not of the nicest kind, into close confinement with limited communication facilities and little government, and see what happens. What happens is government, based largely on ethnic gangs, with hierarchy, rules, and sometimes written constitutions. The basic problem to be solved is the management of the market for drugs, and solving that leads to genuine institutions. A great read." 

The Sum of It All 

Why is the chicken and egg problem so important? Because only by seeing it do we come to understand that we may be confusing the familiar with the necessary and with reality.

Ask most Missourians why we have crimes and violence in Saint Louis and they will respond because you have gangs. 

But, ask gang members why they are in gangs and they will tell you because government does not protect them from violence.
Organized criminal enterprises often act as quasi-governments, protecting property rights and enforcing contracts when legitimate governments are not capable or willing to do so (Anderson 1979; Baumol 1995; Skaperdas and Syropoulos 1995). Skaperdas (2001) surveys the historical experiences of organized crime in several countries and concludes that it arises in power vacuums to fill the need for property protection. Gambetta’s (1993) detailed study shows that the Sicilian Mafia primarily provided businesses with private protection services when the government was unable to. Sobel and Osoba (2008) find empirically that membership in Los Angeles street gangs are a response to violence rather than precipitating it, suggesting that members join to protect themselves when the legitimate government does not.