What makes profit-maximization possible

(The problem with competitive capitalism is not that it is uncreative, but that it is unnatural.)

By Martin Wolf

I agree with everything Professor Landsburg says. The difficulty is not with what he says, but with what he does not say. What he does not address is how a capitalist system works. And as soon as one asks this question, one realizes that what distinguishes successful capitalism is not how broadly the profit-maximization principle, beloved by economists, applies, but how tightly circumscribed it has to be.

"Most of the world's poor are poor because they live under confiscatory governments," writes Professor Landsburg. This is true. But what is a confiscatory government? It is just a government run by profit-maximizers. The people running operating a government are doing just what Professor Landsburg and Milton Friedman think everybody in the private sector should be doing: looking out for themselves and their families.

This is hardly new. It is normal for the possession of power to lead to wealth. In traditional agrarian societies, the people -- or, more often, the person -- with political power was also far and away the richest. He (it was virtually always a "he") used his coercive power and moral authority to extract resources from the peasants. As Mancur Olsen has pointed out, such a 'stationary bandit' might even be better for the hapless peasantry than the roving variety.

The palaces and stately homes that litter the landscapes of erstwhile agrarian societies are monuments to the success of this strategy for wealth extraction. The ruler seized as much of the surplus as he could and offered, in return, security from other bandits. He used the surplus to pay his army, police and judges, build fortresses and live as luxurious a life as the technology of the age allowed. To put this in contemporary terms, politics was a wonderful business. In fact, it was almost the only business.

The confiscators whom Professor Landsburg criticizes are operating in this grand tradition: they view politics as a profit-maximizing business opportunity. What's the point of becoming a ruler if one cannot take what one wants? In impoverished societies, far and away the quickest way to become rich -- often the only plausible way to do so -- is to seize power first. This was the path of Suharto, Mobuto and now Mugabe. It was ever thus.

Consider a society in which everybody was a profit-maximizer. What would it be like? It would be one in which rulers, soldiers, judges, bureaucrats would take whatever they could. It would be one in which bribery and corruption were the norms. It would be one in which market capitalism of the kind Professor Landsburg (and I) extol would be impossible. It would be one in which almost everybody would be poor. And because it would be one in which almost everybody was very poor, it would also be one in which the only way to obtain wealth would be to join in the race for political power. This would be all too natural. It would also be a negative-sum society, in which life tended to be nasty brutish and short.

Profit-maximization is not a generalizable norm for a successful capitalist society. Indeed, it is not an ethical principle at all, for it violates Kant's categorical imperative -- that one should "act only according to that maxim whereby you can at the same time will that it should become a universal law." Profit-maximization is a situational ethic, applicable only to economic activity -- that is, activity carried out under competitive conditions. Monopoly providers of public goods -- security, justice and so forth -- must not act under profit maximization.

We do not even want people engaged in private business to be profit-maximizers tout court. Let us suppose, for example, that a business knows of an undetectable way of dumping poisonous waste, thereby saving itself vast sums of money. Do we believe that it 'ought' to do this? I certainly do not. Do we believe businesses ought to create cartels? No, again. Do we regard it as right for business leaders to manipulate their pay -- by back-dating stock options, for example -- in order to steal as much as possible from their shareholders? No, yet again. Yet all these people are doing is maximizing their personal profits, as individuals in the market economy supposedly should.

In a country like the US, the ability of business to get away with such unethical behavior is constrained by relatively powerful structures for surveillance. But what about the behaviour of businesses in poor countries? Professor Landsburg writes, correctly, of the costs of confiscatory states.

But in many countries, bribe-paying foreign enterprises, deposit-receiving foreign banks, arms-selling foreign enterprises are all complicit -- heavily complicit -- in creating and sustaining those confiscatory states. So, too, of course, are domestic businesses. But what is wrong with what they are doing? They are profit-maximizing, after all.

So the big problem with competitive capitalism is not that it is uncreative. It is certainly highly creative. The problem is that it is unnatural. There have to be rules, ethical norms and institutional constraints governing profit-maximizing behavior, to ensure that the maximization operates for the social good. Of course, pure libertarians would deny this. They believe that a society could be constructed on the basis of voluntary exchange, with no coercion. I think that would last until the first well-organized gang came over the hill, as Thomas Hobbes argued. We need the Leviathan. The question is how we tame it.

Americans are so used to a society in which the profit motive is constrained by -- and embedded in -- other norms and institutions, that they do not even recognize the pervasive presence of the latter in their lives. Like fish, they cannot identify the water in which they swim. They cannot imagine a world, for example, in which the US army decided to be a profit-maximizing firm. The ancient Romans would not have had the same difficulty. (The late Jane Jacobs wrote with typical insight on this broad theme in her book, Systems of Survival.)

The biggest single question in development is how the complex web of social, ethical and institutional principles and constraints that make profit-maximizing capitalism work originate and renew themselves. How does a society evolve a set of restraints on private economic activity that prevent businesses from collaborating to destroy the conditions in which they can do much good? For, as Douglass C. North and co-authors have noted, such collaboration is the natural thing for those with power to do. (See John Joseph Wallis, and Barry R. Weingast, The Natural State: The Political-Economy Of Non-Development, http://www.international.ucla.edu/cms/files/PERG.North.pdf).

The separation of power from profit and the embedding of profit-maximization in a limited sphere of economic activity is highly sophisticated and very peculiar. And if we are to understand what actually happens in our world, we have to understand just how peculiar this is. I am not saying that capitalism is immoral or that it does not encourage and develop valuable moral qualities. But I am saying that profit-maximization does not of itself create a thriving capitalist society. Only powerful constraints on its application do so. Those constraints have next to nothing to do with corporate social responsibility. They are far more fundamental than that.

Comments

[Michael F. Martin]

I wonder whether Mr. Wolf has not conflated rational self-interest with profit-maximization. It seems that most of the horribles he mentions were around before profit-maximizing firms were available to organize individual rational self-interest into socially productive goals. Without coordination, dogged pursuit of individual self-interest degenerates quickly into a free-for-all. But profit-maximization requires a contract (implicit or explicit) that limits the pursuit of individual self-interest. I guess Mr. Wolf's point is that certain government and cultural institutions need to be in place before such contracts can become prevalent as a means for organizing individual self-interest.

Since it seems somewhat relevant to Mr. Wolf's point about the contingency of norms of profit-maximization, is a link to a paper by Shleifer, Posner, and Niblett on "The Evolution of a Legal Rule." Their conclusion (based on a study of damages rules in construction disputes) is that economic efficiency is only one of several competing forces that influence the development of legal norms within a particular jurisdiction over time.

[Paula Hall]

Mr. Wolf's analysis relies on three unspoken assumptions.

The first is that life is a zero-sum game, where one person's profit is necessarily another's loss. To which I say -- speak for yourself. I do not for one minute believe my self-interest lies in the exploitation and destruction of others.

The second is that profit-seeking consists solely in expropriation. What is there to expropriate if there are no producers? A looter can only take what others have produced, and when the looter runs out of victims, he starves, being unable or unwilling to produce himself. Profits are generated through production, not looting.

The third is that political power and economic power are the same. This is false. Political power is the power of laws and government -- ultimately, the power of a gun. Economic power has nothing to do with guns, but with production and voluntary trade. If and only to the extent that an economically powerful firm lobbies for or takes advantage of favorable regulation, does it wield power similar to governmental power. In that case, the power exercised is a hybrid of economic and political power, but these two types of power remain distinct.

The choice is not between no government and a Hobbesian Leviathan. A government that protected its citizens from criminals and foreign aggressors, and which provided a judiciary to mediate disagreements, would provide all the behavioral constraints needed to ensure that all profit was realized as the result of voluntary trade.

[Kevin Carson]

I would add that much of the confiscation carried out by these confiscatory governments is *on behalf of* TNCs. The nullification of peasants' traditional rights in the land, and the eviction of peasant subsistence farmers by landed oligarchies, all so the land could be used for cash crop cultivation in collusion with agribusiness interests -- all this is a modern reenactment of the Enclosures.

[Tracy W]

Consider a society in which everybody was a profit-maximizer. What would it be like? It would be one in which rulers, soldiers, judges, bureaucrats would take whatever they could. It would be one in which bribery and corruption were the norms.

Actually not necessarily. One of the troubles with taking things violently is that the people you are taking things from tend to not sit there and passively take it. Eventually they figure out how to fight back, be that by themselves or by hiring someone to do the fighting for them. So we see through the development of European history, constraints on the power of rulers and soldiers. The barons who forced King John to sign the Magna Carta were doing it in their own interest, to stop him grabbing their power and their assets. The English parliament who brought Charles II back to the throne after the Interregnum made sure that he had to call Parliament, unlike Charles I. The suffragers (both male and female) were seeking to protect themselves by demanding the vote.

As for judges, if you are writing a contract with someone and both of you anticipate that you may need an arbitrator at some point in the future, then the two of you have an incentive to specify an arbitrator who is acceptable to both of you, which generally means one that is not bribeable by the richer party. So you both have an incentive to seek out honest judges, and thus judges have an incentive to be honest.

And if you are a voter, then you have an incentive to vote for politicians that promise to restrain corruption amongst bureaucrats and judges, and to re-elect ones that actually do manage this.

The process is very very far from perfect at directing self-interest so as to make us all richer, rather than the zero-sum game that Martin Wolf postulates. And it's a puzzle as to why it has happened in some countries, and not in others. But, as far as I can tell from English history, self-interest was the driving force behind the expansion of democracy and limits on the king, not high, disinterested motives.

[hyokon]

I think the article has good points, but may have mischaracterized the profit maximizing individuals's behavior.

Does a merchant tend to deceive a buyer (manipulating the scale for example) to maximize his profits? Usually no. Because he does not want to maximize profits only this time and lose the opportunity to have a return customer (not to mention losing being liked by others which may be an important goal of working hard to begin with). In fact, many sellers give discounts to buyers, sacrificing the short-term profits.

When kids play soccers, they play reasonably fairly without a referee. The game does not usually become a chaos. Why? Because they voluantarily make and follow rules to be able to play the game. A referee is helpful when a violation (or a non-violation) is not clear-cut. I think the same applies to human society. Most of us will treat each other reasonably even without a third-party regulating force most of time. A case needing a third party intervention must be an exception.

[craig charnov]

Having just read the article in Time that Bill Gates postulates, the thought comes to mind that the "do gooder" was not evident prior in the last 3 decades...Where was the contribution to humanity then? Was he and his profiteers when they were busy accumulating and manipulating the scenarios inorder to reach the positions they are now in..The poor, the sick, the diseases of the world were evident three decades ago, where were the contibutions and sanctimonious attitudes then. Is it only when the few have achieved the heights of monetary success that they look down and feel that they then can preach of what should be done. Where were they all along? The middle class contributes the majority to everything in this civilization that continues the machine to move. The artful rich, continue to profit in ways the average can not conceive, they do not have the inside track..They do not have the benefit of the Buffet dollars. Yet, the Gates of this world. what do they actualy accomplish. The world is an important arena but, cureing cancer on the home front is to..Lowering the profit on gas, making it affordable to the working class, finding alternative energy sources, putting people back to work, and in short, bolstering up the foundation of our economy, medicine etc.. without giving up the principles this country was founded on should be of the highest of priorities. Being included in the gainfully unemployed middle aged category, educated, and somewhat informed, corporate america needs to have a wake up call..The new catch phrase is "down sizing". Our situation at home is not good. Concentration should be on the ills of our country first, economic, political, social, dietary etc. We can only help the world if we are healthy....Otherwise, who are we trying to fool, ourselves?

[n p chekkutty]

Martin Wolf: There have to be rules, ethical norms and institutional constraints governing profit-maximizing behavior, to ensure that the maximization operates for the social good.

Reading this sentence in conjunction with the question raised by the above commenter -- about where were their philanthropy in the past three decades-- raises some serious questions, of a fundamental nature. When do we start talking about ethical norms, institutional constraints? Do the ethical norms change, or come to an abrupt end, as one crosses the borders of one's country? Can there be different standards for institutional constraints for different parts of the world?

I feel when we bring in ethical norms and such lofty ideals into the world of business we are getting into deep waters. There can't different ethical yardsticks for business and other forms of human activity. If you are seriously talking about ethics, then you are undermining the very foundations on which the corporate firms have operated on the global scene all these years.

But instead, we shold focus on the legitimacy of the corporate managers in their pursuit of social goals. No one can deny that the corporate world can and should take part in rebuilding our world in a new and better way. The resources and possibilities and technical capability for such a transformation do exist today.

But how can the corporate world attempt to prove its legitimacy, its sincerity of purpose? How can the world believe that they do indeed mean what they say, and it is not just another ploy to maximize profits and bleed the poor white, as they have always done in the past?

So steps are necessary to establish one's credentials, even if it is a Bill Gates. The steps the Gates Foundation memo outlines do not give any hope or evidence that they do mean a serious attempt to engage the real rough world out there. Hope they will reconsider the note in the light of what the world expects from them and the most arduous tasks they themselves take upon their shoulders.

[Martin Wolf]

I don’t know whether it is normal to respond to comments here. But since I do so on the FT’s economists’ forum, I will do so here, too.

Michael Martin has got it about right. But the distinction between rational self-interested behaviour and profit-maximisation is forced. More precisely, profit-maximising behaviour for the firm derives from utility maximising behaviour of players in a competitive economy. The question I am asking, of course, is what constrains people (and so the institutions they control) to pursue their utility maximising behaviour in such socially productive, rather than unproductive, ways.

Paula Hall seems to have misunderstood what I said pretty completely. I assume that is my fault. So let me elucidate my view, in response to her comments.

First, I do not believe and nothing I said above implies that all life is a zero-sum game. As an author of a staunch defense of globalisation, how could I possibly believe that? Some activities are positive sum and some are negative sum. The trick for society is to encourage the former and discourage the latter. This is much harder than many suppose, as knowledge of history and the contemporary world would show.

Second, of course I do not believe that profit-seeking consists solely in expropriation. On the contrary, in the sphere of the competitive economy and in the absence of unaddressed externalities, profit-seeking is highly socially beneficial. But this is not the only sort of “game” possible. Moreover, as the late and great Mancur Olson noted, looters do not necessarily run out of victims. The stationary bandit can keep going for millennia: look at the history of the pharaoh’s Egypt. Intelligent looting was, as I argued, the basis for virtually all vast fortunes until the modern economic era. It’s all a question of leaving enough geese alive and protecting them from other foxes.

Third, I fully understand the difference between political and economic power. Indeed, I have often written on this important distinction. What I am asking is how one ensures that the holders of the former do not exploit their position to gain more resources, at the expense of the latter. Ms Hall suggests that a limited government is all one needs. That is certainly arguable. The question I raised, however, is how one ensures that this is what one actually gets. It is far more difficult than most contemporary westerners believe. One cannot assume such a state. One has to ask how a society in which self-interest dominates creates and sustains such a state

Tracy W gives a possible answer: the plundered may fight back. In one very famous case, the English one, they succeeded, more or less. They then created a political system in which those vulnerable to plunder agreed to support a government that protected them. This was the origin of contemporary representative democracy. The history of the world is, however, the history of failures of the plundered to fight back successfully. That is, after all, why slavery and serfdom were pervasive institutions throughout human history. The Chinese empire had a long history of peasant revolts, but none changed their system of government. Even in an advanced modern democracy it is hardly unheard of for people to combine to plunder one another: that is the history of protection against cheap imports, after all.

Hyokon is perfectly right. The merchant does not have an interest in deceiving his buyers if he expects repeated transactions. But what if all his transactions are one-offs and it takes a very long time to discover that his merchandise is defective? We all know about second-hand car salesmen, after all. What if he could dump poison without fear of detection, as I noted?

An informal football game is a good example of a situation in which rules are enforceable without external enforcement. But the conditions are special: the penalty for breaking the rules are obvious, since the other players will cease to play with the cheaters; and it is easy to identify cheaters. In a complex society of hundreds of millions of strangers, all this is far more difficult. It is why we have governments, judges, police, armies and so forth.

I do not think there is much useful I can say in response to Craig Charnov, except that I sympathise with his view on the new persona of Bill Gates, but not with his shrunken moral horizons.

[Jeff Mowatt]

The plundered may fight back. Ironically, that was the very argument used, that they will fight back in defence of their lives, to justify what was to be one of several origins of 'creative capitalism'. One man at least had the opportunity to make the pitch to the then President, by examining the inability of both conventional capitalism and the nonprofit paradigm together to address increasing inequity. This was advocacy for a complete break with the nonprofit model, proposing instead one of a profit for social purpose business paradigm.

The rest as they say, is history. from then on it was possible to make an investment case for developing and transitioning democracy, the business case for full cost recovery through enlightened self-interest.

It will be found, in both theory and practice, here:

http://www.p-ced.com

[Amitav]

This is an excellent essay, and it raises an interesting question that I don't think we've discussed yet. One of my key assumptions in my contribution and comments was that some companies can act in socially beneficial ways when those ways are demonstrably in their self-interest. I may have ignored the fact that often the paramount self-interest is in remaining in the good graces of the host government. Setting aside the issue of developing strong local norms and standards in poor countries, how should global companies with well-established "home" norms operate in countries with weak norms? Should the established norms always prevail? Should the Australian mining company have more stringent safety standards than required when operating in Africa? Should the U.S. consumer products company have similar employee diversity goals in India? Should the British bank have the same customer privacy policy in China? What about when the "home" norms conflict with local laws, e.g., the case of Yahoo revealing user information in China? These seem to be operating practices that may increase non-wage costs but conform to strongly-engrained ethical standards in the home country, such as safety, privacy, etc.

[Martin Wolf]

I thank Amitav for grasping what I was trying to say. Yes, indeed, what should western companies do in corrupt environments? What should they do if aiding the corruption that professor Landsburg rightly condemns happens to be the profit-maximising thing to do? Many western banks offer safe homes for corruptly extorted funds, for example. In short, where do ethical restraints on profit-maximising behaviour come in, if at all?

[Jeff Mowatt]

I grasp it too Michael. This medium however doesn't offer me a voice. Otherwise I might be able to describe how our work in Russia and Ukraine, exposed and dealt with these issues.

We've certainly encountered it, exposing and blocking it where we could. That for me is very much part of our advocacy. Part of what's being called 'Creative Capitalism' is for us a strategy for dealing with it, which will never be understood without reading about it.

[Michael F. Martin]

Kudos to Mr. Wolf for responding to his commenters (a norm not established in this forum). I'm glad I partially understood his argument. A quick reply to Mr. Wolf's response:

The question I am asking, of course, is what constrains people (and so the institutions they control) to pursue their utility maximising behaviour in such socially productive, rather than unproductive, ways.

Messrs. Wolf, Landsburg, and Posner (and probably other posters) share an implied premise -- their belief in the fallacy of composition as applied to aggregation of utility functions. According to this view, aggregate utility cannot be different than the sum of its parts.

But the fallacy of composition does not apply to a nonlinear summation. To be concrete, a division of labor does not increase productivity linearly; it multiplies productivity. In general, cooperation fosters more cooperation in a virtuous cycle. I think that capitalism itself -- because it adds the fuel of self-interest to the fire of cooperation -- is constitutive of social norms of cooperation.

In other words, we need to break free of economic and cultural theories that require linear models of aggregated utility. We've always known these to be approximations anyway; what we now know also is that the approximations can lead to negative social norms.

[Michael F. Martin]

Because I'm speaking a little abstractly here, I'll just say that emergent phenomena (such as Hayek's spontaneous ordering) are all examples of systems in which the fallacy of composition fails.

[Martin Wolf]

"I think that capitalism itself -- because it adds the fuel of self-interest to the fire of cooperation -- is constitutive of social norms of cooperation." This remark by Michael Martin is correct. Indeed, it is a very important point. It is why citizens of a country like the US often find it very difficult to understand what is going on in a society where interactions are all seen in zero-sum or negative-sum form. So how does one shift the latter into the former?

[Tracy W]

This was the origin of contemporary representative democracy. The history of the world is, however, the history of failures of the plundered to fight back successfully.

Until the 19th century. After then, the history of the world changes.

The Chinese empire had a long history of peasant revolts, but none changed their system of government.

Huh? This is China we are talking about? In the 20th century, we had the fall of the Qing dynasty, an attempt at democracy under Sun Yet-San, and the Chinese Communist Revolution. The Chinese have changed their system of government more often in the 20th century than the Americans.

Communism turned out to be a massive failure, causing the deaths of millions in China. But as far as I can tell, most supporters of Communism initially honestly thought it would improve things, whatever ideological blinkers they acquired later.

And then, after Mao's death, we have Deng Xiaoping's reforms, not driven by a peasant revolution but by access to knowledge about what improves an economy.

China still has many problems. But it's an example that things can get better in at least some ways.

Even in an advanced modern democracy it is hardly unheard of for people to combine to plunder one another: that is the history of protection against cheap imports, after all.

And that's also why we have the World Trade Organisation, as a reaction to that.

[Martin Wolf]

The Chinese empire survived more than two thousand years before it broke down, not as a result of peasant revolts, per se, but as a result of its failure to cope with external pressures and foreign ideas (which animated Sun Yat-Sen, for example). As Tracy W notes, we have lived in a somewhat different world since the 19th century. Instead of directly plundering one another, we have learned how to plunder (or, if you like, exploit) the resources of the earth, instead. This shift is what makes today's world hopeful. Even so, moves away from the predatory state are slow, painful and incomplete. Even today, China shows many of the symptoms of a predatory state: look at the land-grabs going on across the country, for example.

[Tracy W]

The Chinese empire survived more than two thousand years before it broke down, not as a result of peasant revolts, per se, but as a result of its failure to cope with external pressures and foreign ideas (which animated Sun Yat-Sen, for example).

This is similar to English history. The Magna Carta was signed because King John was weak after losing a war with France and it was forced on him by barons, not by a revolt by peasants. The English Civil War happened because King Charles I needed the support of the English Parliament to suppress a rebellion in Scotland, and of course back then Parliament was elected by the gentry, peasants didn't get a vote. I don't know the source of the ideas of the barons and of Parliament, but English society was very much influenced by continental European (eg the rise of Protestanism) and Ancient Roman and Greek ideas during this time. One could summarise those two big movements towards restraining government as the English crown failing to cope with external pressures and foreign ideas.

As Tracy W notes, we have lived in a somewhat different world since the 19th century. Instead of directly plundering one another, we have learned how to plunder (or, if you like, exploit) the resources of the earth, instead.

I am very curious as to where you think food, water, shelter, tools and weapons, clothing, etc came from if we only learnt how to plunder the resources of the earth since the 19th century. We can't all survive by directly plundering each other, a lot of someones have to be producing.

Even so, moves away from the predatory state are slow, painful and incomplete.

However, slow and incomplete moves work out far better in practice than swift, drastic moves. The history of remaking society into a better form all at once is disastrous. The French Revolution led to the Reign of Terror and then the Napoleanic dictatorship where he killed most of France's young men. The Russian Communist Revolution led to famine, and Stalin's Great Terror. The Chinese Communist Revolution led to famine and the Cultural Revolution. The Cambodian Communist Revolution led to about 25% of the country dead. Fast moves that seek to perfect the society are far more painful than slow, incomplete moves.

[Michael F. Martin]

@Martin Wolf

So how does one shift the latter into the former?

President Lincoln had a theory, which he discussed in his Lecture on Inventions and Discoveries .

I wrote about this speech here (and see the better version of it linked in this post).

And see also this post , which offers another view on the evolution of cooperation at successively longer and larger scales.

In a nutshell, I will say that our future depends crucially on our willingness to include slower and more off-beat people into productive activities within our economy. That in turn requires us to leverage technological innovations into more allocatively efficient means for connecting smaller and smaller and more and more dispersed units of supply and demand. Distributive inequality gets less attention from economists in the U.S. because the rising tide of globalization has lifted all boats in the U.S. But there are limits to the credibility of a system that promises the ability to sleep under bridges to rich and poor alike. We shouldn't be pushing those limits. We should be vigilant and relentless about keeping the playing field level. Particular attention should be paid to the slowest and most off-beat members of society, which is an interpretation of Rawls's second principle.

[Tracy W]

In a nutshell, I will say that our future depends crucially on our willingness to include slower and more off-beat people into productive activities within our economy.

Nope. Including slower and more off-beat people may be nice, but it's not crucial to our future. We've been managing quite happily with current levels of labour force participation, and the likely threats, such as global warming, or asteroid strike, depend more on scientists and engineers and policy-makers than on slow people. (There are already ample off-beat people amongst the scientists and engineers and policy-makers).

But there are limits to the credibility of a system that promises the ability to sleep under bridges to rich and poor alike. We shouldn't be pushing those limits.

What are those limits? Which society has collapsed in the past because it promised the ability to sleep under bridges to rich and poor alike? I can't think of a single one. I don't think we need to worry about pushing those limits.

We should be vigilant and relentless about keeping the playing field level.

Nah, the world survives happily with a lot of messiness. Attempts to enforce rigorous equality have led to disaster (see China, Cambodia). We most definitely should not be relentless.

Particular attention should be paid to the slowest and most off-beat members of society, which is an interpretation of Rawls's second principle.

Personally I would prefer to live in a society where we are all treated as equals (though I don't think we should be relentless about pursuing that). Some people may need extra assistance, but I don't think that means they need particular attention - the parents I know of disabled kids do reasonable jobs of paying particular attention to their non-disabled kids as welll. Just because someone is normal doesn't mean they are less deserving of attention. I also think that if anything we make too much fuss about creativity (which I guess is what you mean by "off-beat"), and not enough about rigorous evaluation, testing, etc. Creativity is only one part of making improvements.

[Martin Wolf]

It appears I can go on debating with Tracy W to the crack of doom. I will ignore her first and last point, but focus on the middle one, because it is fundamental.

Tracy W asks "where I think food, water, shelter, tools and weapons, clothing, etc came from if we only learnt how to plunder the resources of the earth since the 19th century. We can't all survive by directly plundering each other, a lot of someones have to be producing."

I should have thought it obvious that I understand this. So what was I trying to say in this very brief remark?

It is that the world economy changed after the industrial revolution in a profound way. Prior to that era, the world's economies had three dominant characteristics: average incomes were close to subsistence, the principal direct energy input was animal (particularly human) labour (of course, itself derived from the sun and the fruits of the earth), and economies hardly grew.

In such an economy, the few could enjoy higher standards of living than the toiling masses only by extracting a small surplus from each member of the latter. That is what successful predatory states did: at its crudest, they received the surplus in return for protection from other predators. This is why serfdom, slavery and similar systems were pervasive. This is not to deny that trade played a useful and important role. But it was marginal. The Confucian social hierarchy (with the peasant above the merchant) reflected that.

In today's economy nearly all the toiling is done by machines driven, directly or indirectly, by the energy input from fossil fuels. This has created vast abundance, with huge numbers of people living far above subsistence. It has also created sustained economic growth. The realm of the merchant - or more broadly, of the exchange economy - has become vastly bigger. Wealth no longer depends on extraction of a surplus from the labouring peasantry.

So that is what I meant by the transformation since the 19th century. It is why slavery and serfdom have disappeared. It is also why democracy has increasingly emerged as the dominant system of government. It has many other implications, too. But I will leave these for now.

This is my last word, anyway.

[Tracy W]

Hi Martin,

Thanks for explaining your comment. I am surprised that you date the change to the 19th century, my understanding is that the Industrial Revolution started before then, and indeed had much deeper roots than that.

I am curious as to why you say: "This is not to deny that trade played a useful and important role. But it was marginal."
How did you measure that the role of trade, and work it out to be marginal? I am not aware of any communities in England that were self-sufficient during medieval times.

Whenever people make these sorts of sweeping statements I am deeply curious about which sort of data they might have used. I suspect that many times there is no data behind such assertions, but every now and then someone does turn out to have some ingenious way of measuring these things. It's a shame that you have decided to finish your contribution to this debate.

[steve jennings]

Mr. Wolf briefly mentions the link between external agents and profit-maximising governments, but he makes it sound like an accident, stated almost in the passive voice. In reality the corporate-democracy (one $ one vote) that we "enjoy" in Europe and the US is only possible because of the planned, organised and controlled exploitation of resource rich areas of the world by our "elites". Cecil Rhodes understood very well the need to put calories on the tables of the population at home in order to prevent a revolt against the ruling classes,and this could only be achieved by the exploitation of resources in the colonies (mainly India and bits of AfrIca).
Any and all attempts by colonial peoples to nationalise their resources was met with brutal force, first by the UK, and after about 1950, the USA. This persists right up to today (Venezuela (failed US coup against Chavez), Iraq, Iran, Afghanistan, Colombia, Chile).

If Mr. Wolf (or any other main stream economist) was really interested in doing anything about the appaling state of the world or even shedding a little more light on it then he would spend a few more words on this in his column in the FT, and less on the philosophy of Kant.
Of course if he did so he would soon be fired.
Hmmm where does that place Mr. Wolf and the FT in the world of coercion and profit maximisation to which he alludes?
Regards
Steve Jennings

I might do what Mr Jennings suggests if I didn't believe what he is saying is nonsense on many levels, from the "appalling state of the world" onwards. It has apparently slipped his awareness that most of the world's valuable resources have indeed been successfully nationalised. Little good, on the whole, this has done the nationalisers. Still, I find a certain nostalgic charm in reading a rehash of Lenin's ideas on imperialism.

[Paula Hall]

My thanks to Martin Wolf for engaging the commenters on this thread. As Mr. Wolf has said he's offered his last words on this subject, I won't on this thread post a long comment on his response to my first comment above. If Mr. Wolf -- or anyone -- is interested, I have posted an additional comment on my blog, here: http://www.msthink.com/2008/08/response-to-martin-wolf.html.