The economic record of slavery, in general, as a source of lasting economic development is unimpressive. Slavery was concentrated in the southern part of the United States and in the northern part of Brazil—and, in both cases, these remained the less prosperous and less technologically advanced regions of these countries. Similarly in Europe, where slavery persisted in Eastern Europe long after it had died out in Western Europe, the latter being for centuries the faster growing and more prosperous part of the continent, right up to the present day. Slavery continued to exist in the Middle East and in parts of sub-Saharan Africa long after it was banished from the rest of the world, but the Middle East and sub-Saharan Africa are today places noted more for poverty than for economic achievements.
In short, forcible transfers of wealth from some nations or peoples to other nations or peoples, whether through conquest or enslavement, can be large without producing lasting economic development. A vast amount of human suffering may produce little more than the transient enrichment of contemporary elites, who live in luxury and invest little or nothing for the benefit of future generations. What was said of serfdom in Russia, that it simply put “much wealth in the hands of a spendthrift nobility,”{939} would apply to other systems of oppression elsewhere that contributed little or nothing to economic development.
By and large, imperialism cannot be said unequivocally to have been a net economic benefit or a net economic loss to those who were conquered. In some cases, it was clearly one rather than the other. But even where there were long-run benefits to the descendants of the conquered peoples, as in Western European nations conquered by the Romans, the generations that were conquered and lived under Roman oppression were by no means necessarily better off. However, even such a British patriot as Winston Churchill said, “We owe London to Rome,” {940}because the ancient Britons created nothing comparable themselves. Yet the sufferings and humiliations inflicted on the ancient Britons provoked a mass uprising that was put down by the Romans with a merciless slaughter of thousands.
What can be said from an economic standpoint is that there is little compelling evidence that current economic disparities between nations in income and wealth can be explained by a history of imperial exploitation. There were usually large economic or other disparities before these conquests, and these pre-existing disparities facilitated worldwide conquests by relatively modest-sized nations like Spain and Britain, each of which conquered vastly larger lands and populations than their own.
IMPLICATIONS
Trying to assign relative weights to the various factors behind economic differences would be an ambitious and hazardous undertaking. Even a sketch of just some of the individual factors involved in economic advancement suggests that equal economic outcomes for different regions, races, nations or civilizations have been unlikely in principle and rare empirically. When the various interactions of these factors are considered, the chances of equal outcomes become even more remote, as the number of combinations and permutations increase exponentially. For example, regions with similar rivers are unlikely to have similar economic outcomes if the lands through which the rivers flow are different, or the cultures of the people living on those lands are different, or the waterways into which the rivers empty are different in proximity to markets or in other ways.
Interactions are crucial. Despite the importance of geographic settings in limiting or extending opportunities for economic development, there can be no geographic determinism, since it is the interactions of the physical world with changing human knowledge and varied human cultures which help determine economic outcomes. Most of the substances found in nature that are natural resources for us today were not natural resources for the caveman, because human knowledge had not yet reached the level required to use those substances for human purposes. Only as the frontiers of knowledge advanced did more and more substances become natural resources, in unpredictable times and places, changing the relative geographic advantages and disadvantages of different regions. Even when geography is unchanging, its economic consequences are not.
Nevertheless the effect of geographic influences can be considerable in a sequence of events involving many other factors. Peoples isolated geographically for centuries—whether in the Balkan mountains or in the rift valleys of Africa—tend to be culturally fragmented as well. They may also tend to have highly localized loyalties (“tribalism” or “Balkanization”) that make it more difficult for them to combine with others to form larger political units like nation-states. In turn their individually small societies may for centuries be vulnerable to marauding enslavers or imperial conquerors.
Nor do cultures which originated in places that were geographically isolated for centuries quickly vanish when modern transportation and communications penetrate that isolation. Some people define environment as the physical, geographic or socioeconomic surroundings as of a given time and place. But this leaves out the cultural patterns inherited from the past, which can differ greatly among groups who are all currently living in the same setting, with the same opportunities, but leading to very different economic outcomes among these groups. Although the children of Italian and Jewish immigrants to the United States in the early twentieth century lived in very similar surroundings, and often attended the same neighborhood schools, they came from cultures that put very different emphasis on education, and these children performed very differently in school,{941} leading to different economic patterns as adults.{942}
Even the relatively few individual factors sketched here show many complications when examined in greater detail {xxxiv}—which is to say that the variables at work increase exponentially for each of these factors, making equal outcomes ever more unlikely. Other factors not explored here—such as demographic differences among regions, races, nations and civilizations—simply add to the complications and the inequalities. When the difference in median age between nations, or between racial or ethnic groups within a given nation, can be ten or twenty years, the likelihood that different peoples would have even approximately equal economic outcomes, despite their many years’ differences in adult economic experience, is reduced to the vanishing point.
While there are discernible geographic, cultural and other patterns behind many economic inequalities among peoples and nations, there are also sheer happenstances that can play major roles. Wise decisions or foolish mistakes made by those who happened to be political or military leaders of particular peoples at crucial junctures in history can determine the fate of nations, empires and generations yet unborn. The decision of China’s leaders, when that was the most advanced nation in the world, to seal off their country from the rest of the world, forfeited China’s preeminence in the centuries that followed.
The role of chance when closely matched armies clash on chaotic battlefields can make the difference between victory and defeat “a near run thing,” as the Duke of Wellington said of the battle of Waterloo, which he won against Napoleon—and which determined the fate of Europe for generations to come. Had the battle of Tours in 732 or the siege of Vienna in 1529 gone the other way, this could be culturally a very different world today, with very different economic patterns.
Other happenstances include the great biological vulnerability of the indigenous peoples of the Western Hemisphere to the diseases brought by Europeans, which diseases often decimated the native populations more than the European weapons did. Because the Europeans were far less vulnerable to the diseases of the Western Hemisphere, the outcomes of many of the struggles between the two races were essentially predetermined by microorganisms that neither of these races knew existed at the time. {xxxv} It was said of a kindly Spanish priest who went among the native peoples in friendship, as a missionary, that he was probably responsible for more deaths among them than even the most brutal Conquistador.{943}
Taking into account both discernible geographic, cultural and other patterns that present either wide or narrow opportunities for different peoples in different places and
times, and unpredictable happenstances that can disrupt existing patterns of life or even change the course of history, suggests that neither equality of economic outcomes nor the indefinite persistence of a particular pattern of inequalities can be assumed.
What the centuries ahead will be like, no one can know. But much may depend on how well the many peoples and their leaders around the world understand what factors promote economic growth and what factors impede it.
PART VII:
SPECIAL ECONOMIC ISSUES
Chapter 24
MYTHS ABOUT MARKETS
Many a man has cherished for years as his hobby some vague shadow of an idea, too meaningless to be positively false.
Charles Sanders Peirce{944}
Perhaps the biggest myth about markets comes from the name itself. We tend to think of a market as a thing when in fact it is people engaging in economic transactions among themselves on whatever terms their competition and mutual accommodations lead to. A market in this sense can be contrasted with central planning or government regulation. Too often, however, when a market is conceived of as a thing, it is regarded as an impersonal mechanism, when in fact it is as personal as the people in it. This misconception allows third parties to seek to take away the freedom of individuals to transact with one another on mutually agreeable terms, and to depict this restriction of their freedom as rescuing people from the “dictates” of the impersonal market, when in fact this would be subjecting them to the dictates of third parties.
There are so many myths about markets that only a sample can be presented here. For example, it is common to hear that the same thing is being sold at very different prices by different sellers, apparently contradicting the economics of supply and demand. Usually such statements involve defining things as being “the same” when in fact they are not. Other common misconceptions involve the role of brand names and of non-profit organizations. While these are only a small sample of myths about prices and markets, looking at these myths closely may illustrate how easy it is to create a plausible-sounding notion and get it accepted by many otherwise intelligent people, who simply do not bother to scrutinize the logic or the evidence—or even to define the words they use.
One of the reasons for the survival of economic myths is that many professional economists consider such beliefs to be too superficial, or even downright silly, to bother to refute them. But superficial and even silly beliefs have sometimes been so widespread as to become the basis for laws and policies with serious and even catastrophic consequences. Leaving myths unchallenged is risky, so scrutinizing silly notions can be a very serious matter.
PRICES
There seem to be almost as many myths about prices as there are prices. Most involve ignoring the role of supply and demand but some involve confusing prices with costs.
The Role of Prices
The very reasons for the existence of prices and the role they play in the economy have often been misunderstood. One of the oldest and most consequential of these myths is a notion summarized this way:
Prices have been compared to tolls levied for private profit or to barriers which, again for private profit, keep the potential stream of commodities from the masses who need them.{945}
Crude as this notion might seem after examining the many economic activities coordinated by prices, it is an idea which has inspired political movements around the world, movements that have in some cases changed the history of whole nations. These movements—socialist, communist, and other—have been determined to end what they have seen as the gratuitous payment of profits that needlessly add to the prices of goods and correspondingly restrict the standard of living of the people.
Implicit in this vision is the assumption that what entrepreneurs and investors receive as income from the production process exceeds the value of any contribution they may have made to that process. The plausibility of this belief and the conviction that it was true inspired people from many walks of life to dedicate their lives—sometimes risking or even sacrificing their lives—to the cause of ending “exploitation.” But their own political success in replacing price-coordinated economies with economies coordinated by collective political decisions took the issue beyond the realm of beliefs and into the realm of empirical evidence. During the course of the twentieth century, that evidence increasingly made it painfully clear that eliminating price coordination and profits did not raise living standards but tended to make them lower than in countries where prices remained the prevailing method of allocating resources.
For decades, and even generations, many nations clung to their original assumption and the policies based on it, despite economic setbacks that were often attributed to short run “growing pains” of a new economic system or to isolated individual mistakes, rather than to problems inherent in collective decision-making by third parties. However, by the end of the twentieth century, even socialist and communist countries began abandoning government-owned economic enterprises, and all but a few die-hard countries had begun allowing prices to function more freely in their economies. A very elementary lesson about prices had been learned at a very high cost to hundreds of millions of human beings.
No one would say that wages were just arbitrary charges added to the prices of goods for the financial benefit of workers, since it is obvious that there would be no production without those workers, and that they would not contribute to production unless they were compensated. Yet it took a very long time for the same thing to be realized about those who manage economic enterprises or those whose investments pay for the structures and equipment used in such enterprises. Whether the payments received by those who contributed in these ways were unnecessarily large is a question answered by whether those same contributions are available from others at a lower cost. That question is one which those who are doing the paying have every incentive to have answered by hard facts before they pay out their own hard cash.
Different Prices for the “Same” Thing
Physically identical things are often sold for different prices, usually because of accompanying conditions that are quite different. Goods sold in attractively decorated stores with pleasant, polished and sophisticated sales staffs, as well as easy return policies, are likely to cost more than physically identical products sold in a stark warehouse store with a no-refund policy. Christmas cards can usually be bought for much lower prices on December 26th than on December 24th, even though the cards are physically identical to what they were when they were in great demand before Christmas.
A consumer magazine in northern California compared the total cost of buying the identical set of food items, of the same brands, in various grocery stores in their area. These total costs ranged from $80 in the least expensive store to $125 in the most expensive. Indeed, they ranged from $98 to $103 at three different Safeway supermarkets.
Part of the reason for the variations in price was the variation in the cost of real estate in different communities—the store with the lowest prices being located in less expensive Fremont and the one with the highest prices being located in San Francisco, whose real estate prices have been among the highest of any major city in the country. The cost of the land on which the stores sat was different, and these costs had to be recovered from the prices charged the stores’ customers.
Another reason for price differences is the cost of inventory. The cheapest store had only 49 percent of the items on the shopping list in stock at a given time, while all three Safeway stores had more than three-quarters of the items in stock.{946} Price differences reflected differences in the costs of maintaining a larger inventory, even when the particular commodities were physically the same.
Customers’ costs, measured in the time spent shopping, also varied. It varied both in the time that a customer would have to spend going from store to store to find all the items on a shopping list and in the time spent in checkout lines. One upscale supermarket was rated “superior” in the speed of its checkout line by 90 percent of its cus
tomers but one of the low-price warehouse stores received a similar rating from only 12 percent of its customers.{947} Consumers pay in both money and time, and those who value their time more highly are often willing to pay more money in order to save that time and the exasperation of waiting in long lines or having to go from store to store to buy the all the items on their shopping lists. In short, people shopping at different supermarkets were paying different prices for different things, although superficially these might be called the “same” things, based solely on their physical characteristics.
“Reasonable” or “Affordable” Prices
A long-standing staple of political rhetoric has been the attempt to keep the prices of housing, medical care, or other goods and services “reasonable” or “affordable.” But to say that prices should be reasonable or affordable is to say that economic realities have to adjust to our budget, or to what we are willing to pay, because we are not going to adjust to the realities. Yet the amount of resources required to manufacture and transport the things we want are wholly independent of what we are willing or able to pay. It is completely unreasonable to expect reasonable prices. Price controls can of course be imposed by government but we have already seen in Chapter 3 what the consequences are. Subsidies can also be used to keep prices down, but that does not change the costs of producing goods and services in the slightest. It just means that part of those costs are paid in taxes.
Often related to the notion of reasonable or affordable prices is the idea of keeping “costs” down by various government policies. But prices are not costs. Prices are what pay for costs. Where the costs are not covered by the prices that are legally allowed to be charged, the supply of the goods or services simply tends to decline in quantity or quality, whether these goods are apartments, medicines, or other things.