How the big pieces fit together: Europe’s place in the multipolar world

by Dr. John C. Hulsman

Introduction: The Lesson of the G7 train wreck

It’s official. After the calamitous G7 summit meeting in Canada, it is clear that an unbound Donald Trump is Europe’s worst nightmare. Although with typical unnecessary narcissism, he came late and left early, what Donald Trump did in his few short hours on Canadian soil will be commented on for years, as he emerged as a virtual caricature of everything Europeans hate about Americans.

Preternaturally over-confident and under-prepared, arrogant, and self-regarding, the president urged Russia be readmitted to the G7 club (despite its iron-clad control of Crimea and ruination of eastern Ukraine), doubled down on enraging European and Canadian allies alike over the brewing trade war (‘America is not a piggy bank’), and generally confirmed everyone’s worst fears that the White House actually prefers dealing with America’s authoritarian foes, such as China’s Xi Jinping, North Korea’s Kim Jong-un, and Russia’s Vladimir Putin, rather than the vexing, well-meaning, but weak democratic pygmies who populate the standard multilateral meeting. Surely, after such an odious display the rest of the democratic world must rise up in righteous indignation and…

Well, the best I can come up with is snub Trump administration appointments at formal cocktail parties. For the bleak truth lying behind Donald Trump’s appalling, wrong-headed policies and behaviour in Canada is that the rest of the democratic world is pathetically weak and bereft of agency. As such, while they seethe with disgust at having to put up with the odious president, there is nothing practically they are prepared to do to stop him. This most transactional of presidents has inadvertently but graphically illustrated how practically irrelevant America’s western allies, particularly in Europe, truly are.

Be careful what you wish for

This is all so different from the dreams of a new multipolar world that so animated European thinkers during the long days of the bipolar Cold War. Then, European policy intellectuals—particularly in France—dreamed of living in a multipolar age that would follow victory over the Soviet Union in the Cold War, a time when Europe would finally achieve the strategic flexibility to have its own independent foreign and security policy, no longer shackled to (but still vaguely allied with) the US. But this long-term strategic goal amounted to little more than emotional wish-fulfilment, predicated as it was on two unremarked upon suppositions.

The first was that the relative diminution in American global power would be meekly accepted by a US long used to running things. In other words, a series of President Obamas would shepherd the US to accept its new central, but relatively more limited, structural position in the multipolar world. To put it mildly, a President Trump—whose very campaign slogan ‘Make America Great Again’ is an overly emotional refutation of America’s relative decline—was not reckoned on.

Second, it was blithely assumed by European thinkers that their continent would undoubtedly and effortlessly emerge as the principal new force in this new world of many powers. As China rose during the latter days of the Cold War, following Deng Xiaoping’s historic opening in December 1978, European thinkers did foresee a world where a rising Asia would join America, Europe, Japan, and a diminished Russia as the main players on the global strategic scene (India was little thought of). But the notion that Europe would be by a long way the weakest of these great powers—politically divided, economically sclerotic, and militarily puny—never entered their thoughts.

As a result, while European thinkers seemed to pine for a multipolar world, in reality it was a new era where their continent was rising—as America was falling and the Soviets were non-existent—that was their real dream. Donald Trump’s petulant performance (and Europe’s anaemic non-response) at the just concluded G7 meeting glaringly illustrates that today’s world is simply not the sort of multipolarity European thinkers ever had in mind.

What Europe Should Do

Most foreign policy articles (and I have written over 500 of them) are cries in the wilderness, futile exercises where the analyst proposes outcomes that they know will never come to pass. Nevertheless, it remains the duty of every political risk analyst to try, to posit what can be practically done to retrieve strategic situations, for irretrievable decline is a choice and not a preordained destiny.

In this spirit, what can Europe do to make itself relevant as a Great Power in the real multipolar era we actually now live in? First, psychologically accept that while Trump is an extreme case, American leaders in general are transactional in nature; they will only take European concerns on board if it is viewed as a serious power capable of going its own way in terms of genuine practical policy consequences. Global politics is not a debating society; what matters are the views of the great strategic players, and the power they bring to bear—political, economic, strategic, diplomatic, and social—to further their interests. Europe must stop passively watching the world, and either master history, or history will surely master it.

Second, the Europeans have to act in a far more unitary manner in terms of foreign and security policy. Russia, an economic basket case in comparison (its economy is smaller than that of Italy), is the relevant comparison. For all that it is a corrupt, demographically decaying one-trick economic pony, a decrepit gas station utterly dependent on the spot price of oil and natural gas, Moscow punches far above its actual weight on the global scene.

The reason? President Putin can make decisive, unitary, foreign policy decisions for his country that are quickly acted on. Russia—as the Crimea episode illustrated—is still prepared to spend blood and treasure, to make real sacrifices to further the country’s foreign policy goals and interests. At present, I am not sure many in Brussels would be prepared to sacrifice a week’s holiday to do much of anything. For once and for all, Europe and its leaders have to decide if their foreign policy amounts to merely virtue signalling, or whether they are prepared to make the sacrifices to actually matter in the world.  

 To do so, an inner core of the key western European states—Germany, France, Italy, Spain, and The Netherlands—must move ahead, and actually begin to craft such a common foreign policy. Failure to do so will inevitably lead the other great powers to cherry pick Europe, to keep dividing the place precisely because it is inherently divided. It is not the fault of the outside powers, as states since time immemorial have taken advantage of their rival’s weaknesses. Rather it is the fault of a Europe that simply can’t get its act together.

Finally, as the mediocre age of Merkel subsides, endemic problems must be solved, rather than merely managed. Across the continent, Europe must free up its animal spirits and find a way to increase average growth rates to around two percent, if horrendous rates of youth unemployment and endemic economic torpor are to be righted. President Macron’s courageous and largely successful labour market reforms are a start, by more needs to be done.

With France as a nucleus, and after decades of torturous (and maddening) inaction, the major European countries must commit themselves to some level of serious defence spending, as without an army their moralistic lectures are just that, and nothing more. Finally, and again Macron is onto something here, ‘A Certain Idea of Europe,’ the idea of a strong, distinct, unique and blessed Europe, a sacred place whose interests and values are worth fighting for on the global stage, must be advanced as a unifying clarion call to action.

It is not too late for Europe to emerge as its thinkers once dreamed it would, and Trump’s odious behaviour in Canada surely serves as a call to arms. But it is one minute to the midnight of Europe’s strategic irrelevance.

Dr. John C. Hulsman is President and Managing Partner of John C. Hulsman Enterprises, a prominent global political-risk consulting firm. He is the author of To Dare More Boldly: The Audacious Story of Political Risk. He lives in Milan, Italy.

Michael Best on How Growth Really Happens

BestAchieving economic growth is one of today’s key challenges. In this groundbreaking book, Michael Best argues that to understand how successful growth happens we need an economic framework that focuses on production, enterprise, and governance. Best makes the case that government should create the institutional infrastructures needed to support these elements and their interconnections rather than subsidize individual enterprises. The power of Best’s alternative framework is illustrated by case studies of transformative experiences previously regarded as economic “miracles”: America’s World War II industrial buildup, Germany’s postwar recovery, Greater Boston’s innovation system, Ireland’s tech-sector boom, and the rise of the Asian Tigers and China.Accessible and engaging, How Growth Really Happens is required reading for anyone who wants to advance today’s crucial debates about industrial policy, free trade, outsourcing, and the future of work. 

Why is the study of economic “miracles” important?

National and regional experiences of rapid growth that lack easy explanations are often casually ascribed to divine intervention. Over two dozen national and regional experiences of rapid growth lacking explanation have been dubbed ‘miracles.’ These ‘miracles’ are unexpected and outside the scope of the conventional policymaking mindset. This book brings several such purported miracles back to earth. It offers an explanation in terms of an economics anchored by fundamental principles of production and business organization. The claim is that we can learn about how capitalist economies function and malfunction from examining cases of rapid and transformative growth. The lesson is that there is no divine intervention, just a man-made conjunction of capabilities.

What does the book do?

The book characterizes the economic policymaking framework and implementation means common to the rapid growth experiences. The framework is informed by a historical genealogy of major economic thinkers that have contributed to an economics of transformative growth. It is an economics of capability development and mutual adjustment processes in which changes in business organization, production system, and skill formation are inextricably bound together. The three domains are not separable and additive components of growth, but mutually interdependent sub-systems of a single developmental process. No one of the three can contribute to growth independently of mutual adjustment processes involving all three. I call this the capability triad. 

What unites the neglected economic theorists that shed light on transformative experiences?

The economic theorists whose ideas are discussed in this book examine the innovation dynamics that underlie productivity growth. They share an alternative economics methodology for understanding how economies function and for informing and conducting policymaking. Each thinker focuses on a different interactive connection in the economy to characterize an innovation dynamic within a multidimensional and complex economy. But taken together the innovation processes have common features and can interact with one another. Strategically organized, they can produce dynamic increasing returns.

These great scholars lived and wrote about the real world, which their descriptions suggest is not amenable to magic bullets. But there is no throwing up of hands in despair and depicting episodes of rapid growth as unexplained and inexplicable. Each contribution does offer, at the minimum, an analytical framework in lieu of a “growth miracle.” These models can protect policymakers from unreflective failures. Together they offer more. Economic policymaking is always informed and defended by models, but no single model can mimic modern complex economies or fit all contexts. The capability triad is a better way to understand how crises can be overcome and robust growth achieved.

How did you come to study economic miracles?

In 1969 when I started teaching economics at the University of Massachusetts, the economic outlook for the region was not encouraging. Between the 1930s and mid-1970s, with the exception of World War II, the New England economy underwent a sustained period of economic decline.  Boston’s population declined from 800,000 in 1950 to 560,000 in 1980.

What occurred next is known as the Massachusetts Miracle. Between 1975 the mid 1980’s unemployment fell from 12% to less than 3% as upwards of a half a million jobs were created most in new sectors. Michael Dukakis, governor of Massachusetts, campaigned for the US presidency in 1988 attributing the ‘miracle’ to the creation of a range of quasi-public agencies. But as a board member of one such agency, I was acutely aware this was not the case. At the same time, it was not a consequence of a spontaneous burst of ‘animal spirits’ or unleashed by laissez-faire policies and free markets.

What role did government policy play in the Massachusetts Miracle?

State policy did not plan, foresee, or drive the Massachusetts Miracle. But it was not passive. The state government funded a huge investment to increase the number of electrical engineering students in public higher education from around 600 in 1976 to over 1600 ten years later. In so doing it turned a transformative potential into a sustained growth experience. These graduates were like a high-octane fuel for an explosive growth in the size and number of engineering intensive enterprises. 

Nevertheless, the Massachusetts Miracle cannot be explained without reference to the institutionalized means by which the US economy was transformed during World War II. State education policy responded to an increase in demand driven by the post-war emergence of a large population of technology-driven enterprises themselves exploiting opportunities created by the federal government’s wartime investment in technologically advanced weapon systems. Greater Boston’s research-intensive universities and the state’s legacy of precision engineering were key components in the design, development, and implementation of the President’s wartime strategic vision and mobilization programs. The federal government oversaw the creation of a national science and technology infrastructure of which Massachusetts was and has remained a major beneficiary.

What can we learn from the US World War II experience about industrial policymaking?

World War II was a period of policymaking experimentation and government intervention much as the Great Depression that preceded it. But while the Great Depression inspired an emerging Keynesian macroeconomic demand management perspective, the successful policy regime of the wartime American economy, namely to create and grow new industries and transform existing industries to meet unprecedented performance targets, did not inspire a new supply side, production development perspective within the economics profession.

In fact, the World War II US policymaking experience was an unparalleled industrial policy success. GDP nearly doubled in a four-year period, far exceeding all other nations. Its unmatched performance can be measured by comparing national rates of expansion in munitions production Over the period from 1935-9 to 1944, munitions output expanded 7 times in Germany; 10 times in the USSR; 15 times in Japan; 22 times in the UK; and 140 times in the US (Goldsmith 1946). Furthermore, the US alone produced guns and butter; guns were not produced at the expense of the civilian standard of living (Edelstein 2001; Overy 1995).

President Roosevelt’s vision to create the Arsenal for Democracy was not enacted by either an invisible hand or by central planning but purposefully by an industrial policy and economic governance agenda that organizationally integrated and diffused rapid technological and production innovation. Three complementary productive structures were pivotal. 

The first was the integration of science and industry to design, develop, produce, and deploy new technologically advanced products (e.g., radar systems, penicillin). The second was the diffusion of mass production principles to build and ramp up new organizationally complex products/plants/industries (e.g., aircraft, ships), and to convert existing factories to new products (e.g., cars to jeeps) and to extend mass production and enterprise output coordination principles throughout and across supply chains. The third was the design, administration, and implementation of a participatory management philosophy and skill formation methodology to foster workforce involvement in job design, quality improvement, and new technology introduction. Each of these productive structures is examined using case studies that take us inside the real-world economics of production, business, work, universities, and industrial organization to examine how US industrial policy transformed the nation’s industrial innovation system.

What unites the policy frameworks of the successful transformative growth experiences examined in the book?

Explosive growth experiences are many. I apply the Capability Triad framework to explain other success stories including West Germany, Ireland’s Celtic Tiger, Japan and China as well as policy framework failure in the UK, Italy and the US in recent decades.

We know that they are not explained by stabilization policy. No amount of adjustment of stabilization and market reform policies are sufficient to address matters of productivity and growth. We find in the success stories the crafting and implementation of strategic development policy frameworks. This takes us beyond the terrain of the economics equilibrium and optimal resource allocation, although economics is critical to it. But it is an economics of capability development and mutual adjustment processes in which changes in business organization, production system, and skill formation are inextricably bound together.

This does not mean that macro policy instruments are irrelevant; it means that the transformative experiences are better understood as capability informed macro policies. The idea is to characterize successful economic policies from an organizational capabilities perspective.

In the success stories we find a unified or coordinated set of extra-enterprise, capability-development infrastructures that galvanize a population of companies to engage in product development and technology management capabilities; we find macro-policymaking guided by a production-centric awareness of where a region or country fits within the global competitive environment and the use of the critical barrier analysis to inform infrastructural investment priorities. These can include access to a machine tool industry, engineering support services, development finance and skill formation institutions which, if inter-connected, enable a whole group of firms to innovate and grow without generating severe skill gaps and thereby curtailing progress.    

Why is the formulation of a conceptual policy framework important?

The historical experiences described in this book tell us that a development policy framework is important for success. The case studies reveal extraordinary leaders responding to daunting challenges by crafting appropriate strategic policy frameworks at both enterprise and government levels. At the same time, luck plays a large part in successful outcomes. The expected external conditions needed to support success do not always arrive conveniently, and their absence may frustrate otherwise admirable policy initiatives. Nor is the true significance of the internal elements of a strategy always fully understood even by its own designers. But luck and chance, however random, can be handled best within well-thought-out and coherent frameworks that take full account of the nature of the external environment (opportunities and threats), as well as realistic views of domestic capabilities (strengths and weaknesses). What we can add, as well, is that the resulting SWOT (strengths, weaknesses, opportunities, and threats) analysis can be much richer if it is guided by the alternative economic baseline of the capabilities and innovation perspective and of the dynamic growth processes that it illuminates.

Perhaps the most daunting aspect of the capability triad is that it treats the scope for public policy as being almost completely and seamlessly blended into the detailed mechanics of change that occur within private firms. In this framework, public policy and private entrepreneurial actions do not operate in isolation from each other but become mutually reinforcing. There is some scope for a separable public policy, such as in skill formation, to ensure that the right mix of education and skills is produced to accommodate the changing demands of the economy as it develops. But even here, the links between public and private activity are crucial.

In the quest to break free from narrow, dependent, and reactive policy mindsets, the capability triad framework proposed here does not provide all the answers. But it helps those who hope to fashion transformative policies to be smart when time is pressing and when financial and human resources are limited. Such policies are essential if we wish to bring focus and synergy to the disparate policies that make up a broad enterprise-development strategy in a national, provincial, or local economy.

What is the relationship between conceptual framework and policy success?

Conceptual frameworks and policy design, implementation, and renewal usually evolve in parallel with each other. Frameworks are rather like maps that tell you where you are, where you need to go, and the direction that you must take to get there. Policy design and implementation deal with the messy business of gathering resources, making pragmatic choices, overcoming obstacles, and bringing the team along to a collective goal. To confuse these separate but interrelated elements of strategy, or to emphasize one at the expense of the other, will almost certainly lead to failure. Having a wonderful map, but of a route that would take you over impassable terrain, is useless. Wandering aimlessly in the wilderness bereft of any maps is equally futile.

Fortunately, the capability triad is not like the weatherman! It can offer diagnoses, and  even contingent predictions, and it can also suggest ways forward. The country case studies examined in this book suggest that the logic of the capability triad, based as it is on a distillation of actual experience, provides both structure and content to strategy design. To neglect its lessons, and to focus on price competition and stabilization processes as advocated in standard economics, has condemned national and regional economies to stagnation and decline and to all the social problems that such failures propagate.

What about research methodology in economics?

The economics advanced by a review of the historical experiences of rapid growth and decline in this book do not advance a policy framework with the clarity or certainty of the market fundamentalist or even Keynesian perspectives. Together they tell us that economies are inherently complex and not reducible to mechanical relationships. The methodological argument is that an alternative paradigm, beginning with case studies and empirical research rather than formal models grounded in a priori principles, is a more fruitful approach to understanding real-world economies and guiding policy. This is the position taken by all the thinkers in the production-centric paradigm.

Why have Nobel prizes overwhelmingly gone to the economics of optimal resource allocation? Part of the answer is that it is a comprehensive, context-free theory of individual rationality tractable to elegant simplification. Capabilities do not fit; they are about activities that cannot be done alone or at once.

My book goes the route of a different research methodology of which Darwin is the most prominent. This is systemic observation in which one searches for general principles, applies them to more experiences and in the process subjects them to tests. Not a complete answer but we start with what goes on inside the business enterprise because it is here that innovation and value creation either take place or do not take place. My book links Edith Penrose’s capabilities theory of the growth of the firm with Charles Babbage’s principles of production and Darwin’s evolutionary principles of variation, descent with adaptation and population dynamics. All three operate within the systemic observation methodology that distinguishes the production-centric economics perspective. 

Michael H. Best is professor emeritus of economics at the University of Massachusetts, Lowell, where he was codirector of the Center for Industrial Competitiveness. He has held numerous academic fellowships and participated in development projects with the United Nations, the World Bank, and governments in more than twenty countries. He is the author of The New Competition: Institutions of Industrial Restructuring and The New Competitive Advantage: The Renewal of American Industry.

Dr. John C. Hulsman: The North Korean Summit Hiccup Belies the Greater Problem of the White House’s Failure to ‘Game Out Lunatics’

HulsmanLegend has it that at the height of the Third Crusade (1189-1192), Count Henry of Champagne spoke at length with the mysterious, charismatic “Old Man of the Mountain,” Rashid ad-Din Sinan. The story goes that the haughty Crusader claimed that he had the most powerful army in the Middle East, one that could at any moment defeat the Hashashin, the Old Man’s threadbare cohort of followers. Count Henry went on, pointing out that his force was at least ten times larger than that of Sinan’s.

Unimpressed, the Old Man calmly replied that the Count was mistaken, and that it was his unremarkable-looking rabble which constituted the greatest army in the field. To prove his point, he beckoned one of his men over to him and casually told him to jump off the top of the Masyaf mountaintop fortress in which they were holed up. Without hesitating, the man did so.

Through the many centuries that separate us from Count Henry, the myriad twists and turns on Western politics, culture, and life that come between us, there is absolutely no doubt at all that Westerners today would share his horrified reaction to what the Old Man of the Mountain had demonstrated to him.

“This guy is totally nuts.”

***

This telling historical vignette was eerily reenacted last week, in Donald Trump’s ‘break-up’ letter to Kim Jong-un, the far-out leader of seemingly indecipherable North Korea. Playing the part of Count Henry, the President not so subtlety hinted that America, as the greatest military force in the world, could wipe North Korea off the map at any moment it chose. Like Count Henry, Trump was making it clear to his rival that in essence their contest was so strategically lopsided that meek surrender—in this case with the policy end game of unilateral North Korean nuclear disarmament as the only possible outcome—really was the only possible option.

But as was true for Count Henry, that assumes your enemy is playing by the same rules that you are, and makes the same calculations. If, to our horror, we found that they do not, it is far too easy to simply say our enemies are ‘crazy,’ meaning their motives simply cannot be fathomed, letting us off the hook far too easily.

Throughout history, both decision-makers as well as geopolitical analysts have always had a very hard time getting past the wholly understandable first reaction that those with very different belief systems from ours are simply unknowable. In the Old Man in the Mountain’s case, given his effective strategy for engaging in strategic assassinations, Westerners took to calling his followers Hashashin, or “users of hashish,” as drugs became the only possible (and incorrect) rationale the Crusaders could come up with to explain their intensity, morale, and absolute personal commitment to Sinan, rather than to the Western value of the sanctity of human life. It has always been all too easy for decision-makers to write off ‘lunatics,’ lazily saying to themselves that the different and the strange simply cannot be understood.

There has been a lot of this misdiagnosis going on regarding Kim Jong-un’s totalitarian hermit kingdom; former National Security Adviser H.R. McMaster forthrightly said Kim Jong-un was ‘crazy,’ and is therefore unable to be deterred by the threat of a nuclear counter-strike, meaning that the nuclear deterrence which has kept the global peace for these past seventy-plus years does not apply to North Korea’s nuclear programme. But have Kim’s actions really proved so unknowable, just because North Korea’s politics and culture are so admittedly different from our own?

Far from it. While there is no doubt Kim Jong-un would serve as an excellent Bond villain—between very publicly poisoning his half-brother Kim Jong-nam with sarin and executing his pro-Chinese uncle and former mentor Jang Song-thaek by blowing him to pieces with artillery—there is surely method to his madness. 

While the North Korean dictator is certainly odious, he seems to have a very well-defined and rational sense of self-preservation; in fact, he killed his uncle and his brother precisely because he feared they might emerge as threats to his continued rule and also to his life. In not allowing any alternate sources of leadership to emerge within the famously closed-off North Korean regime, Kim is clearly enhancing his chances of survival in the political shark tank he calls home.

Nor is Kim’s single-minded pursuit of an advanced nuclear weapons program capable of striking the US lunacy; rather the dictator has read some recent history, as the recent spat over the Libya model—a point which led to the temporary postponement of the summit—makes eminently clear. A North Korea in possession of such weapons has a ‘get out of jail free’ card, being able to ward off the oft-stated US desire for regime change in Pyongyang. Kim would be able to definitively avoid the recent fate of Libya’s Muammar Gaddafi and Iraq’s Saddam Hussein, who relinquished their nuclear programs, only to be overthrown and brutally killed.

For National Security Adviser John Bolton and Vice President Mike Pence to bring this up, illustrates that it is they and not the ruthless North Korean dictator who are living in an illogical fantasy world. For the Libya model, given the horrendous outcome for Libyan dictator Gaddafi, would obviously seem to be the last framework of choice for Kim Jong-un to embrace, given his rational desire for survival. As ever, American hawks overrate the objective global power position of the United States, as we live in a world where America, for all that it remains the most powerful nation on earth, is simply no longer the only game in town.

By understanding neither the basic structure of the world we live in—that it is comprised of many powers—nor that Kim Jong-un might be put out by the Gaddafi comparison, senior figures in the Trump White House seem to have forgotten that any negotiation short of unconditional surrender usually involves give and take by both sides, in this case over the terms, time frame, and pace of North Korea disarmament, as well as over the security guarantees that are necessary for a surprisingly rational Kim to be given, in securing both his position and his life.

The Old Man of the Mountain must never be forgotten by modern-day decision-makers, as in the end his seemingly unfathomable against-the-odds strategy was crowned with an improbable victory in the Third Crusade. His successful career underlines the vital need to game out ‘lunatics’ such as Kim Jong-un. For not only is there almost always method to their madness. Sometimes they actually win.

Dr. John C. Hulsman is President and Managing Partner of John C. Hulsman Enterprises, a prominent global political-risk consulting firm. His new book, To Dare More Boldly: The Audacious Story of Political Risk, was published by Princeton University Press in April and is available on Amazon. He lives in Milan, Italy.

Dr. John C. Hulsman: Delphic priestesses were the world’s first political risk consultants

by Dr. John C. Hulsman

In 480 BCE, the citizens of Athens were in more trouble than it is possible for our modern minds to fathom. Xerxes, the seemingly omnipotent son of Darius the Great, had some unfinished business left to him by his father. A decade earlier, at the Battle of Marathon in August 490 BCE, the miraculous had happened: the underrated Athenian army had seen off Darius and his mighty Persian horde, saving the threatened city-state from certain destruction. Now Xerxes had invaded Greece again, to finish the work his father had started, and he’d assembled a vast army that the Greek historian Herodotus (typically exaggerating) put at 5 million, but – though modern scholars disagree on precise numbers – was likely to have been a still-overwhelming force of 360,000, on top of a gigantic armada of 750 ships. Confronted with an insurmountable foe and almost certain destruction, the hard-pressed Athenian leadership requested the services of the world’s first political risk consultant.

Already, by 480 BCE, the Pythia of Delphi was an ancient institution. Now commonly known as the Oracle of Delphi – when, in ancient Greek, the oracles were the pronouncements that the Pythia dispensed – the Pythia were the senior priestesses of the Temple of Apollo, the Greek God of Prophecy. For more than 1,100 years (until 390 CE, when radical Christians chased the last Pythia out of Parnassus), they were viewed as the most authoritative soothsayers in Greece. Pilgrims descended from all over the ancient world to the temple on the slope of Mount Parnassus to have their questions about the future answered. From the small, enclosed chamber at the base of the shrine, the Pythia (there were three priestesses on call at any time) delivered her oracles in a frenzied state – the likely result of imbibing the hallucinogenic vapours rising from the clefts in the rock of Mount Parnassus, which we now know sits atop the intersection of two tectonic plates.

The Pythia would be sitting in a perforated cauldron astride a tripod. Pilgrims reported (and Plutarch, who for a time served as high priest at Delphi, assisting the Pythia in her mission, confirmed) that as she inhaled the strange vapours her hair would stand on end, her complexion altered, and she would often begin panting, her voice assuming an otherworldly tone. In classical days it was said that the Pythia spoke in rhyme, in pentameter or hexameter. To put it in modern terms, the Pythia was clearly as high as a kite. But let’s look at the Pythia afresh, for I would argue that the Temple at Delphi was effectively the world’s first political risk-consulting firm.

Since the height of the Persian Wars, political and business leaders have looked to outsiders blessed with seemingly magical knowledge to divine both the present and the future. While the tools of divination have obviously changed, the pressing need for establishing the rules of the road for managing risk in geopolitics have not. The question for political risk analysis remains the same as it was during the heyday of the Pythia: with superior knowledge (spiritual or intellectual), can we reliably do this?

The Pythia’s prognosticating advantages, not least her outsider status, curiously track the qualities that political risk firms look for in their best analysts today. In their isolation at Mount Parnassus, the Pythia were not in danger of elite capture, and the curse of analytical groupthink that so often follows, in terms of what they predicated. This is the curse that doomed so many modern-day analysts to be so very wrong about the Brexit vote because they didn’t bother to look outside the hermetically sealed elite shell of London; or the startling advent of Donald Trump (they never left the East Coast corridor). Physical, intellectual and emotional distance have great analytical value.

Yet despite being isolated, the Pythia had limited but regular contact with the elites of the day who made the arduous trek to visit them. Over time, the priestesses at the Temple of Apollo came to understand what it was their clients wished to know, and how to provide exactly what they lacked; independent, outside, authoritative advice. It should be noted that the Pythia were chosen from a group of highly educated women, well-acquainted with the world. It is this strange and unique mix of special knowledge, education, distance from (and yet connection to) the centres of corruption and power, that describes the ideal CV for political risk analysts today.

The Pythia offered practical counsel that could shape future actions, just as political risk analysts do today – though we’d use modern jargon and call it ‘policy’ in the public sphere, and ‘corporate strategy’ in the business world. It is amazing how good a political risk record the priestesses actually had. Between 535 and 615 of the oracles have survived to the present day, and well over half of these are said to be historically correct. (I can name a goodly number of modern firms that would kill for that record.)

There has always been a market to answer basic political risk questions: can the Persians be stopped, and if so how? Will the UK vote for Brexit? Will Trump become president? Then as now, those with a reputation for getting basic political risk questions right were venerated, just as those who failed were over time discredited. Crucially, on the biggest political risk question Delphi was ever presented with – Xerxes’ invasion – the Pythia came through with flying colours. In her peculiar poetic and riddling fashion she suggested a ploy to get the Athenians off the hook. She recounted that when Athena, Greek goddess of wisdom and the patron of her namesake city, implored her father Zeus to save Athens, he told her that he would grant them ‘a wall of wood that alone should be uncaptured, a boon to you and your children’.

Naturally, the Pythia’s mysterious oracular pronouncements required interpretation by the city leaders of Athens. One of them, Themistocles, argued that a wall of wood specifically referred to the Athenian navy, and persuaded the city’s leaders to adopt a maritime-first strategy against the Persians. This policy – concocted by the Pythia – led directly to the decisive naval Battle of Salamis, the turning point that brought to an end the Persian risk to Athens’s very survival. To put it mildly, the Pythia had proven to be well worth her political-risk fee – both the direct monetary payment customarily made to her by pilgrims, and the larger donations to the gods, which secured petitioners an advanced place in the line.

To Dare More Boldly: The Audacious Story of Political Risk by John C Hulsman is out now via Princeton University Press.Aeon counter – do not remove

This article was originally published at Aeon and has been republished under Creative Commons.

Sebastian Edwards on American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold

EdwardsThe American economy is strong in large part because nobody believes that America would ever default on its debt. Yet in 1933, Franklin D. Roosevelt did just that, when in a bid to pull the country out of depression, he depreciated the U.S. dollar in relation to gold, effectively annulling all debt contracts. American Default is the story of this forgotten chapter in America’s history. At a time when several major economies never approached the brink of default or devaluing or recalling currencies, American Default is a timely account of a little-known yet drastic experiment with these policies, the inevitable backlash, and the ultimate result.

Americans believe that the Federal government has never defaulted on its debt. Yet in your book, you tell the story of a massive debt restructuring that happened only eight decades ago, in 1933. A debt restructuring that changed contracts unilaterally and retroactively, and imposed losses of 61% on investors. Why do you think that this episode is so little known?

This is a case of “collective amnesia.” Americans think of themselves as law-abiding citizens. We think of the United States as a country where institutions work and where contracts are sacred; a country where the rule of law prevails at all times. Reneging on contracts is not something this nation does. And, certainly, we don’t change contracts retroactively. It is something that “banana republics” do. And when they do it, we scold them and denounce them. We also demand compensation for damages.

When the Supreme Court heard the gold clause cases in 1935, most analysts thought that these were among the most important cases ever considered by the Court. Today, however, they are not even taught in most law schools. We have forgotten the episode because it is convenient, because it helps us maintain the view we have about our nation: a nation that always pays its debts. But, as I show in this book, this is not the case.

Your book is about the annulment of the gold clauses in 1933, and the Supreme Court decisions that ruled that it was legal to change debt contracts retroactively. What were the gold clauses, exactly? And what was their role?

Historically, most long-term debt contracts in the United States were written in terms of gold. That is, the borrower committed himself to paying back an amount of gold (or gold equivalent) equal to the amount borrowed, plus interest. This practice started during the Civil War to protect lenders from possible inflation.

In 1933, when President Franklin D. Roosevelt took the U.S. off the gold standard, all public debt included the gold clause. In addition, most railway and public utility bonds had gold clauses, as did most mortgages. Overall, debt equivalent to approximately 120% of GDP was subject to these escalation riders. That is a huge number. To put things in perspective, it is about twice as large as the debt that Argentina restructured unilaterally in 2002.

You write that the abrogation of the gold clauses was closely related to the abandonment of the gold standard in 1933.

In 1933, President Roosevelt thought that the U.S. could benefit from devaluing the dollar with respect to gold. This had been done by the United Kingdom in September 1931, and it appeared to be helping the UK get out of the depression. However, FDR was told by his advisers that the gold clauses stood in the way of a devaluation. With the gold clauses in place, a devaluation of the USD would immediately trigger an increase in debts by the same amount as the devaluation. This would bankrupt almost every railway company, and many other businesses. It would also be extremely costly for the government. It was at this point that FDR decided to abrogate the gold clauses. The actual annulment took place on June 5, 1933.

When emerging countries, such as Argentina, devalue their currency and restructure their debts, we often brand them as “populists.” Was there a populist element in FDR’s decision to abandon the gold standard and abrogate the gold clauses?

One of the main issues in 1933 was how to raise agricultural prices, which had declined by almost 70% since 1919. After the 1932 election there was a large bloc of populists, pro-agrarian members in Congress. The better known one was Senator Huey Long, but there were others. Two very influential ones were Senator Elmer Thomas from Oklahoma, and Senator Burton Wheeler from Montana. They were “inflationists,” and believed that getting off gold would help increase commodity prices. To a large extent the devaluation of the dollar—from $20.67 to $35 per ounce of gold—was to placate this group of “populist” lawmakers. Wheeler was also an isolationist. In Philip Roth novel The Plot against America, Wheeler is a fictional vice president, and aviator Charles Lindbergh is the president.

There are still some people who believe that getting off gold was a mistake. Was it necessary? Did it work? Should the U.S. go back to gold?

Most economic historians—including Milton Friedman and Ben Bernanke—agree that one of the main consequences of devaluing the dollar in 1934 was that the country received a huge inflow of gold. This additional gold was monetized by the Federal Reserve. As a consequence, there was a large increase in credit. This triggered a recovery, and helped reduce unemployment. A key question, which I address in the book, is whether it was possible, at the time, to put in place an expansionary monetary policy and still maintain some form of a gold-based standard. This is a controversial issue; British economist John Maynard Keynes believed that it was possible; many modern economists believe that it was not.

You argue in the book that at the time most economists were perplexed and didn’t know how to face the Great Depression. Apparently they didn’t understand the effects of fluctuating exchange rates.

In the 1930s the economic analysis of currency values and currency adjustments was in its infancy. Some well-known economists, such as Yale’s Irving Fisher, were very critical of the gold standard, and suggested pegging the value of the dollar to a basket of commodities. Other, including Princeton’s Edwin Kemmerer and Chicago’s Jacob Viner, were convinced that, in spite of some shortcomings, the gold standard was the best available monetary system. In the book I tell the story of how these two groups for FDR’s ear. I discuss who said what and how the President reacted to their advice.

You write that in 1933 George F. Warren was the most influential economist in the world. However, today almost no one knows his name. Who was he, and why was he so important?

George F. Warren was a professor of agricultural economics at Cornell, and a friend of Henry Morgenthau Jr.

Morgenthau was a neighbor and friend of President Roosevelt, who eventually became Secretary of the Treasury. In 1931, Warren published a book titled Prices, where he argued that agricultural prices were related in a one-to-one fashion to the price of gold. If the price of the metal increased through a devaluation of the USD, the price of wheat, corn, cotton, eggs and so on would increase immediately and by the same amount. Starting in July 1933, Warren became Roosevelt’s main economic adviser. In October the president put in place a “gold buying program” based on Warren’s theories. Every morning FDR would determine an arbitrary price at which the government bought small amounts of gold. The president’s expectation was that agricultural prices would follow in short order. But that didn’t happen; the program did not work as expected. John Maynard Keynes criticized it strongly, and in January 1934 the program was abandoned. In the book I discuss, in great detail, Warren’s theories and I compare them to those of other prominent economists, including Irving Fisher’s.

You devote quite some time to the cases argued in front of the Supreme Court. What can you tell us about them?

At the time, the Court was deeply divided. There was a conservative bloc led by Justice James Clark McReynolds, and a liberal bloc that included Justices Brandeis and Cardozo. Charles Evans Hughes, the Chief Justice, was often the swing vote. The cases were fascinating for several reasons; first, the Administration used a “necessity” argument to support the Joint Resolution that abrogated the gold clauses. This argument is very similar—in fact, almost identical—to the argument used recently by countries such as Argentina when restructured their debts unilaterally. Second, the government made very sophisticated economic arguments; in order to support them, it included a number of charts and diagrams in its briefs. Third, the rulings were very convoluted and controversial. In the case involving public debt (a Liberty Bond, to be more precise), the Court ruled that Congress had exceeded its power, and that the abrogation was thus unconstitutional. However, the Court said, there were no damages involved. That is, the government had violated the Constitution, but didn’t have to compensate bond holder for losses.

In modern times, countries that default and/or restructure their debts unilaterally pay a cost. Generally speaking, they have great difficulties accessing the capital markets. However, this was not the case for the U.S. What do you think are the reasons for this?

I discuss this issue in great detail in the book. Milton Friedman argued that by expropriating property rights the abrogation had severe negative effects on the U.S. economy. It negatively affected investment. I combed the data and didn’t find significant dislocations or signs of distress in the weeks and months following the Supreme Court rulings. In the final chapters of the book I give a possible explanation for this. I point out why the U.S. case is so different from recent default episodes, including Argentina and Greece.

Sebastian Edwards is the Henry Ford II Professor of International Economics at the University of California, Los Angeles. His books include Toxic Aid: Economic Collapse and Recovery in Tanzania and Left Behind: Latin America and the False Promise of Populism. He lives in Los Angeles.

Against metrics: how measuring performance by numbers backfires

by Jerry Muller

More and more companies, government agencies, educational institutions and philanthropic organisations are today in the grip of a new phenomenon. I’ve termed it ‘metric fixation’. The key components of metric fixation are the belief that it is possible – and desirable – to replace professional judgment (acquired through personal experience and talent) with numerical indicators of comparative performance based upon standardised data (metrics); and that the best way to motivate people within these organisations is by attaching rewards and penalties to their measured performance. 

The rewards can be monetary, in the form of pay for performance, say, or reputational, in the form of college rankings, hospital ratings, surgical report cards and so on. But the most dramatic negative effect of metric fixation is its propensity to incentivise gaming: that is, encouraging professionals to maximise the metrics in ways that are at odds with the larger purpose of the organisation. If the rate of major crimes in a district becomes the metric according to which police officers are promoted, then some officers will respond by simply not recording crimes or downgrading them from major offences to misdemeanours. Or take the case of surgeons. When the metrics of success and failure are made public – affecting their reputation and income – some surgeons will improve their metric scores by refusing to operate on patients with more complex problems, whose surgical outcomes are more likely to be negative. Who suffers? The patients who don’t get operated upon.

When reward is tied to measured performance, metric fixation invites just this sort of gaming. But metric fixation also leads to a variety of more subtle unintended negative consequences. These include goal displacement, which comes in many varieties: when performance is judged by a few measures, and the stakes are high (keeping one’s job, getting a pay rise or raising the stock price at the time that stock options are vested), people focus on satisfying those measures – often at the expense of other, more important organisational goals that are not measured. The best-known example is ‘teaching to the test’, a widespread phenomenon that has distorted primary and secondary education in the United States since the adoption of the No Child Left Behind Act of 2001.

Short-termism is another negative. Measured performance encourages what the US sociologist Robert K Merton in 1936 called ‘the imperious immediacy of interests … where the actor’s paramount concern with the foreseen immediate consequences excludes consideration of further or other consequences’. In short, advancing short-term goals at the expense of long-range considerations. This problem is endemic to publicly traded corporations that sacrifice long-term research and development, and the development of their staff, to the perceived imperatives of the quarterly report.

To the debit side of the ledger must also be added the transactional costs of metrics: the expenditure of employee time by those tasked with compiling and processing the metrics in the first place – not to mention the time required to actually read them. As the heterodox management consultants Yves Morieux and Peter Tollman note in Six Simple Rules (2014), employees end up working longer and harder at activities that add little to the real productiveness of their organisation, while sapping their enthusiasm. In an attempt to staunch the flow of faulty metrics through gaming, cheating and goal diversion, organisations often institute a cascade of rules, even as complying with them further slows down the institution’s functioning and diminishes its efficiency.

Contrary to commonsense belief, attempts to measure productivity through performance metrics discourage initiative, innovation and risk-taking. The intelligence analysts who ultimately located Osama bin Laden worked on the problem for years. If measured at any point, the productivity of those analysts would have been zero. Month after month, their failure rate was 100 per cent, until they achieved success. From the perspective of the superiors, allowing the analysts to work on the project for years involved a high degree of risk: the investment in time might not pan out. Yet really great achievements often depend on such risks.

The source of the trouble is that when people are judged by performance metrics they are incentivised to do what the metrics measure, and what the metrics measure will be some established goal. But that impedes innovation, which means doing something not yet established, indeed that hasn’t even been tried out. Innovation involves experimentation. And experimentation includes the possibility, perhaps probability, of failure. At the same time, rewarding individuals for measured performance diminishes a sense of common purpose, as well as the social relationships that motivate co-operation and effectiveness. Instead, such rewards promote competition.

Compelling people in an organisation to focus their efforts on a narrow range of measurable features degrades the experience of work. Subject to performance metrics, people are forced to focus on limited goals, imposed by others who might not understand the work that they do. Mental stimulation is dulled when people don’t decide the problems to be solved or how to solve them, and there is no excitement of venturing into the unknown because the unknown is beyond the measureable. The entrepreneurial element of human nature is stifled by metric fixation.

Organisations in thrall to metrics end up motivating those members of staff with greater initiative to move out of the mainstream, where the culture of accountable performance prevails. Teachers move out of public schools to private and charter schools. Engineers move out of large corporations to boutique firms. Enterprising government employees become consultants. There is a healthy element to this, of course. But surely the large-scale organisations of our society are the poorer for driving out staff most likely to innovate and initiate. The more that work becomes a matter of filling in the boxes by which performance is to be measured and rewarded, the more it will repel those who think outside the box.

Economists such as Dale Jorgenson of Harvard University, who specialise in measuring economic productivity, report that in recent years the only increase in total-factor productivity in the US economy has been in the information technology-producing industries. The question that ought to be asked next, then, is to what extent the culture of metrics – with its costs in employee time, morale and initiative, and its promotion of short-termism – has itself contributed to economic stagnation?Aeon counter – do not remove

Jerry Z. Muller is the author of many books, including The Tyranny of Metrics. His writing has appeared in the New York Times, the Wall Street Journal, the Times Literary Supplement, and Foreign Affairs, among other publications. He is professor of history at the Catholic University of America in Washington, D.C., and lives in Silver Spring, Maryland.

 

This article was originally published at Aeon and has been republished under Creative Commons.

Eric Posner & Glen Weyl on Radical Markets: Uprooting Capitalism and Democracy for a Just Society

Radical MarketsMany blame today’s economic inequality, stagnation, and political instability on the free market. The solution is to rein in the market, right? Radical Markets turns this thinking—and pretty much all conventional thinking about markets, both for and against—on its head. The book reveals bold new ways to organize markets for the good of everyone. It shows how the emancipatory force of genuinely open, free, and competitive markets can reawaken the dormant nineteenth-century spirit of liberal reform and lead to greater equality, prosperity, and cooperation. Only by radically expanding the scope of markets can we reduce inequality, restore robust economic growth, and resolve political conflicts. But to do that, we must replace our most sacred institutions with truly free and open competition—Radical Markets shows how. Read on for an interview between the two authors. 

Eric: I’ve never thought of myself as a radical, yet our book is called Radical Markets. Is this a marketing gimmick or are the ideas really radical?

Glen: Our proposals seem pretty radical to me. In our scheme, private property turns into a kind of an auction, so there would be a price on most property all the time and the benefits would flow equally to all citizens, eliminating most inequality of wealth.  The conventional system of democracy—one-person-one-vote and judicial protection of most minority rights—would turn into a market-based system of trading voice credits and using them to buy votes. The current immigration bureaucracy would be radically decentralized, as ordinary people would take over sponsorship of migrant workers. There are certainly ideas more radical than these, but not many that you hear discussed seriously by our academic colleagues.

Eric: Yet, unlike true radicals, we urge a go-slow approach. Test things out, we say. Things could go wrong, we warn. And then we claim to be in favor of markets. That doesn’t sound like Saint-Simon or Marx. Sure, enough our book is #1 on Amazon in the category of libertarianism, though neither of us think of ourselves as libertarians.

Glen: True revolutions occur in slow motion; they begin with ideas. Democracy is a revolutionary idea in a world of kingdoms; it did not happen overnight. Unions began as working men’s associations and only gradually gained power and state sanction. Even Saint-Simon inspired small-scale utopian communities. Revolutions that move rapidly to take over a whole society, like the French or Russian, usually quickly determine they didn’t have their plans fleshed out and end in chaos or greater tyranny than the system they replaced. We have radical, even revolutionary, aims, but we want the changes we propose to stick and that will only happen if they are fully developed, their weaknesses exposed by experimentation.

Eric. I’m still not sure. I like the title because I’m a sucker for word play. The root of the word radical is, well, root. Being radical means getting to the root of things. I think we do that. A radical in math is the root of a number, and several of the ideas in the book have their origin in quadratic equations. And then there is the idea of radical as left-wing. Here, I’m not so sure. In fact, one of our goals is to appeal to people with different political views.

Glen: Well, radical doesn’t necessarily mean left wing, though I guess it depends how you define it.  In fact, The Economist defines its ideology as the “radical center.” To me, that sense of radical is more about favoring fundamental changes to the social order rather than, say, putting the government in charge of everything or redistributing wealth. In that sense, I think we are very much radicals

Eric: We even appeal to Adam Smith and Milton Friedman. What could be less radical than that?

Glen: Adam Smith has an unfair reputation as a “conservative” these days only because his ideas were so successful. He put the finishing touches, intellectually at least, on the unthinking feudalism of the day. In fact, Smith helped found the first major political movement to identify itself as “Radical,” the Philosophical Radicals who are our inspiration. Not surprisingly, ideas that were radical in the eighteenth century can be reactionary in the twentieth, when Friedman wrote. But we give Friedman credit for seeing that central planning and a certain kind of bureaucratic mindset leads to a dead end.

Eric: And for market thinking: Friedman was right to emphasize the value of competition and exchange—essential features of market system—but, like many economists, took our system of property rights and politics for granted, as if thinking on these topics had stopped centuries ago. One way you can tell that you are being radical in an intellectual sense—the sense I care about—is that you find yourself being criticized by people with different political views. If you’re radical enough, people will get angry. We’ve already seen a bit of this. Immigrant advocates and alt-right types don’t agree on much, but they seem to be scandalized by our foreign worker proposal. I’ll be curious to see how people react to our other proposals.

Eric A. Posner is the Kirkland and Ellis Distinguished Service Professor at the University of Chicago Law School. His many books include Climate Change Justice. He lives in Chicago. E. Glen Weyl is principal researcher at Microsoft and visiting senior research scholar in economics and law at Yale University. He lives in Boston.

Matthias Doepke & Fabrizio Zilibotti: The economics of motherhood

EconomicsIn times of heightened economic anxiety, for many American families the celebration of Mother’s Day this weekend will provide a welcome respite from the stress of everyday life. At least for this one day, love and the close bond between mothers and their children take center stage, and worries about money, careers, and other economic concerns are put on hold. Indeed, one reason that there is a special celebration for mothers is precisely that motherhood lacks the formal recognition that the market economy bestows on other activities: mothers do not draw official salaries, acquire fancy job titles, or advance within a corporate hierarchy. Instead, motherhood is an unpaid “labor of love,” and hence a phenomenon where the laws of economics seemingly do not apply.

Yet on closer inspection, even motherhood does have an undeniable economic dimension. To start, there is the economic impact of the celebration of Mother’s Day itself. Florists, greeting card companies, and restaurants serving brunch will do brisk business, and many consider the holiday at risk of becoming overly commercialized.

But the economic roots of motherhood go much deeper than that. Economic forces helped shape the role of motherhood in society, and are in large part responsible for two major transformations in how Western society conceives of the meaning and importance of motherhood.

The first of these transformations started with the Industrial Revolution, and continued throughout the nineteenth and early twentieth centuries. Mothers always had a special role in nurturing children, particularly so for the infants who needed to be breastfed. However, in earlier times the separation between the roles of mothers and fathers was less sharp than later on. Work and home life played out in the same place, say, the family’s farm or artisanal workshop, and children grew up in close proximity to both parents and other family members. Children also started to work from a young age, so that especially boys soon spent more time with their fathers than their mothers.

The Industrial Revolution sharpened the division between mothers’ and fathers’ roles in the family. The introduction of factories and the rise of commuting that followed the spread of railways and streetcars separated the work and home spheres. While men were pushed into the role of exclusive economic provider, women were expected to focus on the home. In addition, as the industrial economy created demand for workers who could read and write, providing children with a proper education became an important aim for most families, and the responsibility for this fell squarely on the mothers. The result was what historians term the “Cult of Domesticity,” a new value system that emphasized the role of women as mothers and educators and discouraged working outside the home.

While motherhood was idolized, mothers were also pushed out of the labor force. In addition to the new cultural norms against working mothers, outright discrimination such as the “marriage bars” that excluded married women from many professions also contributed to defining women more exclusively through their role as mothers. By the early twentieth century, it had become rare for married women with children to be working. It was in this era of idealized motherhood but also strictly separated roles for women and men that the current incarnation of the Mother’s Day holiday in the United States was created.

The second economic transformation of motherhood started with World War II and is still ongoing today. During the war, millions of mothers joined the labor force to support the war effort while the men were fighting overseas. The women of this “Rosie the Riveter” generation demonstrated that women’s contributions do not have to be limited to the home, and many of them found enjoyment and fulfillment in being in the labor force and gaining more independence.

After the war, the traditional division of labor was reestablished to some extent. But over time, more and more women decided to continue working even after marrying and having children, and by today most women, and most mothers, are in the labor force.

In large part, this transformation in the labor market was driven by technological change. Over time, the economy shifted from agriculture and manufacturing to services, eroding men’s traditional advantage in work that rewarded physical strength. Technological change also transformed the household: modern household appliances and market alternatives to home-produced goods such as day care centers and restaurants have reduced the time required to run the household and freed up time for work.

Today, motherhood is no longer defined exclusively through caring for children, but much more so through the “having it all” challenge of combining careers and family life. Nevertheless, the impact of the older role models and cultural norms can still be felt. Notably, time use data show that women continue to bear a disproportionate share of child care work and household chores.

Hence, despite the transformed meaning of motherhood in society, there are still good reasons for a special celebration of mothers. In addition to buying flowers and chocolates, men could do even better by expressing their gratitude through putting in equal time in child care and household chores, and not just on holidays.

By familiarizing themselves with the dishwasher, diapers, and their children’s clothing needs, men could prove to be truly ahead of their time. Economic trends will continue to shape the meaning of motherhood, and fatherhood, for the next generation. Women now graduate in much larger numbers from college than men do, and in today’s knowledge economy that gives them an advantage. Women will soon be the main earners in a large fraction of families. Over time, cultural norms will adjust to this change. The current model of mothers doing most of the household work in exchange for a once-a-year celebration will gradually fade into memory, which is something to look forward to this Mother’s Day.

Matthias Doepke is professor of economics at Northwestern University. He lives in Evanston, Illinois. Fabrizio Zilibotti is the Tuntex Professor of International and Development Economics at Yale University. He lives in New Haven, Connecticut. Their new book, Love, Money, and Parenting: How Economics Explains the Way We Raise Our Kids is forthcoming from Princeton University Press in February 2019. 

W. Kip Viscusi on Pricing Lives: Guideposts for a Safer Society

ViscusiLike it or not, sometimes we need to put a monetary value on people’s lives. In the past, government agencies used the financial “cost of death” to monetize the mortality risks of regulatory policies, but this method vastly undervalued life. Pricing Lives tells the story of how the government came to adopt an altogether different approach—the value of a statistical life, or VSL—and persuasively shows how its more widespread use could create a safer and more equitable society for everyone. In this book, Kip Viscusi provides a comprehensive look at all aspects of economic and policy efforts to price lives. Pricing Lives proposes sensible economic guideposts to foster more protective policies and greater levels of safety in the United States and throughout the world.

What do you mean by “pricing lives,” and where does this occur?

What we mean by pricing lives depends on the context. For the government’s risk and environmental regulation policies, the challenge is to determine how much we are willing to spend to prevent each expected fatality. The principal measure used to set this price is known as the value of a statistical life (VSL), or the amount society is willing to pay to prevent the risk of each statistical death. Companies also set an implicit price on life every time they make products that are not risk-free. Sometimes companies have assigned numerical amounts to the value of the fatalities that are prevented, though how they have done so is seriously flawed and has greatly undervalued life. There is also a role for pricing lives after fatalities have occurred. Regulatory agencies set the penalties that firms must pay for regulatory violations that led to the fatalities. The courts also set a price on lives in wrongful death cases in terms of the amount of compensation that must be paid to the decedent’s family after the death.

Why should there be any limit at all on what the government spends to save lives?

So long as resources are limited, we cannot make an unbounded commitment to a risk-free society. The practical issue is where to set these limits. In the 1980s, I was asked to settle a dispute between OMB and OSHA over the proposed hazard communication regulation. OMB had rejected the proposal, concluding that the costs exceeded the benefits. In my analysis of this debate, I introduced the VSL concept to government agencies. Doing so made the calculation of the benefits of risk regulations ten times more valuable than they were under the previous cost of death approach. It also led to the issuance of a regulation that previously had been rejected because it was viewed as being too costly. Although some government agencies were slow to adopt the higher VSL numbers, this approach is now the norm in government agencies. The VSL is the most important single number used in the evaluation of government regulatory policies.

Where can we get these values of a statistical life numbers?

The most reliable evidence is based on U.S. labor studies of the extra pay workers get for extra risk.  Suppose, for example, that a worker was paid $900 extra per year to face a risk of 1/10,000. Then, for a group of 10,000 workers, they would be paid $9 million (10,000 × $900) for the one expected death to their group. My current estimates of the VSL in the U.S. place this value at $10 million. Once people understand that the VSL greatly exceeds people’s earnings, the criticism that the approach is immoral generally diminishes. Instead, people wonder how people can value their lives by more than what they make. The reason for this surprisingly large value is that they are not buying out of the prospect of certain death. Instead, the VSL only pertains to very small risks of death that are much less costly to prevent.

What do other countries do? Does this U.S. labor market evidence have any pertinence to them?

Many other countries have also adopted the VSL approach, usually based on studies in which people are asked in interviews how much they are willing to pay for safety. Unfortunately, the VSL estimates that are used outside of the U.S. are very low—far lower than is warranted based on the income levels relative to the U.S. Even countries such as the United Kingdom and Australia greatly undervalue lives, with far greater disparities observed for many low-income countries. In this book, I present an approach for transferring the U.S. estimates to other countries, along with appropriate adjustments for income level differences. The estimates I provide for a wide range of countries will greatly increase the value placed on safety throughout the world.

Are there other factors, like age, that can affect the VSL?

What matters is people’s own willingness to pay to reduce risk. Unlike purported economic measures, such as the cost of death approach, people can still have a high VSL even if they are retired. As it turns out, the VSL rises over people’s lifetime, and then does decline somewhat, but it does not plummet with age. The VSL for those age 65 and over is very similar to that of people in their early 20s. There was a public outcry against the Environmental Protection Agency when it attempted an age adjustment that put “seniors on sale, 37% off.” Unfortunately, this age adjustment was not based on any U.S. labor market evidence but on a more speculative interview study from the United Kingdom. Typically, government policies have impacts across the entire population so that in most instances, relying on an average VSL is all that is needed. 

This whole idea of pricing lives sounds similar what businesses do when they decide how much to spend on product safety improvements. Do they get it right?

Unfortunately, companies historically have underpriced lives as well, as they have focused on how much they have to pay in court after a fatality rather than on how much it is worth to consumers to reduce the risk of death. Companies fell prey to the same cost of death approach that government agencies used to use. Jurors have expressed alarm after reviewing these corporate practices, sometimes levying punitive damages of $100 million or more against companies that have valued lives in this way. The result has been that most companies have abandoned such risk analyses altogether and now keep such deliberations secret, for fear of liability. In my book, I propose that companies adopt the VSL in their product safety decisions and that they be given legal protections to encourage responsible corporate risk analyses.

How is it that setting a finite price on life can provide “guideposts for a safer society?”

A properly set VSL raises rather than reduces the amounts that government agencies throughout the world assign to the prevention of fatality risks. Adoption of this approach for corporate risk decisions likewise would lead to safer products. In this book, I also advocate that the VSL be used to set penalties for regulatory violations leading to fatalities. Doing so would lead to an enormous increase in penalties by, for example, boosting penalties for job safety violations by a factor of 1,000. The courts similarly can use the VSL in both assessing product safety and setting damages in situations where deterring risky behavior is the concern. My proposed expansion of the application of the VSL will provide greater incentives for safety in all these contexts. What is particularly striking is that the single VSL number can serve multiple purposes and set the price on life in so many different situations.

W. Kip Viscusi is the University Distinguished Professor of Law, Economics, and Management at Vanderbilt University. His many books include Economics of Regulation and Antitrust and Fatal Tradeoffs: Public and Private Responsibilities for Risk.

Paul Tucker on Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State

TuckerCentral bankers have emerged from the financial crisis as the third great pillar of unelected power alongside the judiciary and the military. They pull the regulatory and financial levers of our economic well-being, yet unlike democratically elected leaders, their power does not come directly from the people. Unelected Power lays out the principles needed to ensure that central bankers, technocrats, regulators, and other agents of the administrative state remain stewards of the common good and do not become overmighty citizens. Like it or not, unelected power has become a hallmark of modern government. This critically important book shows how to harness it to the people’s purposes.

What is the regulatory state?

It’s a term that has come to be used to describe a host of government bodies that regulate particular economic sectors or the public more generally to protect, say, investors, the environment, consumers, workers, and so on. In a rudimentary form it has existed for a long time, going back to the 19th century and beyond. Going wider, Americans sometimes refer to the administrative state, meaning the evolution of government beyond a world of legislators and courts to one in which the executive branch makes policy and is divided up into departments, agencies, bureaus, commissions, and so on.

What are Independent agencies, and why do they matter?

They are government organizations that are not under the day-to-day control of elected politicians, whether in the executive branch or the legislature. Obvious examples today are the central banks, such as the Federal Reserve, European Central Bank, and the Bank of England, but also various regulators insulated from ongoing political control. By no means all agencies in the administrative state are independent. On both sides of the Atlantic, many are under the control of cabinet ministers or subject to annual budget approvals from the legislature, which makes them sensitive to politicians’ sentiments and whims. Independent agencies are distinctive in that politicians can control them only by amending or repealing legislation.

That sounds problematic in a democracy. Is it?

That’s the point of the book. The way I’ve just described them it could be a hell of a problem. Imagine an independent agency that had lots of powers but only the vaguest purpose and objective. Who would be able to tell whether it had succeeded in its mission if it set its own goal posts?! That’s at odds with some of our deepest values: just as “no taxation without representation” was a rallying cry a couple of centuries’ ago, we might just as well demand “no regulation without representation.”

Are central banks a particular problem?

They have become the poster boys and girls of today’s unelected power. Compared with what happened after the Great Depression in the 1930s, when it was politicians who did the heavy lifting, this time it has been central banks that have led the way in reviving the economy and redesigning the financial system. They have used their balance sheets on a truly gigantic scale to influence credit conditions in lots of markets, and have been given lots of new regulatory powers. They are more powerful than ever before, ranking with the judiciary and military as a third core pillar of unelected power.

Do people object to all this?

Yes, but in rather different ways in different countries. In the US, since the New Deal there have been critics who object that regulatory agencies violate the values associated with the separation of powers or even the Constitution itself. In France, not long ago the parliament passed legislation to put more structure around such agencies. In the UK, there is episodic antagonism to government by ‘experts.’

And on central bank independence, there have been challenges in the German constitutional court and attempts to pass reforming legislation in the US Congress.

So what is the solution?

Our democracies need norms for whether and how to delegate to independent agencies that measure up to the deep political values of our democratic, liberal republics: the various values of democracy, rule of law, constitutionalism. My book proposes and defends just such a set of Principles for Delegation, as I call them. They come in two broad parts: criteria for whether to delegate, and precepts for how to delegate.

Criteria for whether to delegate: I argue that a policy function should not be delegated to a truly independent agency unless (1) society has settled preferences; (2) the objective is capable of being framed in a reasonably clear way; (3) delegation would materially mitigate a problem of credible commitment; and (4) the policymaker would not have to make big choices on society’s values or the distribution of its resources.

Precepts for how to delegate: (1) the agency’s purposes, objectives and powers should be clear and set by elected legislators; (2) its decision-making procedures should be set largely by legislators and should accord with the values of the rule of law; (3) the agency itself should publish the operating principles that will guide its exercise of discretion within the delegated domain; (4) there should be transparency sufficient to permit accountability to the legislature for the agency’s stewardship of the regime and, separately, for politicians’ framing of the regime; and (5) it should be clear what (if anything) will happen, procedurally and/or substantively, when the edges of the regime are reached but the agency could do more to avert or contain a crisis. 

Perhaps the biggest thing is that elected legislators should set a monitorable objective. Independent agencies really can improve the credibility of commitments made by government, but only if we know what we want them to do and can track whether or not they are doing it.

Would those Principles affect anything much?

Yes. Here are just three examples.

They would challenge the acceptability of judges completely having completely overhauled the principles of competition policy a few decades ago. The legislation was vague and the views of economists had moved on, so the courts had room and reason to act. But, given our democratic values, this should have been work for elected politicians.

They suggest that role of some financial-market regulators in preserving a stable financial system needs either to be better insulated from politics (such as the SEC in the US) or subject to much clearer objectives (UK).

And they would restrict the roles and activities of central banks rather more than we have seen in recent years.  

Is any of this realistic in actual democratic states?

Well, that’s the point of the book. There are no deep constitutional blockages, so it’s a question of whether we want to be governed in a way that’s consistent with our values. I’m hoping that people who see merit in my Principles for Delegation (or something like them) will cite many more examples than I can (or even know about), generating the kind of debate that is badly needed about how state power is allocated.

Anyway, surely something has to be done to bring the role of experts in government in line with our democratic commitments.

Why did you write the book?

I spent a good part of my central banking career helping to design regulatory and monetary regimes, none more important than the expansion of the Bank of England’s powers after the Great Financial Crisis. We resisted some powers, wanted others constrained, and had strong views on how the different responsibilities should be assigned to distinct committees so as to disperse power and focus incentives. I wanted to try to write down the values and considerations lying behind that. When I moved to Harvard in late-2013, I had the opportunity to do so.

Paul Tucker is a fellow at the Harvard Kennedy School and chair of the Systemic Risk Council. For more than thirty years, he was a central banker and regulator at the Bank of England and the Bank for International Settlements. He lives in London.

Dr. John C. Hulsman: The Ten Commandments of Political Risk

Disturb us, Lord, when we are too well pleased with ourselves
When our dreams have come true because we have dreamed too little
When we arrive safely because we sailed too close to the shore.

Disturb us, Lord, to dare more boldly, to venture on wider seas
Where storms will show your mastery
Where losing sight of land, we shall find the stars.

—Excerpts from Sir Francis Drake’s prayer, 1577 (apocryphal)

HulsmanThe great goal, the Everest of my book, has been to identify the historical elements that comprise the rules of the road for mastering political risk analysis and to holistically put our ten commandments to use in explaining the baffling world we presently live in. Having discovered these commandments—and illuminated them through the use of historical story-telling, deriving them from real-world policy situations throughout the ages—we can get to the Holy Grail of actual understanding.

Here at the end of our story, through the use of this unique heuristic method, we have delineated the long and neglected history of political risk analysis, linking this important tale to the broader efforts of both business and political leaders to master risk in general. Confident in what geopolitical risk analysis has been, is, and can be, it is clear that the Delphic dream of soothsaying—in a limited way, over limited issues, for a limited period of time—can be partially fulfilled.

  • “We are the risk.” As the history surrounding Sejanus and the decline and fall of the Roman Empire makes clear (alongside the corroborating tale of present-day Europe’s decadent decline), geopolitical analysts have a terrible time looking in the mirror and seeing that the society they are part of can itself be the major geopolitical risk problem.

 

  • Gaming out “lunatics.” Far too often geopolitical risk analysts let those with very different belief systems off the hook by lazily assuming that they must be crazy, rather than looking for the method to their madness. As the story of “The Old Man of the Mountain” and the Third Crusade (with inter-chapters on both Charles Manson and ISIS) makes clear, there is almost always an internal logic to any seemingly mad geopolitical interlocutor that can be followed and assessed.

 

  • Gaming out “chess players.” Amidst the daily tumult of a constant barrage of information, it is easy to lose sight of the intellectual needle in the haystack: the assessment of “chess players,” those geopolitical decision-makers who have stable, rational, coherent, long-term strategies in place to further their geopolitical goals. As reviewing the history of Niccolo Machiavelli and Pope Julius II (with an inter-chapter on George Washington and Alexander Hamilton) illuminates, finding these rare geostrategic birds is well worth the effort, as once they are identified (which is difficult), their future actions can rather easily be predicted.

 

  • Recognizing game changers. As the stirring story of John Adams in the sultry summer of 1776 makes clear, seeing the bigger picture—discerning how specific contemporaneous events fit into the larger historical pattern—is a mighty tool in political risk analysis. Separating the wheat from the chaff and intellectually drilling down on what really matters and its historical meaning (as we see both Adams and inter-chapter hero Winston Churchill doing in very different historical contexts) allows the political risk analyst as well as the foreign policy practitioner to see the world as it actually is.

 

  • Balance is the key to foreign policy. Having discovered the secrets of one major driver of geopolitics—be it macroeconomics, geopolitics, or cultural power—far too often analysts quickly forget that there are others and that it is the mix that explains everything. The twin stories of a beleaguered Venetian Republic and a seemingly all-conquering Napoleon in 1797 allow a dual critique of both an economics-only and overly militaristic policies and the doom to which both one-sided initiatives inevitably lead.

 

  • If you are digging yourself an intellectual hole in foreign policy analysis—stop. The “losing gambler in Vegas” syndrome affects both policy-makers and analysts. As the legendary Robert E. Lee found to his supreme peril at Gettysburg (and also “the best and the brightest” of the Kennedy and Johnson administrations as they met their nemesis in Indochina), pushing ahead with an already failed policy in a desperate effort to recoup past losses leads to calamity.

 

  • Know your country’s place in the world. The singular case of the late Victorian titan Lord Salisbury—who bravely and correctly righted Britain’s foreign policy to fit the paradox of its relatively declining but still dominant place in the world of the 1890s—highlights this vital requirement for both policy-makers and analysts alike. Only by fearlessly and correctly assessing your country’s true place in the world (as the inter-chapter on the Genro of Japan makes clear happened across the globe from Salisbury a generation earlier) can you pursue successful political risk analysis.

 

  • Do not put all your eggs in one strategic basket. Distantly related to the “losing gambler in Vegas” syndrome, the “promised land fallacy” besets decision-makers and analysts who ruinously rely on one overall strategy to magically attempt to alter their country’s overall geopolitical position in the world. In the case of Wilhelmine Germany, Admiral Von Tirpitz’s disastrous plan to challenge British naval might (echoing the inter-chapter on Soviet leader Nikita Khrushchev’s equally ruinous “Wars of National Liberation” gambit) helped lead to the Great War and Germany’s destruction.

 

  • Know the nature of the world you are living in. The trials and tribulations of Beatle George Harrison (with the inter-chapter focusing on the diametrically opposed case of the fall of Brian Jones and the rise of the Rolling Stones) and the stunning, lightning-quick dismemberment of his band dramatically underline that successful systems can collapse in the blink of an eye if their underlying power realities change, failing to any longer reflect the systemic power facts on the ground that created such a system in the first place. Policy-makers as well as political risk analysts must know both the nature of the global system they are living in (is it characterized by one great power, two, or many?) as well as if that system is durable, fragile, or evolving.

 

  • Prepare for the “butterfly effect.” The telling present-day case of Deng Xiaoping and the colossal success he made of both Chinese foreign and economic policy must not obscure the reality that East Asia today sits on a powder keg, a single random event away from 1914; just one drunken Chinese sea captain could quite plausibly upset the strategic equilibrium in Asia. The best policy-makers and political risk analysts (as the inter-chapter example of Harold Macmillan also makes clear) see the weaknesses in even the most successful foreign policies, having resilient initiatives at the ready to stave off seemingly unexpected disasters.

 

In traveling far from home, as Sir Francis Drake bid us to do in the swashbuckling, mesmerizing prayer that opens this article and To Dare More Boldly, our journey through history has been bountifully rewarded. For yes, within limits, the future can be foretold through the use of political risk analysis. Truly venturing far from our intellectual shore, in daring more boldly, we have come to see the stars. 

Dr. John C. Hulsman is the president and cofounder of John C. Hulsman Enterprises, a successful global political risk consulting firm. For three years, Hulsman was the Senior Columnist for City AM, the newspaper of the city of London. Hulsman is a Life Member of the Council on Foreign Relations, the preeminent foreign policy organization. The author of all or part of 14 books, Hulsman has given over 1520 interviews, written over 650 articles, prepared over 1290 briefings, and delivered more than 510 speeches on foreign policy around the world. His most recent work is To Dare More Boldly: The Audacious Story of Political Risk.

Rachel Sherman: How New York’s wealthy parents try to raise ‘unentitled’ kids

This article was originally published at Aeon and has been republished under Creative Commons.

ShermanWealthy parents seem to have it made when it comes to raising their children. They can offer their kids the healthiest foods, the most attentive caregivers, the best teachers and the most enriching experiences, from international vacations to unpaid internships in competitive fields.

Yet these parents have a problem: how to give their kids these advantages while also setting limits. Almost all of the 50 affluent parents in and around New York City that I interviewed for my book Uneasy Street: The Anxieties of Affluence (2017), expressed fears that children would be ‘entitled’ – a dirty word that meant, variously, lazy, materialistic, greedy, rude, selfish and self-satisfied. Instead, they strove to keep their children ‘grounded’ and ‘normal’. Of course, no parent wishes to raise spoiled children; but for those who face relatively few material limits, this possibility is distinctly heightened.

This struggle highlights two challenges that elite parents face in this particular historical moment: the stigma of wealth, and a competitive environment. For most of the 20th century, the United States had a quasi-aristocratic upper class, mainly white, Anglo-Saxon Protestant (WASP) families from old money, usually listed in the Social Register. Comfortable with their inherited advantages, and secure in their economic position, they openly viewed themselves as part of a better class of people. By sending their kids to elite schools and marrying them off to the children of families in the same community, they sought to reproduce their privilege.

But in the past few decades this homogenous ‘leisure class’ has declined, and the category of the ‘working wealthy’, especially in finance, has exploded. The ranks of high-earners have also partially diversified, opening up to people besides WASP men. This shift has led to a more competitive environment, especially in the realm of college admissions.

At the same time, a more egalitarian discourse has taken hold in the public sphere. As the sociologist Shamus Khan at Columbia University in New York argues in his book Privilege (2012), it is no longer legitimate for rich people to assume that they deserve their social position based simply on who they are. Instead, they must frame themselves as deserving on the basis of merit, particularly through hard work. At the same time, popular-culture images proliferate of wealthy people as greedy, lazy, shallow, materialistic or otherwise morally compromised.

Both competition and moral challenge have intensified since the 2008 economic crisis. Jobs for young people, even those with college educations, have become scarcer. The crisis has also made extreme inequality more visible, and exposed those at the top to harsher public critique.

In this climate, it is hard to feel that being wealthy is compatible with being morally worthy, and the wealthy themselves are well aware of the problem. The parents I talked with struggle over how to raise kids who deserve their privilege, encouraging them to become hard workers and disciplined consumers. They often talked about keeping kids ‘normal’, using language that invoked broad ‘middle-class’ American values. At the same time, they wanted to make sure that their children could prevail in increasingly competitive education and labour markets. This dilemma led to a profound tension between limiting and fostering privilege.

Parents’ educational decisions were especially marked by this conflict. Many supported the idea of public school in principle, but were anxious about large classes, lack of sports and arts programmes, and college prospects. Yet they worried that placing kids in elite private schools would distort their understanding of the world, exposing them only to extremely wealthy, ‘entitled’ peers. Justin, a finance entrepreneur, was conflicted about choosing private, saying: ‘I want the kids to be normal. I don’t want them to just be coddled, and be at a country club.’ Kevin, another wealthy father, preferred public school, wanting his young son not to live in an ‘elitist’ ‘narrow world’ in which ‘you only know a certain kind of people. Who are all complaining about their designers and their nannies.’

The question of paid work also brought up this quandary. All the parents I talked with wanted their kids to have a strong work ethic, with some worrying that their children would not be self-sufficient without it. But even those who could support their kids forever didn’t want to. Scott, for example, whose family wealth exceeds $50 million, was ‘terrified’ his kids would grow up to be ‘lazy jerks’. Parents also wanted to ensure children were not materialistic hyper-consumers. One father said of his son: ‘I want him to know limits.’ Parents tied consumption to the work ethic by requiring kids to do household chores. One mother with assets in the tens of millions had recently started requiring her six-year-old to do his own laundry in exchange for his activities and other privileges.

This mother, and many other parents of younger children, said they would insist that their kids work for pay during high school and college, in order to learn ‘the value of a dollar’. Commitment to children’s employment wavered, however, if parents saw having a job as incompatible with other ways of cultivating their capacities. Kate, who had grown up middle-class, said, of her own ‘crappy jobs’ growing up: ‘There’s some value to recognising this is what you have to do, and you get a paycheck, and that’s the money you have, and you budget it.’ But her partner Nadine, who had inherited wealth, contrasted her daughter’s possibly ‘researching harbour seals in Alaska’ to working for pay in a diner. She said: ‘Yes, you want them to learn the value of work, and getting paid for it, and all that stuff. And I don’t want my kids to be entitled. I don’t want them to be, like, silver spoon. But I also feel like life affords a lot of really exciting opportunities.’

The best way to help kids understand constraints, of course, is to impose them. But, despite feeling conflicted, these parents did not limit what their kids consumed in any significant way. Even parents who resisted private school tended to end up there. The limits they placed on consumption were marginal, constituting what the sociologist Allison Pugh in Longing and Belonging (2009) called ‘symbolic deprivation’. Facing competitive college admissions, none of the high-school-age kids of parents in my sample worked for pay; parents were more likely to describe their homework as their ‘job’.

Instead of limiting their privilege, parents tried to regulate children’s feelings about it. They wanted kids to appreciate their private education, comfortable homes, designer clothes, and (in some cases) their business-class or private travel. They emphasised that these privileges were ‘special’ or ‘a treat’. As Allison said, of her family’s two annual vacations: ‘You don’t want your kids to take these kinds of things for granted. … [They should know] most people don’t live this way. And that this is not the norm, and that you should feel this is special, and this is a treat.’

By the same token, they tried to find ways to help kids understand the ‘real world’ – to make sure they ‘understand the way everyone else lives’, in the words of one millionaire mother. Another mother fostered her son’s friendship with a middle-class family who lived in a modest apartment, because, she said: ‘I want to keep our feet in something that’s a little more normal’ than his private-school community.

Ideally, then, kids will be ‘normal’: hard workers and prudent consumers, who don’t see themselves as better than others. But at the same time, they will understand that they’re not normal, appreciating their privilege, without ever showing off. Egalitarian dispositions thereby legitimate unequal distributions, allowing children – and parents – to enjoy and reproduce their advantages without being morally compromised. These days, it seems, the rich can be entitled as long as they do not act or feel ‘entitled’. They can take it, as long as they don’t take it for granted.Aeon counter – do not remove

Rachel Sherman is associate professor of sociology at the New School for Social Research and Eugene Lang College. She is the author of Class Acts: Service and Inequality in Luxury Hotels. Sherman lives in New York