Sunday, July 07, 2013

Levy on Risk and Capitalism

I enjoyed Jonathan Levy's Freaks of Fortune--profited from it, too, I think--although I would have a tough time saying just what the book is about.  No matter: I think the author, if pressed, might have to admit the same,.  The subtitle is "The Emerging World of Capitalism and Risk in America,"  What we have here half a dozen loosely connected accounts of people who cope with various kinds of dislocations in the economy of 19th Century America.  I suppose you could say that "risk," broadly defined figures in all of them, although in some the relevance is more attenuated than others.  In any event a hasty reader might infer that Levy thinks risk is peculiar capitalism. If that were a fair characterization then I think you'd have to say that he is forgetting disease, drought, famine,natural disaster and all the other visitations that have afflicted humankind throughout its history.  But I don't suppose he is saying that.  I suppose he is saying (although, strictly speaking, he does not say) that there are certain risks that are are peculiar to capitalist (market?) societies, and that demand responses beyond the ken of mere hunter-gatherers.  He doesn't specify in detail but he does use the phrase "self-ownership" by my count eleven times  to describe the creature newly obliged to lfunction in the new human bazaar.  In context  the phrase appears to come freighted with a kind of horrified fascination and I think I sense (though again, he does not spell out) a nostalgia for some kind of communal past.  He's entitled to that,  of course,but it might have helped if he had been more specific.

Surely the best of these loosely-related stories is his account of the "fraternal societies" that arose in the late 19th Century, to mix ritual,social companionship and benefit payment schemes for members.  You can't spend a lifetime reading commercial law cases without stumbling onto these fraternal societies and I thought I knew a bit about them but I seem to have had it backwards. I had assumed they were precursors of organized market insurance, but apparently they come later: they arise, rather, as a a foil to (and a criticism of) the (as we might say) morals of the marketplace.  The linchpin is that if a member (say) dies, then the society may pay a death benefit; but the money comes from an assessment levied only after the triggering event.  Translated, these societies have--and want--nothing to do with actuarial tables, experience rating, investment reserves and all the other accouterments of a conventional insurance: we are not like them.  It's  interesting also to read his account of the fraternal societies as they try to feel their way through the changing institutional structure of a changing age.  At one point we have Samuel Gompers, new leader of the new American Federation of Labor arguing that "an ideal labor union was really a 'life and health assurance company,' with a 'strike benefit added.'"  Oddly, having done so well with the fraternal societies as foils to "insurance," he says little except in passing about the rise of insurance more generally.

I also profited from his discussion of the post-civil war settlement and the question of how to reconfigure the newly freed black labor force. We talk of "40 acres and a mule" as an idea that went nowhere; but  Levy is able to show that there were some limited experiments with giving blacks access to land for farming,   Some of the support for the idea came from northern abolitionists and here is where it gets really interesting. Levy's point here is that the abolitionists--often enough rooted in the textile economy of New England--hoped to see the blacks through their energy back into cotton, as cheap supply for the northern mills.  But no: the newly empowered blacks seemed to show an unsettling tendency to subsistence farming, as if the idea of putting their own food on the family table was more attractive to them then the idea of getting into production for market (Levy touches virtually not at all on the economics of the choice--whether subsistence farming was a viable alternative, whether production for market realistic promise of a better  life).

Levy also offers an interesting sketch of another little-known institution: a "Freedman's Bank," created in the aftermath of the war to accept and invest the savings of the newly liberated former slaves.  The bank seems to have received an impressive lot of deposits although Levy doesn't linger long on trying to figure out just how the ex-slaves could have acquired--and held onto--so much money.  In a cruel followup, the bank collapsed and the money mostly disappeared, whether the result of fraud, mismanagement, or the general maelstrom surrounding the Panic of 1873,  It's a sad story but a sad part of it is that a lot of white depositors met the same fate when their banks too got swept into the undertow.  I suppose you might say that here we have one of those "risks" that only capitalism can offer.   Perhaps so, but here would have been an excellent point to meditate on just which risks are (or are not) artifacts of a market economy.

I think Levy does less well on the travail of farmers on the frontier in the 1870s-90s.  Heaven knows there was plenty of risk out there: tornadoes, locusts, dust storms, drought, whatever.  Levy seems particularly disturbed that these folks seem to be producing "for market" as distinct from--well as distinct from what, exactly?  Did he hope to find subsistence farming on the 100th meridian?  Levy doesn't specify, and in general here I think his problem is that he doesn't offer much by way of context.  I'd like to know more about what he thinks of the pattern of rain drought that seems to have played so large a role in the development of the frontier; more about how he understands the role of deflation in the money economy.  And so forth.  It would be a far more complicated story but maybe that is the point; maybe this is is all too complicated to deal with adequately in a single chapter.  A chapter on the futures market in Chicago seems vulnerable to the same kind of complaint.  Levy makes it tolerably clear that he hasn't the least use for futures trading in any but perhaps the most limited way.   He might be right, but I think the whole issue needs a more imaginative understanding than he seems able to give it.

Levy's final chapter on "the trusts" is perhaps most disappointing.  He's talking about the great age of industrial consolidation beginning, perhaps, with the Corsair Compact on JP Morgan's yacht in 1885 and continuing, perhaps, to the death of Teddy Roosevelt in 1919.  It's a fascinating story and it presents issues that I don't think we  begin to understand even to this day.  But that's the problem: for good or ill it is a highly visible story and it has been combed over often. Levy would have to be prepared to bring something new to the table; else we might as well retreat to older and more polished (if still incomplete) accounts.  

[One index of Levy' shaky grasp of the issue is that he builds his story of "the trusts" around the now-forgotten George W. Perkins, a vice-president of New York Life who spent a few not-very-satisfactory years as a Morgan associate.  Levy refers to Perkins (if I read him right) as "running the House of Morgan" which certainly would have come as a surprise to the old man himself.  Perkins was, rather, a man of some achievement in the insurance business who nonetheless made a perfect fool of himself in the Hughes insurance inquiry of 1906.  Perkins' first love appears to have been politics or, more narrowly, putting himself into the public eye.  He's entirely too slender a reed to carry the burden that Levy imposes on him.]

So, an imperfect, but still a good book.  The stuff about the fraternal societies and black land ownership are worth the price of admission. Every other topic is sufficiently interesting and important to deserve a fuller,more measured treatment on its own.


Ebenezer Scrooge said...

Mancur Olson did a good job with the fraternal societies in The Logic of Collective Action. However, his view of these societies was quite neoclassical: a group of policy entrepreneurs who had to keep the troops committed to the cause, despite the obvious externalities of collective action. They did so by offering insurance.

IIRC, for-profit insurance (like banking) developed as a business convenience, and spread to the bougeoisie. In the 19th century, the proles were thought better-served by the cooperative sector, including fraternal societies and unions.

While staying on my temporary neoclassical kick, there is no inconsistency between retrospective assessments and sound actuarial practice. Lloyds' names were traditionally subject to retrospective assessments--that's what "unlimited liability" means. Then again, Lloyds actuaries have been known to screw up big.

Buce said...

Thanks, very interesting comment. I'd say that Levy and Olson are not necessarily inconsistent: the "policy entrepreneurs" could have believed their own story at the same time they were marketing it; successful salesmen are typically the ones that believe their own pitch.

Right about Lloyds of course although the point may not be whether the fraternals were different but whether they thought themselves different.

Ebenezer Scrooge said...

Social valence constrains; instrumental rationality explains. Or vice-versa.

I'm not sure I buy Levy's story, even though it is admittedly not inconsistent with Olson's. (I do not think that the double negative is too precious here.) The low-income banking of the 19th century--which I know best--was largely eleemosynary: top-down charitable. I know that much insurance was mutual, but I don't know if it was bottom-up mutual (Levy's story) or top-down mutual (institutions such as the Seaman's Bank for Savings.)