To drop you into the discourse in medias res, there has been a discussion on Twitter over the last few weeks on whether nationalism was invented in the 19th Century. The strong version of that claim (whereby ethnonationalist loyalties were not politically significant until the Age of Revolutions) is spurious. Consider John of Gaunt’s speech in Richard II:

This royal throne of kings, this scepter’d isle…

This happy breed of men, this little world,

This precious stone set in the silver sea,

Which serves it in the office of a wall…

Against the envy of less happier lands,

This blessed plot, this earth, this realm, this England,

This nurse, this teeming womb of royal kings,

Fear’d by their breed and famous by their birth,

Renowned for their deeds as far from home,

For Christian service and true chivalry…

This land of such dear souls, this dear dear land,

Dear for her reputation through the world…

That speech alone should convince anyone that political loyalties were often tied to nationalist feeling long before 1848 (or 1789). Unfortunately, facts have rarely gotten in the way of historians reaching a left-leaning consensus.

The push to minimize the role of the nation in history spans beyond the early modern. Much discourse has been about how the Romans were not an ethnically organized society. Here is an exemplar:

These people are wrong.

A Less Insufferable Alternative

Today, I am going to explain, briefly, the relationship between ethnic loyalty and the SPQR. In brief: the Roman Republic was a nationalist enterprise, and its institutions were the codification of informal ethnic-and-familial ties. Rome built her empire on national, familial, and ethnic loyalty, just as England did two millenia later. And yet Rome, like England, was not a purely biological phenomenon. The Roman identity was not literally taxonomic. Instead, family ties were codified into civic institutions. So, citizenship was not legally dependent on family or ethnic origin, even though citizenship originated as a legal representation of family-membership. This codification provided an advantage to Rome: institutions and ethnic loyalties could co-evolve as circumstances required.

In those respects, what is true of Rome is true of England. Since at least the 17th century, it has possible for non-Britons to become English through civic processes. Thus, soon after the Huguenots traversed the channel in flight of the Church of Rome, they were decidedly English, with all the rights and responsibilities of Englishmen. And yet, even though England was open to immigration, the English nation is clearly an ethnic phenomenon, rather than a “creedal” or “civic” nation like Singapore or South Africa. English (and later British) institutions command the loyalty of the people due to basically ethno-nationalist sentiments. Britain is a cultural group, first and foremost. Rome was, in that respect, similar (as I will argue below).

Beyond mere codification of ethnic ties, Rome and Britain had something else very special in common: in both cases, the ethnicity which defined the state changed. So, in the 17th century, London’s empire was an English one, built in the interest of the English people. Eventually, that changed. By the 19th century, London ruled a British empire, where the Scots and protestant Irish were genuine equals in the state. Scotland may have been a rather eccentric region of the metropole, but Scots (unlike the Catholic Irish) were not foreigners in the eyes of her majesty’s government. The empire of London remained an expression of ethnocultural ties, but these ties expanded in scope alongside the empire. Rome developed much the same way, and this is reflected in the history of Roman citizenship.

The complex transformations of the Roman ethnic identity have deceived a number of historians into thinking Rome did not have an ethnic identity whatsoever.

This is an enormous mistake, and misleads many on the nature of Rome’s “secret sauce” that allowed Rome to dominate the Mediterranean.

There is one further aspect of Roman citizenship that has led to confusion. Unlike the British, the ethno-racial ties of a Roman were deeply nested. So, Britain today has only a few significant hereditary identities. These are the English, Welsh, Scots, and Irish (and Ulster Irish). Other than those, the country has no politically important hereditary groupings (except among immigrants). Romans were more complicated. These complications were rooted in the pre-Roman history of the Italian peninsula, and the gradual expansion of Roman citizenship.

The Relationship of the Roman State to Ethno-Familial Ties

Here is how Roman citizenship developed:

Rome, in its very beginning, was a small community of Sabines, Latins, and Etruscans, as we can see from the ancient genetic record. Over the centuries, this small community grew, largely through birth, and had (rough) consanguinity. However, beyond blood ties, it also had strong institutions around its center: the Roman urb. So, Roman citizenship always had a more civic character than other Italian polities like the tribally-organized Samnites. But the Romans did not have a merely civic identity. They shared a language, gods, a history, festivals, rites and habits. Because the ancient world was a violent place, the Romans were stuck with each other against even their nearest neighbors. Over time, the ethnic divisions within nascent Rome dissolved, and there was a coherent Roman people. They were a tight-knit community. Scholars debate exactly how the early Romans related to other Italians like the Etruscans or Latins, but there was at least some period of time when the “Ius Conubii,” (i.e., the right to marry Romans) was tightly restricted, even being unavailable to other citizens of Latium. At some point, these rules were relaxed. At some point, some Latin communities acquired the right to move to Rome and become Roman, or to marry Romans. These rights¹ came to be called the “Latin Rights.” They may have originally been held only by certain Latin communities, or elites from certain Latin communities, but by 338, they became the right of all Latins, after a war over the question. Note that by 338, Rome had already acquired dominion over many communities outside Latium, and so the Latin War was a dispute between the most Roman people (Latins) over how to rule less Roman people (other Italians).

So, as one can see: the relationship between Roman-origin and Roman citizenship was always mediated through institutions, but it had a significant ethno-cultural element. Being Latin became (nearly) equivalent to being Roman when Rome began to project its power over others.

Thus, even through the late Republic, by which time the city of Rome had become a fairly cosmopolitan place, the Romans defined themselves by common ancestry, tracing themselves in myth to the divine Mars, through Romulus and Remus. As Livy writes:

The traditions of what happened prior to the foundation of the City or whilst it was being built, are more fitted to adorn the creations of the poet than the authentic records of the historian, and I have no intention of establishing either their truth or their falsehood. This much licence is conceded to the ancients, that by intermingling human actions with divine they may confer a more august dignity on the origins of states. Now, if any nation ought to be allowed to claim a sacred origin and point back to a divine paternity that nation is Rome. For such is her renown in war that when she chooses to represent Mars as her own and her founder’s father, the nations of the world accept the statement with the same equanimity with which they accept her dominion.

It is worth noting that the word translated here as “nation” is “gens” - which is the Latin word for an extended family.

The terms by which commentators referred to Romans were decidedly tied to ancestry. Thus, the historian Appian, centuries later, referred to the Romans as a “γένους” a word which is typically translated as “race,” “stock” or “lineage,” and is distinctly more racial in connotation than the alternative “ethnos.”² Florus, another historian from Appian’s time, described the Romans as a single “Sanguinus” or “bloodline,” combined from the Latins, Sabines, and Etruscans.³

It is intriguing that historians managed to reconcile their views of a common Roman bloodline with the brute fact that Roman citizenship expanded radically over time. In part, they did this by emphasizing ancestral (or cultural) ties between the original inhabitants of the city and later admittants to citizenship. Thus, Livy writes that the Latins in 340 wished not to war with the Romans due to their “consanguinity.” Appian wrote that the Roman senate could not have denied citizenship to the Latins in 338, as they were “kinsmen.”⁴

By this method of expansion, blood ties continued to structure the general understanding of Roman citizenship, even though the requisite blood-ties changed over the history of the Republic.

Now, fast forward to the century after the social war, the final era of the Republic, when Rome saw its most rapid expansions and the cultural flowering called its “Golden age.” At that time, “Romanness” and Roman citizenship had greatly expanded beyond Latium. Yet, citizenship still had a decidedly ethnic dimension. At that time, the empire was dominated by Italians (now significantly latinized⁵). Not all of these Italians would necessarily be called “Romans,” but all of them held citizenship, and thus had powers and privileges over Rome’s subject peoples across the broader Mediterranean basin.⁶

The Italians, even after the social war, had a complicated set of loyalties. An Italian of the late Republic would be loyal to his familia (i.e., his immediate relatives). He would also be loyal to his gens (i.e., his clan). In later centuries, most gens would be divided into different sub-clans called cognomina, but such divisions were rare at this time. An Italian would also likely be loyal to his city (Naples, Brindisi, Tarento, Pompeii, etc.). Then he would perhaps be loyal to his people. He might be Etruscan, Ligurian, Piceni, Greek, etc., and would feel loyalty accordingly. Finally, he would be loyal to the SPQR itself.⁷ Thus, the empire was divided into hereditary groups that were themselves divided into hereditary groups, and each layer had political significance.

Because pre-Roman Italy was largely a world of ethnically-organized polities, many of the wars of the early Roman Republic were against informally-organized ethnic groups. These included the Samnite war, the Picentine war, etc. So, once the Romans had conquered and integrated those groups, the Roman empire was in some ways like a British empire if Britain had been built by Scots (who were also fractal in organization: divided into lowlanders and highlanders, and further divided into clans and septs). We can draw an even more direct analogy between Republican Italy and a modern people: Rome was built by Italians. Italians today clearly have nationalism, but also have nested identities. So, Italians today are very loyal to their city, and the Sienese are even loyal to their ancestral neighborhood. In some regions, there is intense nationalism for the north of Italy, and finally there is loyalty to Italy itself.

Like Rome, or Britain, loyalty in Italy today is a mix of ethnic and civic. It is possible for a Napolitano to become Veneziano (hypothetically…), just as it is possible for the son of Berber Jews to become ethno-nationalistically French. And yet “Venetians” are understood to have a common history, a common dialect, and a distinct appearance. Italian cities and regions have ethnic ties which are mediated through civic identities, but those civic identities are given life by ethnic ties. Similarly, the Roman Republic was an organization of a people, connected by ties of ancestry and culture, even though Roman citizenship was not legally defined in terms of shared ancestry.

By the late Republic, the Roman ethnic-identity had somewhat simplified, by becoming largely co-extensive with Italian origin. Thus, in the records we have, we find numerous “snide remarks” by Romans to the many peoples of the Mediterranean (Gauls, Greeks, Jews, Egyptians, Spaniards, Africans, Sardinians, Germans, Phoenicians, Carthaginians, Persians, Thracians, etc.), and yet there is little ill said of any Italians (except for the occasional jibe at the Etruscans).⁸

By this time, the Italians had come to be seen as one common community. Thus, Livy presents the Campanians, in their apologies for disloyalty in the second punic war, as claiming good treatment by Rome due to their “consanguinity.”⁹ Similarly, Polybius presents the Campanian Mamertines as pleading for Roman support against Syracuse on grounds of “homophily.” The historian Vellieus, in the time of Tiberius, explained the social war as motivated by allies’ resentment at Rome for treating them as “aliens” despite their shared “gentis et sanguinis.” At least by the time of the Empire, it was so obvious that Italians were fundamentally Roman that withholding citizenship from them was unfair. The Socii named their capital “Italica,” and its coins depicted the Italian bull goring the Roman Wolf. Rome, by building the Italians into a military and commercial superpower, had created an Italian nation that it could no longer unilaterally control.¹⁰

Now, the enfranchisement of all Italy certainly put a strain on the Roman self-conception in terms of shared genous, given the diverse ancestry of pre-Christian Italy. Consider: Cato sometimes explained the traits of Romans as tracing to their descent from the hardy Sabines. And yet, by Cato’s time, the senate had incorporated the wealthy elites of all the Italian peninsula. One way the Romans got around this problem was by lying. So, Italian aristocrats of the late republic fabricated genealogies for themselves to tighten their ties to the heroes of the Roman past. Modern historians have thus described Roman ethnic identity as having a “strikingly heterogenous, even labyrinthine character.” The Romans were greatly concerned with “descent,” and yet “traced no single chain that gave a linear quality to their lineage… They took pride in multiple origins” and were a “conglomerate” of “repeatedly renegotiated identities.”¹¹

And yet, the “labyrinthine” views of the Imperial-era historians were not pure fraud or anachronism; there was a pre-existing connection between Italians¹² that was already apparent in the middle-republic. Thus, Polybius, in the Second Century B.C. described the strength of the Roman state as the strength of these Romanized Italians acting in defense of their homeland.¹³ He explained the superiority of Roman infantry to Carthaginians thus:

[A]s regards military service on land the Romans are much more efficient [than the Carthaginians]. They indeed devote their whole energies to this matter, whereas the Carthaginians entirely neglect their infantry, though they do pay some slight attention to their cavalry. The reason of this is that the troops they employ are foreign and mercenary, whereas those of the Romans are natives of the soil and citizens. So that in this respect also we must pronounce the political system of Rome to be superior to that of Carthage, the Carthaginians continuing to depend for the maintenance of their freedom on the courage of a mercenary force but the Romans on their own valour and on the aid of their allies. Consequently even if they happen to be worsted at the outset, the Romans redeem defeat by final success, while it is the contrary with the Carthaginians. For the Romans, fighting as they are for their country and their children, never can abate their fury but continue to throw their whole hearts into the struggle until they get the better of their enemies… Now not only do Italians in general naturally excel Phoenicians and Africans in bodily strength and personal courage, but by their institutions also they do much to foster a spirit of bravery in the young men.

You can see here that “Rome” was already a grouping along basically ethnic lines: it was a polity of Italians to pursue their collective interest, and its traits depended on the Italians’ traits.

So, the genius of Rome was not that Roman citizenship was untied to ancestry. Instead, its genius was its power to change which ethnocultural ties defined membership. Rome began as one community against the other Latins, and then it was Latin against other Italians, and then it was Italian against everyone else.

In the early empire, we can see Roman-Italian ethnic self-comprehension in its mature form. Thus Juvenal, writing in the late first century, sees all Italians as basically co-ethnics, and sees foreignness in Greeks and (even more so) eastern-mediterraneans. By this time, the city had become significantly non-Italian in origin, causing Juvenal great… consternation:

That race most acceptable now to our wealthy Romans, That race I principally wish to flee, I’ll swiftly reveal, And without embarrassment. My friends, I can’t stand A Rome full of Greeks, yet few of the dregs are Greek! For the Syrian Orontes has long since polluted the Tiber, Bringing its language and customs, pipes and harp-strings, And even their native timbrels are dragged along too, And the girls forced to offer themselves in the Circus. Go there, if your taste’s a barbarous whore in a painted veil. See, Romulus, those rustics of yours wearing Greek slippers, Greek ointments, Greek prize medallions round their necks.¹⁴

The Decay of the Roman Ethno-Cultural Identity

After the end of the republic, the ethnic character of Roman citizenship faded away.

Earlier, in the last decades of the republic, ethnic conflict had ceased to be the primary political- or military divide in society, as factions came to be defined by loyalty to individual generals or political factions,¹⁵ rather than to communities and kings. In such a world, admission to full citizenship became a tool for patronage or other public policy, rather than a manifestation of ethno-cultural ties. Under empire, the Romans, stripped of self-government, could no longer protect their ancestral privileges from dilution. The emperors often found the expansion of citizenship to be a useful tool. In a few cases, they might even citizenship out of sincere, Lib-Dem idealism.

The process of patronage-motivated-expansion began even before the Principate, with the Lex Roscia in 49 B.C. By that law, Caesar granted citizenship to Transpadana - the Po valley, which was inhabited by Gauls at the time. [It is generally believed (https://en.wikipedia.org/wiki/Lex_Roscia)) that the law was passed to reward the Gauls’ loyalty to Caesar in his wars against Pompey (and to secure that loyalty for further wars).

A particularly striking sign of the shift from ethnic-citizenship under self-governing Rome to purely civic Romanness under autocracy is memorialized in the Lyon tablet. That tablet records a senate speech, in which the (genuinely liberal and idealistic!) emperor Claudius argues for allowing trans-Alpine gauls into the senate, and chides his senators for their small-minded and chauvinist resistance:

Of course, I can foresee the objection which will arise in everyone’s mind [to lettting transalpine Gauls into the senate]… But do not rebel against [my proposal], and do not regard it as a dangerous novelty. Look instead at how many changes have taken place in this city, and how, from the origin, the forms of our Republic have varied….

…Undoubtedly, by a new custom, the divine Augustus… wanted all the flower of the coloniae and the municipium… to be admitted to this assembly. But what? Isn’t an Italian senator preferable to a provincial senator? What I think on this point, I will show… but I do not think that the inhabitants of the provinces should be excluded from the Senate, if they can do it honour.

[Claudius lists some distinguished senators from beyond the Alps]

All these distinguished young men on whom I cast my eyes, you do not regret seeing them among the senators any more, than Persicus, a man of noble race and my friend, do not regret reading on the portraits of his ancestors the name Allobrogic¹⁶! If, then, you agree with me that this is the case, what else is there left for you to wish for, other than I make you touch with your finger the soil itself, beyond the boundary of the province of Narbonne, sending you senators, while we have no reason to repent counting people from Lyon among the members of our order? With hesitation, it is true, Conscript Fathers, I stepped out beyond the provincial boundary you know and with which you are familiar; but it is time to openly plead the cause of Long Haired Gaul. If I am accused of this war it waged for ten years against the divine Julius, I would counter with a hundred years of inviolable loyalty and devotion in many of the critical circumstances in which we found ourselves. When Drusus, my father, subdued Germania, they ensured his safety by keeping the country behind him in profound peace, and however, when he was called to this war, he was busy making the census in Gaul, a new operation and out of the habits of the Gauls. We know too well how difficult this operation still is for us, even though it involves nothing other than publicly establishing the state of our resources!…

In many ways, Claudius’ views are admirable. And thus, his speech is often lauded by classicists today.¹⁷

And yet, it is hard not to separate Claudius’ attitude from the viewpoint of an autocrat. Claudius, a representative of the top-down state, is in conflict with the prior order. The older senators prefer a senate and polity defined by thick ties: land, ancestry, history, gods. To them, the state exists to serve the interests of a particular community, and is a bottom-up manifestation of the community’s collective interests. Claudius does not view things that way. Instead, Claudius represents the new top-down state, which sees none of its subjects as fundamentally different from the others. His state is not a bottom-up development, and so sees no need for pre-institutional ties.

The new state views its subjects from above, rather than from within. Under the top-down view, foreignness is irrelevant to inclusion (“Allobrogic!”). Caring about that is bigoted, and small-minded: because foreignness is unrelated to the state as an organization. To the top-down state, citizenship is purely a concern of an institution (the state), which exists for its own purposes. Thus, inclusion in the senate is a proper reward for helping the government in a pinch.

Unfortunately, the top-down Roman state did not retain the kindly, responsible liberalism of Claudius. Aside from a string of five good emperors, and a smattering of other responsibles (such as Titus) the Roman emperors were a series of extractive warlords, slowly consuming the loyalty, homonoia, and institutional structure that centuries of republic had fostered.

And so, eventually, citizenship ceased to have any real weight whatsoever. The final blow came with the Edict of Caracalla in 212, whereby that emperor granted citizenship to all free residents of the empire’s lands. It is generally understood that the edict was passed simple to make these subjects easier to tax.

Why am I Bothering to Talk About This

Now, why am I writing this? Was it really because of tweets? There is no reason to care about Tweets. The trouble is that these tweets are based on ostensibly reputable scholarship, which gives a misleading impression of how Rome thrived. Consider some (very slightly exaggerated) statements by Mary Beard, the grande dame of Roman scholarship today. According to her:

[The Romans] redefined the word ‘Latin’ so that it was no longer an ethnic identity but a political status unrelated to race or geography. This set the stage for a model of citizenship and ‘belonging’ that had enormous significance for Roman ideas of government, political rights, ethnicity and ‘nationhood’

Other classicists have stressed the Romans’ “inclusiveness, the unprecedented willingness of Romans to take new members into their community and share the privileges of citizenship with them.”

Brett Devereaux, a military historian who teaches at NC State and blogs constantly, has stated that “‘Roman’ was at its core a legal status, defined by citizenship which marked membership in a community.”

Beard is more nuanced than her peers, and better captures the nuance in the nature of Roman identity.

Romans were as xenophobic and ethnocentric as any people there’s ever been; they look at the streets of Rome and say, ‘Too many bloody Syrians.’ When the Emperor Claudius thinks he will allow people from Gaul to become senators, he has a big backlash of people saying: ‘We don’t want those f—— Gauls in here.’

Thus, Beard understands ‘Romanness” as rather like “Britishness, Scottishness, or Europeanness,” “a bit like the American dream.”

Beard wisely captures the nuance - there was a Roman civic identity that emerged, and “Roman citizen” was not a purely ethnic signifier. And yet ethnicity, blood-and-soil ties to the gentes of Plebeians and Patricians, was core to Romanness, just as ethnic ties have always been central to Britain.

So Beard’s rather liberal, cosmopolitan, and optimistic statements can be reframed: The Roman state arose as the project by which a collection of families, tied by blood and soil through the institutions of a single city (the Romans), dominated their neighbors (the Latins). They did this in order to hoard resources within the dominant families/city. The state secured loyal service because it was built on meaningful pre-institutional ties. However, the family-based identity of the Romans was closely tied to their civic institutions, so the state could legally reshape the Roman identity around broader ethnic ties when political exigencies demanded.

This expansion and reshaping of Romanness was a remarkable feat; one at which the Greek institutions failed when faced with the same challenge. The background conditions for Greek-unification were at least as favorable as those in Italy. Writings of any Hellenistic-era Greek will show that panhellenic sentiment was strong.¹⁸ And, history would vindicate the panhellenists: eventually the Greeks would be united (with Macedonians) as the privileged caste of the vast empires of the Diadochi.¹⁹ However, the Greek institutions were not up to the task of expansion. Unlike Rome, the Greek poleis were incapable of expanding without losing cohesian. Thus, a Periclean Greek might call himself an “Athenian” or “Rhodian,” but never a “Delian.”²⁰

This difference from other poleis (like Athens) allowed the Roman coalition, while remaining an ethnic coalition, to expand far beyond what one city could conquer. So, once the Romans had dominated the Latins, they integrated them as equals (more or less) in the Roman state, in order to dominate more-distant peoples. Then, with Latin support (and the help of other allies), they dominated Italy, culminating with the conquest of Greek-speaking Tarentum in 272. They then integrated the Italians, and incorporated them in the Roman state in order to dominate further outsiders. This final process culminated in the social war, when the Italians claimed their rights to equality in the SPQR. Since the Italians were now organized under the Roman military system, they were as militarily capable as Romans, and could thus claim their place as equals. The Roman-Italic identity remained key to the Roman identity for some time. “Roman” came to be contrasted with Greek, Syrian, or Gallic, rather than with Volscian, Faesuelean, Sabine or Etruscan.

However, this expanding-process didn’t survive the transition to empire. As citizenship lost its ethnic dimension, civic ties didn’t transform, they broke. For centuries, “Romanness” had been a privilege proudly held by the unified people who militarily dominated their neighbors. With the empire, ethnic and civic factions ceased to be important, militarily. The citizen-army of the early republic was replaced by a professional soldiery which had enough institutional cohesion to mold recruits from anywhere into Roman soldiers.²¹ Thus the portion of Italians in the legions starkly declined over the 1st and 2nd centuries. Lacking military importance, Rome’s “citizens” no longer had the leverage to hoard their special privileges, and citizenship expanded according to the state’s immediate needs. Slowly, Romanness ceased to be any type of unified grouping, and came to represent nothing more than a series of past policy-judgments. Under such conditions, it is no mystery that Romanness ceased to command any sense of loyalty from Rome’s citizen-subjects, and government fell to anyone who could convince enough legionnaires that he could given them booty and land.²²

So, in complete, context, the purely civic citizenship of the late principate, lauded today as a triumph of open-mindedness, is not so aspirational as it seems. The Romans did not discover a form of civic unity divorced from ethnocultural ties. Instead, the transformation of Romanness from an ethno-cultural label to a purely civic identity was its hollowing, as civic unity lost political significance.

Eventually, even the civic institutions lost all meaning. The SPQR (a military government ruling the Mediterranean world) ceased to have any real tie to the SPQR (a city and its deliberative body). The capital could move to Milan, or Istanbul, as was needed by the military organization that now ruled for its own sake. The senate could be staffed with the emperor’s friends and lackeys because its administrative and legislative responsibilities had been eliminated. The people could be pacified with a grain dole, and eventually that dole could cease, because the people didn’t have any leverage over the military-institution that was the real power in the world.

And then Rome fell.

The tl;dr of my take on this is that this is a valid concern, but the recently-announced tariffs, as well as the other prominent proposals to deal with these concerns, are not going to succesfully do what the concerned-parties want them to. That sounds very milquetoast, so I’ll be more clear and say that I think most of this stuff is just a massive waste of money and/or just corruption aimed at enriching Trump or Biden’s clients.

A lot of people in both of these political coalitions have an instinct that this is the case, but they don’t have the theoretical tools to explain why what’s going on is bad. A big part of the problem is that the arguments typically used to defend free trade are only focused on welfare, which skeptics of trading capital for labor are not trying to maximize. In fact, a lot of them explicitly admit that their policies will reduce welfare but claim it’s worth it because Americans are already wealthy and what they really need is to repair the political economy problems of the declining middle class. So I hope to make a contribution by arguing in a way that shares a willingness to prioritize political economy problems over welfare––but nonetheless finds a fatal means/ends mismatch between the policies that have been used so far to address this and the objectives of those policies.

The Labor Economics of Trade in Mainstream Economic Theory

Economists have long been aware that production factor abundance gaps, namely the capital / labor abundance gaps that drive our trade surprlus, can cause negative consequences for labor. If a capital-rich labor-poor (these are relative comparisions) state trades with a labor-rich capital-poor state, then we would expect wages in the capital-rich state to fall. Consider an illustration of the prominent Stolper-Samuelson theorem, a great example of how lots of economists think about trade:

Economists tend to think that the depicted wage decrease is fine because total welfare goes up. Since scarce resources get employed more productively: “the pie gets bigger.” Any changes in ex ante distribution can be addressed through ex post redistribution: “more pie for everyone.”

As the above tweet suggests, some people are cynical about this story. Awarding large gains to capital-owners who are already wealthy, at the expense of middle-class laborers––even when the size of the capitalist gains outweighs the losses of laborers, reinforces the collective action difficulties of redistribution¹. The amount of redistribution we choose is not exogenous wrt existing wealth distributions. In simple English, the more wealth gets concentrated in a few people’s hands, the more power they have, and the better they will be able to prevent any redistribution to wider shares of the population.

There’s some empirical support for this being the right story to tell about the last 30 years of decreasing trade barriers:

Household incomes, after redistributive policies, haven’t increased much for most Americans, even as the pie has gotten a lot bigger. So, you might think that redistributing gains to capital under free trade isn’t very realistic because capitalists will use the additional power they acquire from their gains to prevent exactly the redistribution that makes those gains worth it for laborers. Limiting trade may therefore look like a good––perhaps the only––way to maintain a high labor income share even though it involves giving up some potential gains.

The question then is whether departures from classical free trade, like tariffs or subsidies, can address this issue. The first concern is that tariffs are more regressive than tax-and-transfer redistribution. The Trump administration has put forth some zany theories on tariff incidence based on FX markets, but the literature has documented clearly that tariffs have some incidence on consumption, and therefore are like any consumption tax, regressive.

Another issue is that the same political economy dynamics of political capture apply to tariffs. If tariffs are a second-best alternative to redistribution, then as soon as the wealthy realize this, they will use their anti-redistribution channels of political influence to prevent tariffs. Even if a momentary political coalition such as the current administration can maneuver around this, in the long run we wouldn’t expect tariffs to be any more durable as a form of redistribution than tax-and-transfer schemes.

Infant Industry Theory

Another theory of tariffs focuses not on labor economics but rather on the notion of infant industry and comparative advantage. The classical theory of Ricardian trade, of which the Stolper-Samuelson theorem discussed above is an additional gloss, says that states should have free trade because they will be most productive specializing in their strongest industries and should import the rest of their consumption basket by trading the output of those strong industries.

A prominent response to this recommendation is based on the notion that comparative advantage is not fixed and can in fact be made by states. For advanced forms of industrial production like computer chips or jet engines, a big component of comparative advantage is the existing expertise of the production community. A state could intentionally develop a community of producers who are knowledgeable about these industries through direct investment in R&D and by shielding the industry from superior foreign competitors until it has developed enough of a comparative advantage to be profitable. That would eventually increase the total welfare of the economy by acquiring new comparative advantages.

A truly classical economist would have to say that investors know this and price it in, hence there shouldn’t be any market failures. But if you concede that investors can be nervous about making bold leaps on industries that may not be profitable for decades, then you can see why there might be a role for government intervention here. The prescription would then be for targeted tariffs and subsidies to help these industries thrive before they have built up enough expertise to compete on the world market.

This theory is a much better fit with the Biden policies of subsidies in computer chips and EVs than it is for Trump’s across the board tariffs. However, there is still a big problem as it applies to the actual long-run competitiveness of the targeted infant industries. That problem has to do with the underlying labor / capital abundance mismatch between the United States and its competitors.

Here, when we talk about abundance, what we are really talking about is price. It doesn’t matter how many laborers are actually available in the population if they are more expensive for an industry to employ. The price of labor is the laborer’s wage. So, if wages are higher, then labor shows up as less abundant in the context of Stolper-Samuelson comparative advantage theorizing.

Consider OECD data on average wages:

Labor in the United States costs around 25% more than its competitors for advanced industry in Europe, and almost 75% more than its developed East Asian competitors like Japan and ROK. The case of China need not even be mentioned.

The basic issue I’m driving at is that wages in the United States are much higher than our competitors in infant industry spaces like EVs or computer chips. So, even if you could develop as much existing expertise in those industries as counterparties like Germany, Japan, or China, it would still be cheaper to produce those products in those countries. Even where the expertise component of comparative advantage can be matched by infant industry support, you still have to deal with the labor component.

As a structurally capital-abundant economy, it’s unlikely the United States could ever be competitive on that front. While infant industry tariffs or subsidies could add to U.S. welfare in some cases, we would expect this to be true only in industries with low labor intensity.² I’m not saying we shouldn’t try to develop any of these industries, but you wouldn’t expect most Americans to get richer by doing this. Any labor-intensive production relocated to the United States will pass on the costs of its labor inefficiencies to the consumer, deadweight loss included.

In fact, the infant-industry theory tends towards suppressing wages, whereas the redistribution theory calls for increasing them. If one is trying to help an industry that is currently non-competitive but promises to become so in the future, then one wants to direct all available resources within that industry towards investment. The basic problem an infant industry faces is that it cannot produce cheaply enough to survive against global competitors. In order for that industry to survive, it must either be insulated from global competition and developed exclusively within the domestic market–or it must be subsidized such that it can afford to sell below its marginal cost.

In both cases, the greater the labor share of income for the industry, the longer it will take to eventually become competitive, and the more expensive it is to make it become so. Even if you can artifically increase labor compensation in ways that aren’t incident on the industry (i.e. by labor subdidies), the cost of those subsidies will be incident on other laborers through taxation or inflation. The bottom line is that infant industry wealth creation won’t look like creating lots of good middle class jobs, and if one does not distinguish between the two theories, then one will be unable to form an effective industrial policy that accomplishes either of the aims laid out previously.

A Materialist Account of Democracy

So far, we’ve seen that tariffs and subsidies don’t look compelling from the persecptive of mainstream econ––neither as a substitute for redistribution or as a way of making labor-intensive infant industries eventually competitive, and you certainly can’t do both at the same time. But since the premise of this post is that mainstream econ defenders of free trade are talking past their critics by focusing on welfare, we should now look at what the non-welfare considerations associated with tariffs are.

Aristotle provides a great account of the relevant political economy dynamics when he discusses the relationship between military strategy and form of government:

When the country is adapted for cavalry, then a strong oligarchy is likely to be established. For the security of the inhabitants depends upon a force of this sort, and only rich men can afford to keep horses. The second form of oligarchy prevails when the country is adapted to heavy infantry; for this service is better suited to the rich than to the poor. But the light-armed and the naval element are wholly democratic; and nowadays, where they are numerous, if the two parties quarrel, the oligarchy are often worsted by them in the struggle…the oligarchy should also yield a share in the government to the people, either.

The idea here is that when a state depends on a certain body of people for its defense, it is likely to and almost compelled to award that body of people with advantages such as political agency and basic respect. I believe free trade critics have a similar instinct about economic production, which is arguably just as important, and is in some ways constitutive of military power in an age of industrial combat. Adjusting for the different role of producton in Aristotle’s pre-industrial world, we can say that on the basis of his theory, the more a broad range of laborers plays a role in economic production, the more respect, dignity, and political agency they will command.

We’ve already discussed how people in concentrated interest groups, such as the wealthy or coalitions of affectively-tied bureaucrats, tend to be better at political influence because it’s easier for them to solve collective action problems. So if laborers can’t directly influence politics as well as these groups, then the good way to look out for their welfare would be for the aforementioned groups to be incentivized to care about laborers.

The more the performance of the economy depends on the health and wellbeing of its laborers (as opposed to its ability to package and sell assets), the more capitalists and government officials will care about said health and wellbeing. The subjective experience of being a middle-class laborer also changes in proportion to the role of labor in the economy. The more important the laborer is in ordinary production, the greater sense of respect and self-sufficiency we would expect laborers to feel. Think about the difference between commanding a middle-class wage on the market vs receiving redistributionary income from inscrutable political processes in Washington.

Now that we’ve gained an appreciation for the kinds of non-welfare concerns that motivate skeptics of trading capital for labor, we can reconsider the wisdom of departures from classical free trade. How would industries shielded from labor arbitrage affect the subjective experience and political agency of middle-class laborers? One might think that by putting giving laborers a better role in production by preventing Stolper-Samuelson factors from equilibrating across borders, laborers will acquire those goods.

But I’m skeptical of this because I think such barriers behave quite similarly to redistribution. Recall Aristotle’s suggestion that an oligarchy award political power and recognition to the masses if it depends on them for military power. The converse of this recommendation would be to maintain a kind of illusory oligarchy-in-name-only: a polity governed on its face by and for a few but in reality necessarily oriented to the masses. My point here is that when a state tries to maintain a certain political form in the face of materialist developments that undermine that form, the result is often that the form becomes a contemptible mask of what’s really going on.

I have to think that tariffs and subsidies would behave similarly. While on their face, they would maintain an important role for laborers in industrial production, in reality, everyone would know that this role is maintained by costly government policies. Capitalists and political officials, rather than gaining respect for the laborer based on his essential contributions to the economy, would comport themsleves patronizingly and indifferently towards a class that they would regard as the recipients of an inefficient handout. The consumer class, in an age of social media, would surely resent people in other countries enjoying cheaper and superior products.

Although industrial production was associated with an age of higher respect and agency for the American labor in the past, the reasons for that state of affairs went beyond the inherent poliitcal economy character of industrial production. That production really was the force powering the American economy. But to bring it back with tariffs and subsidies today would not create this same effect. Everyone with eyes to see would recognize the subsidized industries as a dressed up redistribution scheme, which would do nothing to solve the political economy problems discussed in this section.

Constructive Moderate Solutions

Adam Tooze, who has more articulately expressed sympathy with both the above political economy story and the conventional econ critiques of tariffs and subsidies, often talks about reimagining the service economy. That’s obviously the right move to give the American laborer an honored and important role in society without paying the high costs of shielding our markets from superior industrial producers.

A lot of people dismiss this thinking as silly because their paradigm of service work is made up of stressful, sporadic, and spritually-inegalitarian forms of work like uber driving or waiting tables. They think there’s no way that a sector made up of jobs like that could ever lend the dignity that industrial production once did, which is precisely why they choose to advocate for costly and inefficient ways to revive that production.

But there are in fact lots of ways that Americans could make life better for each other without needing to compete with jurisdictions where even highly-skilled specialists are paid wages of $40k. I’ve spent a lot of time in “undeveloped” countries like Uzbekistan and Latvia, where I observed consistently cleaner and safer public life than what exists in the United States. A lot of this cleanliness, safety, and sense of order is generated by the constant presence of employees responsible for the space. Equipping American public spaces with these kinds of services would generate lots of local employment and create value for the community in a way that everyone could respect.

Another opportunity has to do with architecture. We’ve all seen the kind of cheap and ugly construction below that makes up a lot of the new housing supply in the United States:

Constrast this with older architecture, which is often decorated with ironwork and masonry. To provide this level of expertise for housing across the country, a large network of skilled laborers would be needed. While the opportunities I mentioned in the paragraph above might make for a good entry-level position in the laborforce, working as a skilled laborer to improve public and private buildings would make more sense as a career appropriate for later stages of life.

Another underexploited area––though not exactly service work––is food production. The United States has an enormous supply of land, a primary and scarce input in food production––especially dairy and ranching. While our food supply is reputationally associated with poor quality and agribusiness toxicity, our land endowment points to a different future. Large dairies and ranches, with high-paying, middle-class jobs and extremely stringent quality standards, could be created on federal land. The United States could easily become a world-leading producer of high-quality organic meat and dairy.

Consider the contrast between this last option and widget production. The problem with the latter, as I said in the last section, is that widgets are commoditized, i.e. they are all the same, and people in other countries can make them for much cheaper than American workers can. Therefore, any attempt to rebuild the importance of American labor through widget production will inevitably entail shielding such production from the rest of the market. Rather than promoting respect for labor, these policies are likely to be seen as a wasteful and unjustified transfer, and rightfully so. When accounting for deadweight loss, regressive consumer surplus loss, and the necessity to compensate capital investors with reasonable margins, setting up uncompetitive widget production is an extremely wasteful way to accomplish the task of giving a broad range of laborers an opportunity to contribute meaningfully to the economy.

On the other hand, producing healthy, high-quality food for the entire country is likely to engender respect even if some government intervention is required maintain the high standards. We might also expect that workers would rather spend time outside on beautiful federal lands than work in factories making batteries and computer chips. When we consider the quality of the experience for the worker, the cost / wastefulness of the proposed intervention, and whether the output meaningfully improves American society, it seems obvious to me that investing in production of things like healthy food is a more attractive choice than subsidizing uncompetitive electronics manufacturing, a process so unpleasant for workers that prominent East Asian firms have entire teams dedicated to preventing worker suicide.

A last and more radical option, which Tooze also highlights, involves a devaluation of the dollar:

If your aim is restoring the competitive position of US industry, a large dollar devaluation would do more than a sprinkling of industrial subsidies. But how to engineer one in the face of global demand for US financial assets is anyone’s guess. There is discussion of a tariff on foreign capital inflows, in effect a tax on the dollar as a reserve currency. But for such a radical policy to see the light of day would require producer interests to dethrone Wall Street — nothing short of a revolution.

This seems like a good idea to me and could easily be accomplished by some form of reverse capital controls. It’s probably true that even though competing in commoditized widget markets with East Asian economies is a bad idea, we should reduce our trade deficit to more sustainable levels. So, I’m not against some move like this, which would entail the market selecting our competitive industries rather than government officials doling out subsidies and tariff protections to their clients. Some industrial production will certainly thrive in such a world, but it will be production selected for comparative advantage rather than popularity with VC donors.

I think the takeaway for those sympathetic to the moves away from free trade that have been made in the last decade should be this: you aren’t crazy to think that there’s something wrong with the capital / labor trade, but the economists are right that you aren’t going to fix those problems with tariffs-qua-redistribution or by subsidizing and protecting infant industries. The actual political economy problems with trading capital for labor will only be addressed by identifying ways for laborers to make essential contributions that don’t depend on erecting artifical barriers to trade in commoditized widget markets. Luckily, there are many such opportunities in American life, and everyone would be better served by focusing on them directly instead of trying to tinker with the strucutral tendency for the economy to trade capital for labor.

A lot of people responded to my last post with millenarian AI hype that, if true, would undermine my conclusion that cutting-edge chip production is not of national security importance to the United States. It’s useful to recall here that on the most ambitious timeline, the F-47 will enter operation in around 2034, mass production a few years later, and then fly throughout the 2040s and 2050s. If we use more recent Air Force projects as a guide, that timeline could take as long as 30 years. I think it’s interesting that the U.S. military does not believe AI will be ready for unmanned systems to handle the full spectrum of air combat operations by then.

Идея о том, что оказание военной помощи Вооруженным силам Украины (ВСУ) приведeт к ослаблению Вооруженных сил Российской Федерации (ВС РФ), стала важным обоснованием такой помощи. Министр (бывший) обороны США Ллойд Остин на пресс-конференции в феврале 2022 года заявил, что США помогает Украине, потому что государство хотело бы видеть «ослабленную» Россию. RAND корпорация, в своем анализе хода войны, указывает на потенциальную выгоду от длительной войны в виде постоянного «ослабления» российской армии. В пресс-релизе Пентагона зловеще отмечается гибель 300 000 российских солдат в ходе войны, что позволяет предположить, что такие потери снижают военную мощь России и меняют баланс сил в Европе в пользу США и их НАТО союзников.

Рассуждения гипотезы о том, что длительная война на Украине ослабляет Россию, простые: если Россия потеряет людей и технику, сражаясь на Украине, то у нее будут менее оснащенные и меньшие вооруженные силы для ведения или угрозы будущих военных действий. Это понятная интуиция, но я хотел бы предположить, что она основана на ошибочном понимании военной мощи как запаса, а не как потока.

В экономике и бухгалтерском учете проводится различие между величинами, представляющими запас: количество чего-либо, существующее в определенный момент времени; и величинами, преставляющими поток: скорость, с которой количество чего-либо изменяется в течение определенного периода времени. Например, балансовый отчет отображает набор запасов: моментальный снимок активов и обязательств компании, существующих в настоящее время. С другой стороны, отчет о прибылях и убытках отражает сумму денег, которую бизнес приносит за определенный период времени.

Более понятным примером может служить разница между уровнем заполнения бензобака автомобиля и его литров на 100 км. Стандартный дисплей в автомобилях традиционно показывает, сколько бензина в данный момент находится в баке автомобиля (запас), тогда как некоторые современные дисплеи также показывают, сколько бензина автомобиль расходует в зависимости от того, как он едет прямо сейчас (поток).

В мирное время мы обычно понимаем военную мощь с точки зрения запасов.¹ Мы подсчитываем такие показатели, как численность военнослужащих, находящихся на действительной службе, или количество танков и истребителей, имеющихся в настоящее время в распоряжении ВС. Важная причина для этого заключается в том, что в мирное время это, как правило, наш единственный вид информации. Несмотря на то, что вооруженные силы строят новые системы и набирают новых солдат для замены старых или технологически устаревших запасов––или даже для наращивания своих вооруженных сил––такие темпы представляют собой лишь скорость, которая требуется государству для замены своих запасов по мере их старения, а не максимальную скорость, с которой государство теоретически могло бы восполнить потери, разрушенные системы и израсходованные боеприпасы.²

Хотя может быть оправданным использование запасов в качестве эвристического метода, чтобы оценить военной мощи государств в мирное время (из-за того, что достоверной информации о потоках нет), не следует, что запасы точно отражают уровень военной мощи государства. Один из способов составить правильние интуиции об этом — обратиться к произведениям по военной истории.

В любом произведении по военной––или даже общей истории войны между двумя промышленно развитыми государствами––редко можно найти (за исключением тех мест в произведении, которые описывают начало конфликта) информацию о запасах войск и боеприпасов, транспортных средств и других военных систем, имеющихся в распоряжении государства в определенный момент времени. Вместо этой информации, эти произведении, как правило, сосредоточиваются на потоках: они упоминают такие факты, как количество жертв, которые несет государство ежемесячно, и сколько боевых техник производят его заводы, чтобы восстановить уничтоженные или израсходованные припасы.

Я подозреваю, что причина, по которой историки сосредотачивают внимание на этих величинах потоков, а не на статичных запасах, заключается в том, что в длительном конфликте на самом деле относительный баланс потоков может быть более важным при решении результатов таких войн между промышленно развитыми государствами. До тех пор, пока государство не сможет заставить своего противника немедленно капитулировать, военное преимущество, которое оно имеет перед своим противником, будет зависеть от того, насколько быстрее или медленнее оно сможет восстановить потери и доставить новую технику на фронт.

Длительные боевые действия между промышленно развитыми государствами часто оказываются настолько дорогостоящими и разрушительными, что все первоначальные запасы войск и техники государства будет уничтожен, так что способность государства продольжать войну будет в меньшей степени зависеть от того, (и по прошествии достаточного времени, вовсе не от того) насколько велик был этот первоначальный запас, а скорее от того, насколько быстро государство сможет набрать и оснастить пополнение для истощенных сил.

Фактически, именно такой результат произошел с Россией. 90% ее первоначальных сил военной операции были уничтожены. Но даже этот масштаб разрушений оказался недостаточным, чтобы предотвращать России вести военные операции, поскольку ее ВС генерировали достаточные потоки для обеспечения новых сил для восполнения потерь.

Как только мы увидим, в какой степени потоки необходимого с военной точки зрения (например темпы производства техник, темпы набора персонала, т.д.) решают результаты войны––а не первоначальные запасы––тогда предположение о том, что сокращение государственных запасов может изменить долгосрочный баланс сил, покажется менее убедительным. Даже если вы можете нанести потери и уничтожить технику, если государство поддерживает или может развить достаточно высокие скорости потока, чтобы восполнить эти потери, то потери и разрушения на самом деле не снизят его долгосрочную военную мощь. До тех пор, пока государство не потеряет достаточно людей и оборудования, чтобы капитулировать, его потоки может компенсировать любые потери, причиненные в определенный момент времени.

До сих пор я исключительно абстрактно рассматривал расличие между запасов и потоков как эвристики для военной мощи. Но мое конечное намерение состоит в том, чтобы применить это различие, чтобы объяснить, почему ошибочно ожидать, что предоставление военной помощи Украине ослабит ВС РФ. Главная из причин, по которой мы можем быть уверены в ошибочности этой точки зрения, заключается просто в том, что она уже была эмпирически опровергнута. Верховный главнокомандующий Объединённых вооружённых сил НАТО Генерал Кристофер Каволи засвидетельствовал Конгрессу США что сегодня ВС РФ более мощна, чем в начале военной операции. Слова Генерала стоит процитировать полностью:

Россия находится на пути к тому, чтобы командовать крупнейшей армией на континенте и оборонно-промышленным комплексом, способным производить значительные объемы боеприпасов и техник для поддержки крупномасштабных боевых операций. Независимо от результата войны на Украине, Россия будет больше, смертоноснее и злее на Запад, чем когда она вторглась.

Простая диаграмма³ рассказывает ту же историю:

Дополнение 2025: Теперь у нас есть еще одна цитата от высокопоставленного генерала, который сказал, то же самое, что и генерал Каволи… Российские вооруженные силы сейчас сильнее, чем до военной операции на Украине:

US Air Force general: Russia military larger, better than before Ukraine invasion

Здесь у нас есть недвусмысленные доказательства от наиболее информированных должностных лиц правительства США, что оказание военной помощи Украине не только не удалось ослабить Россию, а на самом деле привело к именно противоположному результату. Понимание военной мощи в смысле потока, на который ссылается генерал Каволи, когда упоминает «оборонно-промышленный комплекс», объясняет нам, почему это произошло. Хотя помощь НАТО помогла нанести потери ВС РФ, Россия удалась восполнить потери и разрушенные системы путем набора новых войск и строительства новых систем. А Россия не только сделали это с достаточной скоростью, чтобы только восполнить потери, вызванные НАТО военной помощью, но она даже умудрился укрепить свои ВС и сделать их более смертоносными во время ведения военной операции. Несмотря на то, что военная помощь НАТО сократила запасы военной мощи России на 2022 год, она увеличила соответствующие потоки, сделав ВС РФ более мощными в долгосрочной перспективе.

Одна из причин полагать, что военная помощь Украине, тем не менее, ослабляет Россию––даже несмотря на то, что военных потоков России были достаточными, чтобы превысить потери, причиняемые такой помощью––заключается в том, что сохранение таких потоков является слишком дорогостоящим и финансово неустойчивым для России. Но предсказание о том, что Россия обанкротит себя из-за военных расходов––как, по мнению некоторых, произошло с Советским Союзом в конце холодной войны––должно было бы основываться на глубоком незнании российской экономики. На пике войны в 2023 году Россия потратила на оборону всего 5,86% своего ВВП — ненамного больше, чем 3,5% в США, и это очень далеко от явно неприемлемой цифры около 20%, которую СССР тратил в 80-е годы.

Но даже соотношение расходов на оборону к ВВП не отражает всей картины. До 2022 года профицит бюджета России составлял 15 миллиардов долларов––несмотря на то, что ее экономика восстанавливалась после пандемии. Можно утвердить, что большой стимул, обеспеченный увеличением военных расходов, был именно тем лекарством, которое было выгодно и необходимо российской экономике в 2022 году. Этот момент может выйти за рамки простых предположений, если мы отметим, что темпы ВВП роста в России возросли с начала военной операции. Хотя верно, что существует такое явление, как неприемлемый уровень военных расходов, России очевидно не грозит опасность достичь такой опасной уровни, и стимул, обеспечиваемый увеличением объемов военных расходов, кажется, на самом деле, полезное препятствие для экономического роста России.

Если военная помощь Украине не смогла сократить численность или мощь ВС РФ, а фактически сделала их больше и сильнее и не представляет реальных экономических трудностей для России, то мы можем отклонить претензии Американских чиновников и внешнеполитических комментаторов, о том, что такая помощь может быть оправдана, поскольку она ослабит Россию. Простой факт (если верить показаниям наших военных), что ВС РФ сейчас сильнее, чем в феврале 2022 года, и российской экономике не грозит крах.

Я считаю, что главная причина, по которой эти официальные лица так ошиблись––в той мере, в какой такие взгляды были высказаны добросовестно––заключается в том, что они не думали о военной мощи с точки зрения потоков. Причина, по которой мы можем быть в этом почти уверены, заключается в том, что ни США, ни кто-либо из их НАТО союзников ни разу не предоставили оружие, которое могло бы подорвать военно-промышленный комплекс России и, следовательно, ее способность генерировать потоки; вместо этого, все оружие, предоставленный ВСУ, было системами малой и средней дальности, которые только могли позволить Украину уничтожить текущие запасы Российских войск и техники.

Но наши чиновники представляли себе военную мощь России как запас, и они думали, что если военная помощь может сократить этот запас, то Россия станет слабее. В результате они не смогли предвидеть, что без разрушения военно-промышленного комплекса России или причинения потерь в большем количестве, чем может переварить огромное 140-миллионное российское население, будет невозможно помешать России заменить свои потерянные силы и стать более опытной и испытанной в боях в этом процессе.

Конечно, для американцев, есть другие причины поддержать политику оказания помощи Украине. Возможно, некоторые захотят сослаться на “liberal international order” и Мюнхен 1938 года, а не на реалистические соображения, которые я обсуждал выше. Моя цель состоит не столько в том, чтобы прийти к окончательному выводу о мудрости этой политики, сколько в том, чтобы снабдить скептиков и оппонентов политики ответом на важный аргумент, используемый в ее пользу.

Я также надеюсь, что читатель сможет понять, что хотя внешнеполитические чиновники США часто называют себя «adults in the room», они совершили серьезную ошибку, предсказав, что длительная война на Украине ослабит Россию. Они совершили эту ошибку из-за грубого, базирующегося на запасах взгляда на военную мощь, который опровергло бы элементарное изучение военной истории. Будем надеяться, что этот эпизод побудит американские внешнеполитические чиновники и его сторонников занять более скромную позицию по отношению к тем, кто предлагает альтернативы их катастрофическим решениям.

Надеюсь, этот пост ясно дает понять, что аргумент о том, что военная помощь Украине приведет к ослаблению ВС РФ, никогда не имел никакого смысла. Если такая цель когда-либо была важной частью обоснования нашей политики на Украине, НАТО официальные лица совершили огромную ошибку, не сумев учесть, как российские военные потоки будут восстанавливать разрушенные запасы. Делать вид, что всегда существовали какие-то реалистичные доводы в пользу оказания военной помощи, невозможно, учитывая тот неоспоримый и предсказуемый факт, что сегодня армия России сильнее, чем в феврале 2022 года.

The United States Department of Defense is both the largest employer and the government agency with the largest budget in the entire world. As the regulatory and business outlook for software companies’ traditional lines of business (consumer advertising) becomes less compelling as a source of continued growth, it is reasonable for the tech industry to look toward military contracting as a new economic opportunity.

I am concerned about some of the ideas promoted by tech companies pursuing the strategy I described in the previous paragraph. I’m harmless, well-behaved, and deep inside the Overton window of American politics, so I of course have no problem with corporations discharging their responsibility to create value for shareholders in whatever legally-compliant way they see fit. However, I do want the fine readers of my blog to be equipped to identify the weaknesses associated with the burgenoning “defense-tech” and “industrial policy” discourses. It is in that spirit that I would like to discuss several concerns I have with the arguments put forth by tech companies and their lobbyists on why they should be cut into our government’s massive defense spending.

Ball bearings for freedom

Since the 2016 election and Washington’s conversion to universal hawkishness on China, there have been calls from across the political spectrum to address the United States’ lack of industrial capacity to engage in extended war. As far as I can tell, the idea here is basically that the United States has lost the ability to physically make a lot of the components necessary for producing enough materiel to replace stocks destroyed by extended combat with the PLA.

Doyens of the right like Tom Cotton have emphasized the importance of building up a defense-industrial base to fight the Chicoms.

This is a bipartisan publication. Center-left people like Jake Sullivan have made similar noises:

Any war with a country like the PRC, a military like the PRC, is going to involve the exhaustion of munition stockpiles very rapidly. So a big part of the answer to a healthy defense industrial base over time is the ability to regenerate, to surge, to build during a conflict, not just to build before to prepare for a conflict. And that’s got to be a key lesson that we take away from what we’ve seen over the last three years on the battlefield in Ukraine.

I find the idea that we would ever choose to engage in extended all-out combat with the PLA, and a fortiori that we should order our economy to be able to do this, absolutely deranged. I wonder if those invoking this possibility in order to lobby for DoD handouts understand how many millions of Americans would be killed, dismembered, and impoverished by such a destructive prospect. I know some people say we have to endure such warfare in order to defend one-party states like Japan and Vietnam from illiberal CCP agression, while others would admit that all-out conventional war with the PLA is a terrible idea but say we have to be ready for anything.

I agree that we should be ready to defend ourselves and our interests in case the PRC decides to threaten either, but that doesn’t mean we have to either engage in extended conventional warfare with the PLA or have an industrial base capable of supporting such warfare. More importantly, I believe this conclusion holds no matter how much you believe China is an aggressive expansionist power bent on destroying the international world order.

Allow me to illustrate my view with a case from 20th century history. When President Dwight D. Eisenhower took office, everyone agreed that the Soviet Union possessed conventional military superiority in Europe. In plain English, that meant that if the Soviets decided to launch a ground invasion of Europe, the United States government, and Moscow itself, believed the Soviets would certainly win.

Ex-CIA Director and Secretary of Defense James Schlesinger recounts:

We, in the judgement of the administration, could not stand up against the hordes of Soviet soldiers that would be sent against the West…[for] NATO intelligence, the prevailing presumption was …that the Soviet Union would be bending every resource to build up their military forces against the West as rapidly as possible.

I think this situation is a lot like the one defense-industrial policy proponents allege the United States currently is in with respect to China. We have a rising superpower with 1) undoubtedly expansionist aims 2) a commitment to gaining territory in which the United States has a strong interest, and 3) superior industrial capacity to fight and win an extended war to acquire that territory.

Eisenhower, like Trump today, faced calls from what was not yet then known as the “military-industrial complex” to massively build up the defense-industrial base in order to respond to the Soviet threat. But Eisenhower–wisely, as I will argue–declined these calls. He even decreased the size of the standing military and balanced the budget by reducing defense spending. Eisenhower was able to succesfully advocate for these things because he understood the strategic importance of the United States’ most destructive military asset: nuclear weapons.

Beginning with NSC 162/2, Eisenhower depended on a new strategy based on countering the Soviets by threatening massive nuclear retaliation should they invade Europe:

The result of the Eisenhower review was the emergence of a deeper dependence on nuclear weapons and long-range airpower to deter war. Eisenhower chose not to maintain all of the very large Army and Navy that had fought the Korean War. He chose, rather, to invest more heavily in airpower, especially Strategic Air Command, in large part because that kind of defense could be built for lower cost.

IR Professor George Quester puts a finer point on it:

Massive retaliation, the way Dulles and Eisenhower used it, in a way was a suicide pact. It said if the Russians invade Western Europe, “we’re going to hit back with everything we have. We’re not going to waste a lot of resources on trying to build tank defenses”…Depending on massive retaliation made European economic growth continue longer…we’re all richer today because [of it].

I hope the reader can see why Eisenhower’s choice was a wiser move than trying to go pound for pound with the Soviets in Europe. The Soviet Union was a non-democratic command economy that could coercively suppress its population’s consumption in order to fund military buildups. Another problem was that the United States had to defend both itself and many non-European theaters, meaning that forces committed to Western Europe could only ever be a fraction of total force availability. With Europe still devastated in the 1950s, both of these factors meant that any effort to keep up with the Soviets in Western European military capabilities would be outrageously expensive for the United States.

Samuel Huntington recounts:

The United States, the President is reported to have argued, must have sufficient military strength, but a “prodigal outlay of borrowed money on military equipment could in the end, by generating inflation, disastrously weaken the economy.”

Defense-industrial policy advocates are right to identify that an industrial base is a compoment of a nation’s military strength. But that doesn’t mean that we need to have as big of an industrial base as China or that we should try to compete with them in their own backyard. Eisenhower was not a pushover when it came to the Soviets, but even he could see that it would be better to draw a clear line beyond which they could expect massive retaliation and thereby avoid massive military expenditures of our own.

Even in a nuclear age, it is still important for us to have powerful conventional capabilities to deal with situations that require military force but do not rise to requiring a nuclear reponse. But the United States is already spending a highly abnormal portion of its GDP on defense, which is to say we already have a massive reserve of conventional capabilities that can inflict devastation anywhere in the world. I don’t see why we really need, on top of this, to spend money building factories that can churn out munitions in year five of an extended war with the PLA. Any threat dangerous enough to justify that kind of warfare would be better addressed through credible nuclear deterrence.

Chips and AI don’t blow things up

An argument related to the idea to the PLA defense-industrial base stuff is the idea that computer chips and software have some great military significance that justifies subsidizing domestic corporations’ uncompetitive production lines for chips and other technology products. The supposed military importance of chips–and their necessity for developing AI–is often discussed in light of drones, so let’s begin our analysis there.

Everything I’m about to say on drones is mostly a summary of this excellent article Why Drones Have Not Revolutionized War: The Enduring Hider-Finder Competition in Air Warfare from ETH Zurich’s Mauro Gilli, so you should just read that if you want a truly rigorous exposition of my point.

Gilli’s analysis begins with the general kinetic features of air warfare. Dropping ordnance from the air allows militaries to inflict enormous and well-targeted destruction, but in order to be able to do this, aircraft must evade an enemy’s air defenses. As General William DePuy put it: “what we see we can hit; what we hit we can kill.” The only force limiting the operation of this maxim is enemy air defenses.

These factors give rise to what Gilli calls a “hider-finder competition”: a technological arms race between an enemy’s ability to detect aircraft and the aircraft’s ability to evade enemy detection. The driving force in the former case is radar development, whereas in the latter, aircraft hide by reducing their radar cross sections, being fast/maneuverable enough to evade enemy anti-air fires, and by locating and/or destroying enemy air defense systems.

What that means is in order to succesfully penetrate enemy airspace, aircraft must have extremely sophisticated properties that allow them to accomplish all of those tasks. They must also carry enough ordnance to be able to destroy their targets. If one imagines a highly fast and manueverable low-RCS aircraft, equipped with sophisticated radars and the ability to communicate with ISR assets, and capable of carrying heavy ordnance, then one is basically thinking of a contemporary strike fighter.

Drone proponents believe that drones will outperform and obviate these strike fighters because they are cheaper and don’t need a pilot. On the first point, I hope it is clear that all of the features that make fighters expensive (e.g. supersonic engines, low-observable airframes, datalinks to ISR, low probability-of-intercept radars) would have to incorporated into a drone if it is to succesfully penetrate enemy airspace. In other words, drones are currently cheaper than strike fighters because they are slow and are unsophisticated, but being fast and sophisticated, and therefore expensive, is a necessary condition of being able to conduct modern air warfare. If drones are ever to become an important part of offensive airpower, they will need to take on the expensive characteristics that strike fighters currently have.

On the issue of pilots, there are two important points to note. First, none of the combat drones currently in operation are autonomous, so they still require pilots, just not in the cockpit. It’s reasonable to assume that the costs of training these pilots would be similar to manned aircraft. It’s also worth pointing out that these uplinks are vulnerable to electronic warfare, an issue which has been so difficult in the Russia-Ukraine war that both sides have been known to connect drones to their operators with physical wires.

But even if one assumes that the electronic warfare issue will be solved or that autonomous combat aircraft will be developed, there’s no reason to think that will be a particularly big deal. It costs about $10 million to train a fighter pilot for the U.S. military, and one can assume that the aircraft have to be a little bigger to accomodate a cockpit. That’s a lot of money, but compared to the total flyaway cost (which doesn’t even account for R&D expenditures or maintenance costs) of a modern strike fighter like the F-35, one is only looking at 10-15% cost savings by avoiding the need to train a pilot. That would be very nice, but it’s not exactly a strategic gamechanger. So, the idea that we need chips or cutting-edge AI labs because drones are about to revolutionize warfare doesn’t make a lot of sense.

One can abstract these observations beyond from the case of air warfare and drones. When we see that warfare is defined by kinetic realities and not whether a technology product sounds cool to gullible podcast listeners, we can justify a more skeptical attitude towards the military uses of popular technologies like generative AI or uncompetitive domestic chip production lines. Of course, chips are necessary in military systems like radars and fly-by-wire, but the number of these systems that the military needs are numbered in the thousands or tens of thousands, not the 8-figure annual production numbers achieved by superstar firms like TSMC. There’s really no reason to believe that existing production capacity won’t be able to meet the comparatively miniscule (and non-cutting edge) production requirements for military uses.

At this point grifters people will take issue with my dismissiveness about the imminence of the AI-singularity or will posit other technological frontiers that we need to start worrying about. They will say that although the technologies of which I’m being skeptical haven’t revolutionized warfare yet, they will soon, so we have to invest in them now in order to stay ahead of the curve. That’s an impossible argument to refute, since it relies on premises that it acknowledges aren’t true right now, so all I’ll do is note that defense spending is almost half of all government discretionary spending. I’m a W-2 wagie without access to any offshore tax shelters, so anyone saying we need to “invest in transformative technologies for national security” is effectively asking for 17% of my salary (37% federal income tax * 47% share of defense spending in discretionary budget). If you want me or other voters to give you that money, you’re going to have to do a lot better than simply invoking millenarian sci-fi tropes like transhumanism and superintelligence.

An American Affairs article I read today provides an excellent example of this pattern of thinking. The entire article is about how our lack of chips production capacity is a national emergency that requires large taxpayer expenditures to address. But the article concedes that the military currently does not need very many or very advanced chips (“the existing DoD inventory of weapons and systems largely does not require the most advanced chips used in commercial equipment”). So then why is a lack of domestic chips production a national security emergency? The authors offer us the following incredible passage:

It is increasingly clear that the emerging technologies that will decide future conflicts will once again require the most advanced digital logic and memory chips. Artificial intelligence, quantum computing, advanced data centers, and autonomous drones, for example, are now realities, and will require ever faster, ever more powerful and ever less power-hungry chips, and nations with early and assured access to such chips will be able to seize technology dominance.

1. There are no fully autonomous drones in military use today, so they are certainly not “now realities”.
2. Quantum computing is 1) as of now totally unusuable for anything practical and 2) has limited connection to the transistor-based chip production they propose to subsidize.
3. As for the other “emerging technologies that will decide future conflicts,” the authors provide no argument for how artifical intelligence (apart from drones) or “advanced data centers” will be militarily useful.

This little bit of specious reasoning (“increasingly clear”) is all the authors have to offer as to why it’s a national security necessity to spend our money to maintain domestic cutting-edge chip production.

For now, conventional military dominance is defined by one’s ability to produce and fire physical ordnance like gravity bombs and artillery: the two technologies–which, despite all the hooplah about drones–still make up the vast majority of fires employed in the Russia-Ukraine War. As I said in the previous section, I do think we need to maintain a limited level of production of these items to address situations in which nuclear retaliation would be an overreaction. But I certainly don’t think taxpayers need to fund a bunch of other stuff related to chips and AI, at least not until there is an actual demonstrated military use for them. National security is too serious of a business for vague techno-optimist speculation.

Industrial defense production won’t uplift the American worker or elites

If you buy my arguments that the national security case for ramping up subsidized production lines for industrial equipment and chips doesn’t really make sense, then we have to ask why these arguments are so popular. Of course, as the opening of this post describes, there are lots of people who have an economic stake in getting the DoD to fund their companies. But lots of intellectuals with no such economic exposure to DoD contracts are also promoting it. Why are they continuing to do this even though the military case for it doesn’t make much sense?

I think the answer has a lot to do with the fact that some intellectuals implicitly regard industrial policy not as a demand of national security, but rather as a way to free American labor from the grinding inequality of a debt-financed tech-platform-dominated service economy. I’m sympathetic to this aim, but I don’t think that the kinds of production that would be subsidized under the most ambitious defense-industrial policies would actually accomplish it.

I currently live in New Haven, which is in many ways an excellent metaphor for an American economy made up of disempowered laborers whom deindustrialization has reduced to serving lattes and delivering takeout to a small class of knowledge workers. Even the “elite” pole of this economy doesn’t have a great deal, as they spend their time nervously competing to access an ever-narrowing band of prestigious credentials and firms. Most of this competition is experienced as compulsive anxiety interspersed with repressed thoughts of how meaningless all their work is. YLS Professor Daniel Markovits’ book The Meritocracy Trap, is an excellent description of the sociological situation I’m trying to describe.

It’s hard for me to see how defense-industrial policy would make this situation better. The obvious mechanisms would be 1) laborers can get good jobs in the factories and 2) directing artillery shell production would be more fulfilling for elites than doing financial transactions or technologically-sophisticated advertising. The problems with (1) are, first of all, that I’m not sure those jobs would actually be that great.

The United States has a romantic attachment to an age of industrial production in which workers were paid considerable monopoly rents in addition to their marginal productivity, but if you assume that defense-industrial production doesn’t obey such monopoly dynamics, then working for long hours on one’s feet in toxic and dirty environments is not actually a great deal.

But even if these jobs are great for the people doing them, that doesn’t make them a net benefit for the country. That’s because however you do the accounting, to the extent a given production line requires government subsidies, then the rest of the country has to pay a cost in order to have it exist. Whatever economic benefit accrues to these workers beyond their marginal productivity would be borne by the rest of the economy. The cost for everyone else would at least balance out and even potentially exceed the benefits to the small percentage of workers employed in such work. And before anyone says the rich would bear the tax burden, they should recall that America already has one of the most progressive tax systems in the world, making it so that any large expenditures would inevitably be borne in large part by the middle class through higher taxes, inflation, or both.

It’s important to distinguish this observation from a general critique of industrial policy. One very well might think that it makes sense to subsidize certain industries in order to give them time to develop comparative advantages against global competitors. But that’s not what’s being proposed here. No one is saying that American factories just need some time in order to get good at producing materiel for the market; the argument is simply that we should produce ad nauseum for our own military so we can fight the PLA at some point. That is to say, what’s being proposed is not a limited period of subsidies eventually leading to the emergence of a competitive industry; it’s just a perpetual transfer from taxpayers to firms, a set of cashflows of which there’s no reason to think workers will ever see a substantial cut.

Another argument is that elites will have more fulfilling careers in defense-industrial production than they will in a post-industrial service economy. I won’t defend the current elite offerings of private equity, plastic surgery, and optimizing algorithims for screen time addiction, but two wrongs don’t make a right. There’s no reason to think defense-industrial production is a wise use of resources just because existing options are bad. I personally don’t think I would find very much fulfillment in funelling taxpayer money to uncompetitive firms who survive by making tools for Americans and Chinese teenagers to murder each other on beaches in a competition over which nationality of oligarchs will extract IP rents from TSMC.

Congratulations reader: you’ve just received the $230,000 value of a YLS degree.

• My post
• Hanes’ response
• My response

@s_r_tarnmoor

Having pondered the exchange of views between my esteemed, illustrious, and I am sure (although I have never met them in the flesh) handsome colleagues, I have reached the conclusion that Mr. Lee’s proposed reform is desirable, but not for the reasons he gives. The agency cost framing is a distraction, because the legal system does not directly create value. Rather, it transfers resources between persons in such a way as to give clear guidance on how laws will be enforced and to encourage compliance with them. The proper question is whether the proposed reform would allow the legal system to do this job better.

Rather than agency costs, we should begin with the observation that legal process is expensive, and yet for all that expense it sometimes errs. Sometimes, whether due to a confused judge or a mistaken jury, a plaintiff can recover on a claim that should not have resulted in recovery. As a result, although the reality of course is a spectrum, we can as a stylized fact say that there two different types of claim with more than de minimis value, but with value low enough that the expense of legal process might deter: meritorious claims not worth very much, and meritless claims potentially yielding a great deal.

From a societal perspective, recovery on a meritorious claim (no matter how small-stakes) creates value, though one can argue if the value created was worth the cost. Whereas recovery on a meritless claim (no matter how large-number) destroys value, in every case. The value created or destroyed is not the transfer from defendant to plaintiff, which is just that, a transfer. Rather, the value created or destroyed is more abstract: justice, the predictability that enables long-term planning, etc. Still, if we need to put a number on it, it would perhaps be fair to say that society values each person getting their due the same amount as does that person. So recovery on a meritless claim destroys value equal to the amount recovered, while recovery on a meritorious claim generates value equal to the amount recovered (up to the proper amount of recovery, at which point any further recovery becomes unmeritorious).

The costs of litigation, from a societal perspective, include plaintiff-counsel costs (“PC”), defendant-counsel costs (“DC”), and adjudicator costs (“AC”). These costs are the costs of having a functional justice system. Reducing these costs might seem an unalloyed good, serving to increase access to justice. But in fact reducing the costs of litigation is a double-edged sword. Or, to pick a more precise metaphor, it is like dumping lubricant over a complex machine. The point of lubricant is to allow a movement that ought to occur to occur more easily, with less loss of energy in the form of heat. But apply lubricant to a knot, and it might come undone; apply lubricant to the floor, and someone might fall down. Reducing the costs of litigation across the board is not necessarily a good idea, because it invites in the courthouse door both low-value meritorious claims and high-value meritless claims.

Rather, the best way to encourage small claims while discouraging longshot claims is fee-shifting. Fee-shifting encourages any claim with a high probability of success, while discouraging any claim with a low probability of success, regardless of claim value. This is fairly easy to show. Let \(R\) be the expected amount of recovery and \(E\) the probability of recovery. Then there are four possible regimes, with the following payoffs:

• No fee-shifting: plaintiff expects \(E(R)-1(PC)\), defendant expects \(E(-R)-1(DC)\)
• Total fee-shifting: plaintiff expects \(E(R)-(1-E)(PC+DC)\), defendant expects \(E(-R-PC-DC)\)
• Fee-shifting only for plaintiff: plaintiff expects \(E(R)-(1-E)(PC)\), defendant expects \(E(-R-PC)-1(DC)\)
• Fee-shifting only for defendant: plaintiff expects \(E(R)-(1-E)(DC)-1(PC\)), defendant expects \(E(-R-DC)\)

On the plaintiff’s side, the more is wrapped up in an \(E\) coefficient, the more incentive there is to bring a meritorious suit, and the more is wrapped up in a \((1-E)\) coefficient, the more disincentive there is to bring a meritless suit. Vice versa for the defendant’s side, where the question is whether to resist the suit or settle. The no-shifting rule encourages meritorious suits, but does not disincentivize meritless suits at all. The total fee-shifting rule strongly disincentivizes meritorious suits, while doing more than the no-shifting rule to encourage meritorious ones. In effect, it prevents a claim from being brought unless the expected value of the claim exceeds the likelihood that the claim is meritless times the costs of litigation (excluding adjudicator costs, which society bears).

Unsurprisingly, fee-shifting is the preferred rule between sophisticated parties, and commercial contracts tend to include fee-shifting clauses. So why isn’t fee-shifting the default rule in American courts? The general rule is no fee shifting. In civil rights suits, the rule is fee-shifting only in favor of plaintiffs. Fee-shifting only in favor of defendants is used for certain claims perceived to exert a chilling effect on civil rights, like copyright suits and defamation suits. Total fee-shifting is relatively rare as a legal rule, though, again, parties often opt into it. If you ask Claude this question, it will give you various answers, such as that a lack of fee-shifting encourages settlement, while fee-shifting discourages settlement–perhaps a desirable outcome when civil rights are on the line. But even for run of the mill cases, it’s hard to see how the beneficial effect of encouraging more settlement could outweigh the detrimental effect of encouraging more longshot claims.

I suspect that the true answer is that phrase–“sophisticated parties.” The American system is a default rule for the benefit of unsophisticated parties. That default rule makes sense, I think, not just because it makes it more likely that all parties will have an opportunity to choose, but also because it gives unsophisticated parties a rule closer to what’s good for them. After all, if fee-shifting properly incentives small claims while disincentivizing meritless claims for relatively risk-neutral parties, it might go too far in discouraging both types of claims when the plaintiff is far from risk-neutral. In layman’s terms: For sophisticated parties, a lawsuit is a gamble, and it’s important for the risk and the reward to be properly calibrated–otherwise the sophisticated party might become a claims-monger. But for the common man, who is more risk-averse, bringing a lawsuit is hard enough without the added risk of having to shoulder the defendant’s legal bills just because some unforeseen issue meant that your claim was not recoverable.

The harm of claims-mongering was one of the primary motivators for the traditional rules limiting alienability of choses in action. I express no view on whether the abandonment of those rules in favor of contingency fee agreements and litigation funding agreements is itself desirable. But the above considerations strongly suggest that contingency fees and litigation funding agreements destroy at least one of the primary justifications for the American rule. The problem with plaintiffs firms and litigation funding firms is not that what they are doing is bad for their clients, the way an agency-costs framing would suggest. Rather, the problem is that they are sophisticated, relatively risk-neutral parties whose incentives must be properly aligned, or else they will engage in litigation that is beneficial for their clients, but damaging to the legal system as a whole. Fee-shifting is the most natural way to accomplish that goal.

And, once again, litigation does not create value. What creates value is having a legal order where people respect one another’s legal entitlements.To the extent that such an order is not maintained through perfectly accurate adjudication, the cost of legal process is not a bug. It’s a feature, serving to deter abuse of the adjudicatory system’s inaccuracies.

• My post
• Hanes’ response

Let’s start by defining a few variables:

• \(W\) is the winnings of the plaintiff in liability suit, whether from a verdict or settlement
• \(C_p\) is the plaintiff’s legal costs
• \(C_d\) is the defendant’s legal costs
• \(β\) is the contigency investor’s share of \(W\) and is \(<1\)

The contigency investor’s payout can be thought of as:

Assuming profit-motivated investors will pursue all nonzero EV claims, then contigency investors will finance any claim where:

There is a share of claims where:

i.e. \(EV(W)>C_p\)

such that a positive EV claim will not be financed. This is what Hanes means he says that contingency investors are under-incentivized to bring claims.

The question is whether we want all claims where \(EV(W)>C_p\) to be financed. In order to evaluate that, we need a way of accounting for the total social good associated with whether a claim gets brought.

One such accounting could be the following: the total social good is

In English, it’s the expected value of the winnings minus the plaintiff’s and the defendant’s legal costs. Rather than wanting to see any claim where expected winnings exceed the plaintiff’s legal costs, we might want those expected winnings to be greater than the total litigation costs borne by all parties.

We can go even further with that reasoning by introducing \(C_l\) as the costs to the legal system (court staffing, judges’ time, etc.) associated with the claim. Then we would want any claim where:

Provisionally assuming this method of accounting, let’s return to the contingency investor’s incentives (\(βEV(W)-C_p\)).

So their payout structure will look like this:

Hanes——who is even more esteemed and illustrious than I am, and whose handsomeness is beyond the possibilities of linguistic description——is concerned with the blue-highlighted part of the line below and argues that it contains a segment of claims which are improperly denied financing by contigency investor’s incentive structure:

I don’t have any response to this argument——in fact I think it’s probably right! Where I differ is merely that I would characterize this problem as a subspecies of the general principal-agent problem existing between contingency investors and the legal system (not just plaintiffs).

When Chancellor Allen identifies the problems of bad shareholder incentives in foonote 55 of the Credit Lyonnais case, he points out that there are two (2!) ways that shareholder-management can go awry.

One is that shareholders have superoptimal risk-appetite because they have downside exposure to cashflow reductions capped at the firm’s total debt burden. But another is that they are too indifferent (i.e. suboptimal risk appetite) wrt projects that increase cashflows but only at levels below the debt burden. I believe Hanes’ under-incentivization problem is exactly this second case, whereas the over-incentivization problem is the first case.

Chancellor Allen arrives at his conclusion about agency problems by considering the array of community interests that a corporation represents (bondholders, trade creditors, tort victims, etc.). In that spirit, let’s reintroduce the notion of the total litigation costs of a potential claim:

If you buy that these costs ought to be considered in accounting for the desirability of a claim, then I would be concerned about the agency problems that arise in the green-highlighted part of the payout line. I totally agree with Hanes that the blue part is a problem too, but I’m not sure what to do about it, whereas I do think my policy proposal of requiring contingency investors to have more downside exposure properly deals with the agency problems represented by the green line segment.

In Short

There is not a principal-agent problem with respect to plaintiffside firms that is analogous to the principal-agent problem arising from stockholders running corporations during bankruptcy.

The key mistake made by my esteemed, illustrious, and even handsome colleague is his failure to see that costs of litigation do fall on plaintiffside lawyers: those lawyers have to do the painful work of bringing the litigation itself. For that reason, the litigation system should function well: so long as the rules of evidence are not unreasonably weighted to favor one side, the deadweight loss of litigation is split pretty equally between the plaintiffs (who must do work to prove their claim) and defendants (who must do work to disprove it).

So long as costs are split evenly, then most claims should end in settlement: the defendant should make a payment to the plaintiffs of the expected value of the plaintiff’s claim, offered in exchange for peace in the valley. That expected value should be, generally speaking, the value that encourages efficient behavior by deterring negligent actions. There is no problem here.

My Esteemed Colleague’s key error is this: he thinks that the payment to the plaintiffs is deadweight loss, but it isn’t. It’s a transfer. The only deadweight loss is the expense/hassle of the litigation itself, and plaintiffside firms (and litigation financiers) do pay that deadweight loss - the litigation financier has to pay the plaintiff lawyers to spend hours of work preparing their claim.

So, the tort system should work to promote efficiency. At least, any inefficiency would be a failure of the underlying law, not the financing structure of plaintiffside litigation.

If the procedural law is not unfairly weighted to one side, and the underlying substantive law is sensible, then the transfer of the expected value of one’s claim should be a good thing: the law had given everyone a package of rights that incentivized them toward good behavior (or upheld justice or whatever), and thus the transfer mandated by the court (or agreed to in settlement) upholds a system that makes life go along swimmingly. The transfer is not deadweight loss.

So the bad thing that we should worry about is not payments to plaintiffs, but litigation expenses. But for litigation expenses, the “capped downside, unlimited downside” problem is absent. Plaintiffside lawyers do not have a capped downside with respect to litigation expenses.

Therefore, the litigation-finance system should not be over-incentivizing plaintiffside litigation. In fact, it under-incentivizes it - for reasons I will explain below.

The Learned Hand Rule and its Discontentments

To see why the plaintiffside litigation system under-incentivizes litigation, let’s examine how things ideally work under the Learned Hand rule: a stylization/idealization/approximation of the concept of negligence that everyone is taught in their one-l torts class.

Under Learned Hand, an activity is negligent if, on the margin, it creates ex ante risks of harm that exceed its ex ante prospects of benefits. Thus, whenever someone is harmed by negligent action, they can sue for the damages resulting from that activity, and thus any negative-externalities of actors are internalized, and actors will only undergo actions that have a positive expected value. The tort system under Learned Hand imposes a general Pigouvian tax (a tax on all negative externalities in the amount of the negative externality), and everyone acts efficiently. That’s the idea of Learned Hand.

Now, things become more complicated once you introduce legal uncertainty and litigation costs.

Suppose there is an activity that has some benefits and some costs. There’s no black-letter rule as to which of those costs and benefits are legally cognizable.¹ Thus a court might hold that the activity is negligent (and thus wish to deter it) while it might not.

Because of legal uncertainty, some activities might be deterred even if the court wouldn’t actually want to deter it. Assuming plausible risk preferences (risk aversion, but not of the rawlsian kind), legal uncertainty is likely to deter activity somewhat more than the activity would be deterred by the law people thought would probably solidify eventually. People avoid risks.

So, generally speaking, legal uncertainty means that activity will be deterred more than it should be deterred in order to encourage economic efficiency. The Learned Hand rule can go wrong.

Furthermore, there is another overdeterring bias baked into the system, even when law is certain. The bias results from factual uncertainty.

Note that, once the cognizeable harms and benefits are established under law, factfinders (typically juries) have to assess the magnitudes of those benefits and costs. Juries have famous biases - in particular, they tend to punish defendants for being big corporations, and they do not like entities that engaged in a formal cost-benefit analysis that accept a certain degree of… mortality risk.

But even if juries are unbiased, there is a bias worked into the Learned Hand rule itself - the Learned Hand rule biases actors against actions with big impacts.

Even if juries are reasonable, there will always be a fuzzy line between negligent behavior and responsible commercial action. Thus, there will always be risks of litigation. And, while the Learned Hand Rule internalizes negative externalities (harms to others) it does not internalize positive externalities (benefits to others). Thus, if you invent a new business practice that lowers congestion, that helps various people all through the world, but you cannot sue them for that benefit. Whereas, if you invent a new practice that worsens congestion (or facilitates crimes on the other side of the world), you can be sued. So, under Learned Hand, your negative externalities are internalized, but your positive externalities are not, which means it’s better to engage in a practice that affects no one than a practice that affects everyone (with if those effects are an even mix of positive and negative impacts).

So, the Learned Hand rule encourages small, conservative actions, and discourages large, impactful ones.

Now, the Learned Hand rules tries to cabin this bias by only allowing suit for actions that are on net bad for society (i.e, negligent). But factfinders are a fickle bunch - you can never be quite certain which actions they will disapprove of. So, it’s best to err on the side of conservatism in one’s business practices.

Thus, through several biases (legal uncertainty & and the Learned Hand Rule’s bias toward small-impacts) the basic structure of the tort system can overly deter activity. There are other biases that push in the opposite direction (most importantly: the requirement that damages be sufficiently concrete and certain) but limitations on damages are only so powerful, given juries’ tendency to ignore them.

The Further Quirk of Settlement

Beyond biases inherent to Learned Hand, the quirks of settlement negotiations might divorce the realities of tort litigation from the economist’s ideal.

What is settlement? Why does it happen? Owen Fiss would tell you settlement is cowardice. That is a bit silly. Litigation is like war; settlement is diplomacy. Trials should only happen when negotiations break down. Litigation costs are deadweight loss, and successful negotiations will avoid it.

Think about it this way: a legal claim of uncertain validity is a big pot of money. There are two claimants to that money. Thus, there is some expected value which is the ex ante predicted amount that the plaintiff would get by going to court. And there is some expected amount of the pot that defendants would, on average, retain.

So the two claimants can either split up that pot and go their separate ways (this is called settlement) or one of them can go to court to try to get the whole thing. I will call the predicted amount that the plaintiff will get (ex ante) is EV(P): the size of the pot multiplied by the probability that the plaintiff win.

But here’s the thing - if the plaintiff pursues their claim in court, the plaintiff doesn’t really get EV(P). They get EV(P) minus the cost of hiring lawyers (and minus court fees, the cost of hiring experts, etc.).

So, it would be better for all parties concerned if the defendant handed the plaintiff EV(P) before any litigation costs were incurred, and then the two parties signed a settlement agreement and called it a day.

But that won’t quite happen, because the litigation costs introduce their own pot of money that can then be fought over.

You see:

• EV(P) is the amount the plaintiff could expect, ex ante, to win in court.
• EV(P) - {expected plaintiff litigation costs} is the net amount they would expect, considering litigation costs.
• EV(D) is the amount the defendant would expect to get in court.
• EV(D) - {expected defense litigation costs} is the net amount they would expect.

So, a plaintiff is better off getting a settlement of any amount greater than [EV(P) - {expected plaintiff litigation costs}] rather than going to court.

But the defendant would also be better off settling for any amount greater than [EV(D) - {expected defense litigation costs}] than going to court.

So what? Well, that means that {expected defense litigation costs} + {expected plaintiff litigation costs} is a pot that has to be split in negotiation. As long as each party gets more than the net-expected benefit of litigation, they would prefer to settle rather than litigate. So… who gets more than that?

Something something negotiation. The way that negotiation splits pots is more a matter of psychology than economics; there’s no way for a mild autist like myself to predict in advance how pots will be split.² Negotiation is a crypstic labyrinth of passions where logic cannot tread.

So, we cannot say conclusively that the dynamics of settlement negotiations favor of defendants or harm them.

But we can be certain of something: the dynamics of negotiation bias companies toward not engaging in activity that might lead to litigation later. To get that second pot, firms want to credibly commit to an aggressive negotiating position. Credibly committing to a position has costs.³ So, the dynamics of litigation mean that {defense litigation costs} cannot be reduced to zero. There are pre-litigation costs (the costs of credibly committing to one’s position in later settlement negotiations) that one must pay in order to succeed in settlement negotiations later. Thus, there is an unavoidable cost that companies must pay when they enter a litigation-risky line of business, and those costs go beyond the payments that go to plaintiffs: the existence of the tort system creates deadweight loss even when parties settle.⁴ Thus, the tort system biases corporations toward lines of business that do not introduce litigation risks beyond what is economically efficient.

The Counteracting Bias: The Weakness of the Plaintiffside Litigation System

So, several biases leave the Learned Hand rule (despite its intuitive appeal) a less than perfect law, to overdeterring behavior by overencouraging litigation. First, legal uncertainty means that the tort system overdeters potentially negligent behavior (so long as actors are risk-averse). Second, uncertainty over factfinders overdeters big, impactful activities in contrast to those that minimally impact anyone. Third, the costs of credibly-committing to positions (and negotiating settlements) bias corporations away from lines of business that pose litigation-risks.

But then there is a great counteracting bias: the litigation finance system biases the system toward under-deterrence.

Let me draw a quick analogy to agriculture. Because… I want to. The typical form of tenancy in the modern world is rent. Under the “rent” system, the landowner gives control of a parcel to a tenant, the tenant makes decisions about management and gets the full returns from their efforts (since the rent is fixed) and so the maximally efficient decisions are made. Contrast that to the sharecropper system. In sharecropping,⁵ the benefits of the tenant’s labors are split between the tenant and the landlord. If the tenant works particularly hard, the immediate result is that more crops are grown. Then, some of these crops go to the tenant while the remainder goes to the landlord. Thus, a sharecropper will put in less effort than is optimal. Any efforts that just barely break even in terms of total productivity won’t be taken by sharecroppers, because the sharecropper only gets a portion of the benefit.

Why did I tell you this? Because litigation finance operates on a sharecropping system. Plaintiffside lawyers are paid by getting a percentage of the benefits of litigation: a “contingency fee.” Thus, like a sharecropper, they are underincentivized to bring claims. Some claims with positive expected values for plaintiffs will not be pursued, because they don’t have positive expected value for plaintiffside lawyers. Like a sharecropper, plaintiffside lawyers won’t pursue a claim if it’s only marginally worthwhile.

Why are they paid this way? Well, there are probably a number of reasons that plaintiffside lawyers are paid this way, but one is the doctrine of “champerty:” In most jurisdictions, it is illegal to sell your legal claim to someone else (the way a landlord “sells” the potential produce of a land by renting out the land to a tenant.)

Thus, the funding system for plaintiffside litigation underincentivizes litigation, relative to what the Learned Hand Rule contemplates.

To the extent that the United States is overly litigious, that is not because of litigation finance, it is because other aspects of the tort system overdeter activity or overly redistribute to plaintiffs.

Some explanations for why this period of economic history was so great include:

• more aggressive government intervention in the economy, such as protections for unions and limits on permissible financial transactions
• the superior labor economics of industrial production vs a financialized service economy
• it’s time to build: we used to have more of a patriotic can-do spirit whereas now we have a bunch of dour anti-growth bureaucrats who won’t let you run pump-and-dump crypto scams on your gullible internet followers

Depending on which of these explanations one believes in, and they are by no means mutually exclusive, policy recommendations for the present might include reviving certain midcentury economic regulations, pursuing an “industrial policy” of protective tariffs and subsidies for labor-intensive industrial production processes, and exhorting (from the comfort of your air-conditioned VC office in Palo Alto) twitter users to get their hands dirty on a factory floor. This last one works best if you complain about bureaucrats while working for a VC fund controlled by a lawyer.

I think the idea that any or all of these prescriptions can bring back the attractive elements of the midcentury American economy look less compelling when we understand how much of it was based on monopoly rents.

Consider GDP shares by country after WWII:

Let’s also look at capital per worker levels:

Once the worst-affected countries in WWII recovered their prewar levels of capital investment, they began to cut into American industrial market share:

Take Japan as an example:

The intuitive story for this would be as follows. Japan’s capital stock gets destroyed in the fighting of WWII. After that happens, they have no choice but to import industrial products from the United States. But once they recover enough to start rebuilding capital equipment, they start to compete with us in industries like autos and consumer electronics, cutting into our market share and eliminating monopoly rents which were previously shared between American labor and capital. The exact same thing happens with Europe too.

A good contemporary example of these economics is the firm Google. Google has one of the highest average wages of the S&P 500. It is also one of best performing stocks of the last decades. So, both Google’s labor and capital are making lots of money. But it is important to understand that Google has a practical monopoly over search, one of the most important products on the internet. A lot of their profits are monopoly rents and not compensation for the capital and labor costs of producing the product. When a firm can enjoy these monopoly rents and distribute them to both its workers and investors, everyone is happy.

I think Google basically represents what the American economy was like in the midcentury. It’s great to enjoy monopoly rents, but now that rest of the world has enough capital stock to compete with us, we can’t do so anymore. That requires us to carefully target industries in which we actually enjoy a comparative advantage and can become competitive. Industrial policy may be somewhat useful in getting such industries off the ground, but it can never bring back a world of abundant monopoly rents. The same goes for midcentury economic regulations and exhorting people to build stuff.

A lot of people have responded to these ideas by pointing out that America still has great GDP growth. None of what I’m saying should be interpreted as predicting that America can’t grow anymore or that there aren’t forms of wealth we can’t enjoy in a post-industrial-monopoly world. But the disappearance of monopoly rents for industrial production does mean that this growth occurs at a lower magnitude (GDP growth is lower now than it was in 1950) and that it gets initially distributed in ways that may make redistribution more challenging (attaining a high labor share is easier within a highly-profitable firm than it is within an entire economy).

There are still many other sources of growth available to us, some rent-based (like financialization) and some legitimate, but we should not expect them to yield the same kind of easy and massive returns that near-monopolistic control of industrial production did. Similarly-monopolistic control of financial markets and internet advertising platforms may in fact be enough to power the U.S. economy indefinitely, though we have not yet found a way to cut most American labor into these rent streams.