Week of April 5, 2020

Optimization, Maximization, and Collective Invention

The history of technology might well be summed up with the phrase “bigger and better”—the creation of larger-scale, more efficient methods of producing greater quantities of things. Steam engines increase in horsepower; looms in productivity and capacity; steel in durability; vehicles and communication lines in speed; and so on. The telos of each sequence is some kind of higher capacity. A factory that, with a given resource input, produces more outputs than a comparable station is consequently superior and represents an improvement. Minimization, vaunted in the manufacture of computer chips, is spatial maximization. Industrial history stresses the significance of the conglomerate and economies of scale to the development of American and German manufacturing in the nineteenth century, and the multi-national corporation to globalization the twentieth. Standard economic models seem to bear out this interpretation: the concept of utility maximization entails the employment of all available resources (in intertemporal models, wealth is often assumed to be zero at the end of the final period) in service of consumer satisfaction or producer profit. The agent expends his entire budget constraint, and (if acting rationally) reaps the largest total reward.

Sometimes, however, the optimal solution does not involve full capacity use. Consider the example of the fluyt, mainstay of the Dutch mercantile fleet during the sixteenth and seventeenth centuries. Weighing in at 300-500 tons, this light, unarmed trading vessel ended a hundred-year expansion of European sailing ships (driven by the invention and improvement of the full rig). Though rigging design permitted the construction of 2,000-ton giants, the fluyt capped civilian cargo expansion until 1800. Compared to contemporary models, especially warships, the vessel was small, slow, and unadorned; yet it underpinned the commerce-based Dutch Golden Age and became the backbone of the European merchant marine. The success of the fluyt lay not in gigantism, but in ease of use. Stability and a sophisticated system of pulleys and blocks allowed a skeleton crew to conduct navigation, shrinking one of the largest operational costs. To historian Carlo Cipolla, the configuration represented the achievement of an “optimum tonnage” for the early age of sail.

In an era dominated by colossal oil tankers, such a definition appears counterintuitive. Indeed, the maritime networks developed during the nineteenth century to replace commercial sailing dramatically increased in value with the introduction of steam-powered, screw-propelled ocean liners (which permitted the swift transport of cheap bulk cargoes)—the maximization principle writ large. How did Dutch naval technicians avoid the impulse to expand? The answer lies in factor prices: wages in the Netherlands were relatively high by European standards, imparting a strong incentive for shipbuilders and merchants to economize on manpower in any task. By increasing the prevalence of capital (the hull) and energy (the sail) relative to labor, the Dutch achieved a better cost-output ratio. Robert Allen famously contended that a similar effort underlay the Industrial Revolution a century later, as commercially-inflated wages impelled English engineers to develop techniques (steam engines, coal-fired plants, power looms) that saved on labor through energy use and mechanization. The anticipatory case of the fluyt, however, took place in defiance of the technological frontier.

The lesson, in any case, is that markets themselves are creative forces, not just engines of choice between existing alternatives. Political markets—democracies—design policies based on the sensitive needs of voters, whose collective input (albeit imperfectly) defines state imperatives. Economic markets, as seen above, take aggregate signals (prices) about popular wants and respond not with the best available option, but things unexpected and new—what Joseph Schumpeter famously called “the creative response of history.” The collective decision-making processes that such participatory systems enable direct endeavor into hitherto unsuspected channels, responsive to a matrix of goals rather than narrow, maximalist objectives. Where community signals are disregarded, as was required in Soviet-style economies, actors are deprived of these indefinite but necessary incentives, leading not just to inefficiency but to missed opportunities. The artisans who made the fluyt could not have known where to direct their energies without the subtle hints provided by labor costs through the market. More impressive designs might have impressed at fleet reviews, but lost the Netherlands her commercial supremacy. In a time when titanic unilateral responses (from large firms and governments alike) are becoming default solutions for societal problems, it’s important to bear in mind that only through iterative bargaining can a wide range of interests be successfully incorporated.

Links

Nabokov on Dostoevsky, by Vladimir Nabokov

An incisive review of Russia’s greatest nineteenth-century novelist by her greatest twentieth-century novelist, stuffed with magnificent throwaway epigrams, glittering witticisms, and universal truths of aesthetics and artistic endeavor. Nabokov adduces a book’s worth of critical wisdom in a brief lecture, and in so doing compellingly savages my favorite writer.

Why Don DeLillo Deserves the Nobel Prize, by Gerald Howard

American literature, especially from the last five decades, is something of a blind spot for me, but this eloquent paean to Don DeLillo returned some of my sight. It’s certainly curious that so many novelists of marginal virtue have attracted the Committee.

How Reform Worked in China, by Yingyi Qian

Essentially a history of China’s modernization in a series of analytical anecdotes, Qian’s concision and subtlety elevate this brilliant introduction to the Communist reforms. His concept of “transition institutions,” which protect losers and empower innovators, is particularly essential and widely applicable—and lies at the heart of the contrast between the Chinese and Russian economies over the last two decades.

The magic of Pushkin’s verse comes alive in a new translation, by Robert Chandler

The oft-overlooked Alexander Pushkin, founder of Russian fiction, has had a volume of his poetry published by Penguin, and apparently it’s quite good. Otherwise, Chandler introduces Pushkin as an artist bedeviled by the same crises of tradition and modernity—the deep, irresolvable contradictions—that plagued Dostoevsky.

Finally, I have a new article out in the Berkeley Economic Review, which can be read here: The Long Decline of Global Interest Rates.