Extreme Economies

There is a new book that fits this category perfectly which I am happy to recommend to one and all. Richard Davies: Extreme Economies: What Life at the World’s Margins Can Teach Us About Our Own Future.

Davies travels the world to visit nine places which are indeed examples of economies at the extreme edge of things. It’s a clever idea. Instead of looking for average locales to see how things work, find places where some event or other has pushed the economy far from the norm. Go there and see how things work. Or, in some cases, don’t work. He splits his nine cases into three categories: Survival (where things work), Failure (where things don’t), and Future (where we get a glimpse of what is to come for all of us).

What sets this book so far ahead of the pack is that both the economics and the writing are quite good. Davies can write like a journalist. Each chapter could easily have been published in something like The Atlantic, Wired, or The New Yorker. These are all fascinating stories which are extremely well-told. You will actually enjoy reading this book. Good journalism is one thing, but good journalism in which the economics doesn’t make me cringe? Well, that is a rare beast.

The punchline of the book? Adam Smith was right in The Wealth of Nations: man is a trading animal.

This division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature, which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Whether this propensity be one of those original principles in human nature, of which no further account can be given, or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to inquire. It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any other species of contracts.

People like to trade with one another. The act of trading is what creates economies. How does this work? Well, here Davies beautifully illustrates Hayek’s notion of spontaneous order. Set up the rules of the game and next thing you know an ordered social system spontaneously arises.

Spontaneous order is perfectly illustrated in Davies three success stories. First we have Aceh, Indonesia, which was completely devastated, as in razed to the ground, by a tsunami in 2004. There was literally nothing left standing. The second is Zaatari, Jordan, which is the largest refugee camp in the world. The third is a prison in Louisiana, which has the largest per capita incarceration rate in the US.

All three locations provide stunning stories of human ingenuity. None of these locations seem like promising place to find economies functioning well. And yet, in all three cases, Davies finds a very vibrant economic order. Aceh is now a nice booming town, much more vibrant than it was before the devastation. The refugee camp in Jordan has a massive, well-organized black market where you can get whatever you need at competitive prices. The prisoners in Louisiana developed an entire monetary system which can be used to purchase goods which are smuggled into the prisons. The monetary system described in this last chapter is so clever, I’ll be assigning this chapter in my future money and banking courses.

OK, I’ll tell you what they do in the Louisiana prison. Normal currency is banned in the prisons, so you don’t want to be caught using it. Instead, they use the technology of prepaid debit cards. There are single use scratch cards (MoneyPak) that have a 14 digit number (the “dots”) which the owner can use to load funds onto a debit card. You can buy these scratch cards with cash, so there is no record of who bought them.

To make a large cash payment a prisoner asks a friend on the outside to buy a MoneyPak and to pass on the dots once they have done so. These 14 digits, as good as hard cash, can then be exchanged with a guard or another prisoner for something in the prison, including drugs. By exchanging dots instead of cash, the prisoners keep their hands clean. The free people on the outside—one buying the MoneyPak, the other receiving its value on a Green Dot card—do not need to meet each other, know each other or link bank accounts. Using pre-paid cards in this way creates an informal currency that is durable, divisible into payments as small as the MoneyPak minimum of $20 and is accepted everywhere. It fits precisely the standards for a good currency that Jevons and Menger set out centuries ago

People are very clever.

But, sometimes being clever is not enough, which leads to Davies’ Failures. The Darien Gap in Panama, should be a vibrant economic hub linking South America to North America. Kinshasa, DR Congo is sitting on a wealth of natural resources and is one of the poorest countries in the world. Glasgow, UK used to be the second most prosperous and vibrant city in the UK and is now one of the poorest.

What happened in each of these failures? Markets didn’t develop. In all three cases there is an external force that prevents the sort of spontaneous creation of markets that allow people to take advantage of the resources which are there. The result is a hopeless poverty. People hunker down, don’t interact much with others, and the society just decays into collapse.

Those six chapters alone would make this book well worth reading. But, then comes the discussions about the future. This is where you get to find to if you are an optimist or a pessimist. After reading these three chapters you will either think that humans are clever enough to solve these problems (like in the first three chapters of the book) or we aren’t clever enough (like in the second three chapters of the book). But, there is no doubt Davies has identified three things which will shape the next century.

He begins with Akita, Japan, a city of no particular note in Japan. Well, one particular note: it is an old city. A very old city. It’s not the buildings or landmarks that are old, though. It is the population. The average age in Japan as a whole is rapidly rising. Japan is not alone in this. As Davies notes, by 2050 in both South Korea and Japan the average age will be 53, and more than a third of the population will be over 65. How does a society function when a third of the people are retired? Well, if Akita is an example of what it is to come: it doesn’t. China, Europe and the US are facing similar demographic changes in the next 50 years. There simply are not enough young people to balance out all the people who will be retiring.

Next up we have Tallinn, Estonia. This is a place that has gone to the extreme in becoming a digital paradise. Just about every aspect of government is digitized. Even citizenship. No matter where you live in the world, you can become a digital citizen of Estonia. You want to know what it is like when everything about you is all sitting on a computer server somewhere? You want to know what it is like to live where the government can potentially look up everything about you? Where robots and AI are rapidly reshaping the whole economy? You want to see the digital future? Visit Tallinn.

And finally, Davies goes to Santiago, Chile to look at income inequality. It was a brilliant choice. Chile is the most prosperous country in South America. The poor in Chile are richer than the poor in other places on the continent. And yet, you can visually see the income divide in Santiago. When both the rich and the poor get richer, that does not mean the gap between the rich and the poor gets narrower. What happens if the gap gets large, very large? Is it enough to say the poor are richer than they used to be and richer than they would be in other places? Will that be enough to keep the poor happy? In other words, is it absolute or relative income that matters to people? That is the question facing Santiago.

Like I said, this book is really good. If you are stuck at home thinking about the future, this is a perfect book to read. You can buy a copy by clicking on the picture of the book cover above. Highly recommended.