What’s the relevance of archeology to today’s financial and political disputes?

Before you answer “None”, take a look at “The V.C.s of B.C.”, a New York Times Magazine report by Adam Davidson, who also does the Planet Money show for NPR.  The feature concerns recent archaeological findings, forthcoming in “Ancient Kanesh: a Merchant Colony in Bronze Age Anatolia”, and some rather unusual interdisciplinary work, including economic analysis, being done in the wake of these findings.

In most ways, Kanesh is just another ancient near-eastern archaeological site, fascinating to scholars but indistinguishable to non-specialists .  But in one critical sense Kanesh is proving unique; it turns out have been something of a trading hub on the outskirts of the Assyrian empire and the cuneiform records of its merchants’ transactions  (and lives) turn out to have been preserved in astonishing detail.  The analysis of these records is likely to have great impact on one of the oldest debates in economic history.

That debate revolves around one question: “What was the ancient economy like?”  Scholars have never reached consensus on this question, with the division roughly divided between a modernist camp, who hold that, absent iPhones and the eTrade app, people in 1800 B.C. were pretty much the same as people today, and a primitivist or substantivist camp, who hold that pre-modern peoples and economies were not “market-driven” in the sense we observe today, but focused on status or utility-driven forms of exchange.

The Kanesh record, with its descriptions of financial instruments and records of boom-and-bust cycles, is certain to provide evidence for the modernist side of this debate.  Economists working with the primary Kanesh team even seem to have verified that the Gravity Model of Trade – an equation very similar to Newton’s equation for calculating the attraction between two bodies – seems to describe the level of trade between Kanesh and its neighbors, just as it usually describes the level of trade between modern economies.  This discovery is captured in a hilarious Indiana-Jones-meets-Isaac-Newton (or is it Adam Smith?) illustration by Andrew Rae:

So, let me repeat the initial question.  What is the relevance of this discovery to today’s financial and political disputes, particularly to the debates around globalization and international trade agreements?¹

My answer, based on the information in the article (and what I have told you), would be “None”.

Adam Davidson disagrees.  Davidson says that lots of people (we assume these are mainly anti-globalization people)  see “global trade as a choice, something a specific setoff politicians and businessmen decided to impose on the rest of us” via trade agreements, etc.  The Kanesh findings illustrate trade’s “intractability” and the “natural tendency for different regions to trade a fairly predictable volumes.”  If trade largely ignores political boundaries, it follows that it is mostly beyond the reach of political manipulation or democratic decision making.  “There is much we can do within our borders to address the impact of global trade,” but little that can be done, either through agreements or popular action, to “shape trade to achieve different outcomes, like a resurgence of manufacturing or a lessening of inequality.”

My response (with apologies to Adamson, I have re-arranged his argument to make it seem far more one-sided than it is) is that this is nonsense, that though there are “gotchas” aplenty, there is basically nothing in either economic history or the gravity model of trade to suggest that we should accept this kind of dis-empowerment.  Anti-globalization policies, with respect to trade, might be bad policies, but they are not pointless.

So what is “the gravity model”?  The illustration, by the way, does not quite get it right.  The classic expression^2a would be

F_ij = G( M_i M_j ) / D_ij² .

First, the gravity model has been and is used far beyond trade.  The first application may have been to human migration patterns, and the model has been used to determine optimal locations for hospitals and shopping centers, so that these “attractions” don’t miss under-served areas or undermine allied businesses.  Certainly, with migration, and here we are talking about within-country as well as  between-country patterns, the model does seem to underscore a “natural” phenomenon; in modern economies, large cities ”pull” people from the surrounding countryside; a large, rich economy like the US pulls people from its Mexican neighbor – it also pulls people into Mexico from Guatemala.  My guess is that no scholar holds that migration is as simple or as impervious to political control as the gravity model would suggest – but populist movements or politicians who rail against immigration can nonetheless sound a bit like King Canute, forbidding the tide to come in.

Second, the gravity model, though it transformed physics, is not exactly rocket science when it comes to economics.  When applied to trade it does give rough quantification to a fairly obvious empirical relationship, one that is much easier to grasp than Newton’s original intuition about attraction between massive bodies.  No one would be surprised to learn, say, that two large companies find lots of reasons to do business with each other, even if they were located some distance apart.  Kimberly-Clark needs a lot of computers; IBM needs a lot of toilet paper.  Similarly, one would expect a small company to look to do business with nearby potential customers, with large ones being especially “attractive”.  And the attraction is mutual.  If a Kimberly-Clark plant in Wisconsin needs an elevator fixed, it probably isn’t going fly in a Thyssen-Krupp technician all the way from Germany; some local repairman can probably get the job done.

That is what gravity model is really saying when it is applied to trade.  The “M_i times M_j” figure in the numerator, borrowed from Newton, is saying that trade tends to increase proportionally to the product of the size of two economies.  Likewise, the denominator “D_ij²” says that trade decreases as costs go up.  Trading costs were originally almost a pure function of distance, so the gravitational metaphor was apt, but the operative sense of the model would be just as well-conveyed if we called the denominator “C” (for cost) instead of “D” for distance.  The cool thing is that the gravity equation, like the unexpected fallen apple, gives us just what economists are typically trying to achieve through complex manipulation of formulas.  Just about every economic model attempts to isolate some variable (whether it’s the overall value of trade or GDP growth per capita) against some other variable or expression that increases it via the numerator or decreases it via the denominator.  With the gravity model, we get both.

But the important point, in the case of trade, is that unlike M_i and M_j, which are givens, the denominator contains politically imposed items, like tariffs, which are under our control.  When Adamson suggest that  the level of trade is fairly impervious to import duties or trade agreements, I would say he is taking the “D” in gravity model too literally.

Third, the gravity model is just that – a model and not, like Newton’s original, a “law”.  The model describes a well-known empirical tendency, but no economist considers the equation itself to be a complete explanation or theory of trade.^2b  For one thing, the model cannot predict a zero result, something that, in the real world, happens all the time.  So the model can predict that trade would be higher between North Korea and China than between North Korea and the United States; it cannot predict that there is no trade between North Korea and the United States, much less that there would have been no trade for over 50 years between the United States and Cuba.  The element of politics in the denominator of the gravity model is only part of the larger story of how politics can influence both trade and economic outcomes.

Adamson’s suggestion that politicians have only “crude tools” at their disposal is one, moreover, that is strongly contradicted by modern economic history.  In the nineteenth century, the United States, Germany, and France all successfully used “mercantilist” (or high-tariff) policies in their efforts to catch up with British industrialization and economic expansion, ³ and Britain’s “free trade” policy in that period was a reflection of its low-cost producer status – and of its ability to open target markets via colonial control and gunpowder diplomacy — not of high principles.⁴  Indeed, in the previous centuries, Britain had protected its textile industries against cotton imports as aggressively as it later promoted cotton cotton exports.⁵  I am not saying that policies adopted today would be as effective (or destructive) as the forgoing examples; all I am saying is that applying a modern formula to an ancient economy does not lead to the conclusion that countries can’t choose to protect certain industries or that such protections, if adopted, won’t be effective.

Should such policies be attempted?  There is a second argument against them: not the negative argument that trade restrictions are ineffective, but the positive argument that trade itself is good, that it brings “the greatest good to the greatest number”, around which I leave readers to draw their own conclusions.  Economists, in truth, are not much interested in the gravity model in the form we have discussed.  They don’t care a lot how much trade is produced by economies of a certain size.  They care a great deal about how much economic growth is produced by trade.  The free trade argument, today, is that the overall benefits of trade (in growth) to all parties taken together outweigh the costs.⁶   I would reply that even if we believe this argument, it doesn’t follow that the people who stand to bear the costs of trade liberalization should passively accept those costs.  Trade in this sense is not something that is or should be “beyond politics” – it is politics.

As with modern times, so it must have been with Kanesh.  Its efflorescence as a trading center cannot have been a simple “natural” phenomenon; some combination of political and economic circumstances – perhaps some earlier version of the Pax Assyriaca – must have supported Kanesh’s rise and, changed or withdrawn, must have caused its fall.  Kanesh eventually disappeared – along with all the other late Bronze Age kingdoms – into a true dark age.  In that sense there is no defying gravity, then or now.

*     *     *

¹ The qualification is important.  Kanesh may provide an excellent case study illustrating the dangers of over-sophisticated financial instruments and the necessity, for market stability, of financial regulation.  “Ancient Kanesh” is expected to tell this story, but Adamson’s article simply doesn’t provide enough information.  My point to follow is limited to the trade discussion and is certainly not that history can’t be relevant to current questions.

^2a As simple web searches will show, economists do not precisely follow Newton’s formula when applying the gravitational model to trade.  The technical literature is very large.  For a reviews of the use of the formula since its application to trade by Tinbergen in 1962, see: James Anderson, “The Gravity Model”, NBER Working Paper, 2011 and Luca Salvatici, “The Gravity Model in International Trade”, AGRODEP Technical Note TN-04, April 2013.  My comments align with Salvatici’s high-level conclusions.  I have not however, gone into any explication of the log-log form of the equation or the inclusion of separate dummy variables for shared borders or trade agreements; for my purposes, these can be considered as components of “distance”, along with other costs.

^2b Attempts to link the model to a complete theory begin with James Anderson, “A theoretical foundation for the gravity equation”, AER 69 (1979) and are reviewed by Anderson and Salvatici in the papers cited in the previous note.  My high-level comments do not take this very technical work into account.

³ For US, German, and French catch-up policies, see Robert Allen, “Global Economic History: A Very Short Introduction”, Oxford (2011), p. 2 et passim.  Allen describes a “standard set” of four catch-up policies that included mass-education, chartering of financial institutions, and creation of a national market via infrastructure investment and elimination of internal tariffs in addition to the protectionist measures mentioned above.

⁴ For Britain’s nuanced shifts between trade and power politics and its effects on manufacturing in the economies of target partners, see Immanuel Wallerstein, “The Modern world-System III: The Second Era of Great Expansion in the Capitalist-World Economy, 1730s-1840s”, rev. ed., UCP (2011), pp. 149-151.  Wallerstein quotes an East India Company director who, in 1840, boasts with perfect equanimity of England’s success in “converting India from a manufacturing country to a country exporting raw produce.”

⁵ O’Brien, Griffiths, and Hunt, “Political components of the industrial revolution: Parliament and the English cotton textile industry, 1660-1774”, EHR XLIV (1991).

⁶ For a detailed exposition of the benefits-of-liberal-trade argument, see James Anderson’s essay “International Trade Theory” in the New Palgrave Dictionary of Economics.  See, especially Section 5, “Division of the Gains”.  The counter-argument, as Anderson mentions, usually comes from a broader analytical framework than neoclassical economics.  Wallerstein’s “The Modern World-System”, cited above, provides an example.