Liquidity, Aristocracy and Serfdom

We see an extended conflict in the wake of capitalization. Capitalism selects for certain types of behavior and people.  These selection effects are starkly different from the selection effects illiquid forms of capital, which before capitalization were not even considered capital.  The essence of older forms of illiquid capital is violence.  Whether direct violence in the forms of men with swords or the protection of fortifications.  The serfs, the farm and the fort are the archetype of illiquid capital.  As the cost of defense decreases, there begins a divergence between defense ( both active and passive ) and capital.  Liquid capital, especially other forms than currency, is only widely possible when one does not have to protect property passively or directly employ protection to prevent theft ( there will always be a minimum level of protection needed though).  During the early middle ages even merchants, who are usually the archetype furthest from violence, formed bands to defend themselves from raiders, barbarians and robbers.  Italian merchants even formed navies to defend themselves from pirates.  Certainly in the absence of security, trade becomes an occupation only for the brave, bold and armed.
     Separating capital from violence creates a distortion in the market.  Where before property was only maintained via defense by property owners.  Now free men can utilize generated safe zones to protect their property.  This means their incentives in the short term, their lifespan, lie with maximization of capital.  Not all actors will desire or achieve wealth but eventually a form of wealth generation will emerge that was previously unavailable to illiquid capital owners.  Of these capitalistic methods some will come into direct conflict with the goals of those who maintain defenses. Some of these methods will eventually hurt the average person. Many will describe this subversion as evil, but in practice both illiquid capitalists and liquid capitalists are amoral actors.  The difference is that illiquid capitalists have more incentive to maintain the commons.

     The crux of civilization is successfully internalizing the positive externalities of security into the corporation.  The people must be absorbed into private government as subjects so that they cannot free ride off services.  This guarantees institutions providing security are compensated properly for their services.  By absorbing the subjects into a private corporation the aristocrat can eschew both the cost of barter for security and the cost of organizing actors to pay for defense ( the creation of excludable goods).   While security can be an excludable good, history has tended to produce security as a non-excludable good requiring that adequate security be maintained by a hegemonic actor with a natural monopoly ( I use natural loosely here it may be natural in the geopolitical but not the capitalistic sense).    
     Naturally wealth does benefits most actors.  As the availability of capitalistic methods spread the degrees of separation between actors and violence increases further, fewer actors are directly or indirectly affected by or involved in violence/defense.  The interests of individual actors (note not the group) begin to align with the capitalists and their liquid wealth.  However, by this point many liquid capitalists are as wealthy or wealthier than the illiquid capital holders.  Many illiquid capital holders must adjust their methods.  The demesne system was eventually supplanted in many areas when aristocrats realized that it was cheaper to rent their land to farmers than to take care of their own serfs.  Much in the same way wage slaves are cheaper than real slaves. Eventually especially creative amoral capitalists invent ways of making money which directly affect the well being of the average citizen.  However these methods are usually unpopular with existing illiquid capital holders. They have a few options: bribe the illiquid capital holders or find new owners for the illiquid capital.  A defining factor of the illiquid capital owners is lower time preference.  While many capitalists have lower time preference few have a time preference as low as illiquid capital holders.  The combination of low time preferences and illiquid capital is what makes sovereigns so incentivized to increase the value of their property and maintain it.
     The modern world has provided one of the worst incentive models ever conceived.  It is more sinister than anything that could have been imagined by a single man.  In fact it defies the understanding of those that employ it.  It is so ingenious in that it allows the unwitting academics to repeatedly play the savior all the while writing another episode of destruction and upheaval.
     To return to better governance by theorizing any sort of modern aristocracy I posit that we cannot first imagine a perfected system.  We must first look to the natural avenues in which a natural aristocracy might arise and secondly provide a generic but descriptive definition of aristocracy.  While it is traditional to define aristocracy in terms of their martial prowess I believe that this is somewhat inadequate.  Aristocracy is responsible for defense but that is only part of their nature, many real aristocrats throughout history have outsourced defense to mercenaries.  Ergo defense is necessary but insufficient for aristocracy. What is the primary characteristic of the Aristocracy is the holding of illiquid assets.  This could be artificially illiquid assets as in non-transferable assets via contract or practice or functionally illiquid assets, as in assets than cannot be transferred within reason.  The second quality is indeed a hegemony on violence in a geographic region.  The aristocracy should be the clear winner in any local conflict ( unless it is with someone higher up the hierarchy).  This does not necessarily mean the aristocracy should be warriors, although it doesn’t hurt.  A man with an army but no illiquid capital is a warlord, bandit or general.  A man with an army and liquid capital is still just a warlord, there is nothing to tie him to any particular piece of land or people and his capital can travel with him on his predatory ventures.  A man with illiquid capital but no army is just an businessman.   It is not until the warlord becomes a sedentary bandit that he truly becomes an aristocrat, alternatively it is not until the merchant builds an army that he becomes an aristocrat.  Until those conditions are met the aristocrat has little in common with their subjects.  Afterword, both conditions are met and their fates are tied together with their people.  Hierarchy is implied in either the owning of land and people or military might.  If you cannot decide what to do with your property or army ( within reason ) then you are neither owner or general.
    Back to my point about not imagining natural aristocracy as a perfected system.  When we look back any aristocracies golden age we are looking at an evolved and formalized system.  No system emerges as a finished product ( and products must often be revised and improved to compete ).  Systems emerge by fulfilling a need they change both as they improve the cost and efficacy of fulfilling that need and as the environment changes ( often due to the byproducts of the system). Aristocracy in 900 AD did not look like Aristocracy in 1400 AD nor 1100 AD.  In the same way Rome was not “founded” as a Republic nor did it truly end as one.  Systems tend to change and any long lived system will not be static.  Humans have an ability to adapt their environments, any system which is no longer adaptive will eventually be outcompeted.  This is not to say that change must be quick.  Reckless change throws away important foundational systems without a stable way to replace them.  Systems must adapt to new circumstances without throwing out the hard won wisdom of the specialized knowledge of their particular form of civilization.
      In risk of sounding too libertarian here, government is just the strongest gang in town.  This is not meant as a slight against government.  A well functioning government does far more good than harm and it should not be viewed as a moral ill.  In private governments gestation phase it often is indistinguishable from bandits, pirates or indeed a gang.  This is not to say a gang, especially a modern one, is a desirable form of government.  They are however, a form which has been selected for that maintains both a hierarchy, territory and defense.  They have also been selected for violence and criminality, but to some extent, so were the original robber barons.  I do not hope the future is ruled by the gangs we see today, however their structure and forms are worth noting if at the very least as another form which has again and again throughout time.
     Unlike societies where persons were owned by person or corporation today governments and corporations increasingly atomize and make more liquid workers.  For an unnatural hierarchy, one which derives its power from social capital rather, there is always an incentive to grab power from the social and economic sphere for itself.  Since a democratic government is not an institution which builds it can only usurp power from its subjects.  A natural hierarchy builds it’s own social, political, material and martial capital. Education just one of many tools which moves people from illiquid capital to liquid capital.  Apprenticeships create illiquid capital. A black smith may move about and work in different places, but ultimately he spent his life training as a blacksmith.  A Harvard grad while they have no real skills has demonstrated through signalling that they are smart.  Demonstrating intelligence then becomes a prerequisite for getting a job.  This also forms a cost barrier as college becomes more expensive.  If we regard the college method as a form of liquidation.  We can see that it only really benefits those who can successfully signal intelligence. For the vast majority of workers constant shifting of jobs, destroys skill capital by the inefficiency of transfer.  Many of the inefficiencies of our current system are equally derived from modern psychosis, bad governance and immoral capitalists.  Books could be and have been written on this unfortunate synthesis in the modern age.
    To end on a positive note, I will call back to better times so as to not be so fatalistic.  There was a time when lords, merchants and priests worked hand in hand to spread the word the law and wealth.  During these times merchants would brave the winter storms to bring their most valued goods salted fish to far off lands so that they could celebrate lent ( salted fish was usually consumed in lieu of meat during a fast).  Along with beer, it was the only good allowed to be shipped out during the beginning of winter storms ( they banned shipment of normal goods from Nov 11th to Feb 2nd). All other goods, except beer, would have to wait for shipment till the storms quelled, but an exception was made so that people could have the only meat allowed during their fast ( beer and fish could be shipped as late as Dec 6th nearly month after other goods).  Merchants brought not only their goods, but their religion spreading Christianity to pagan lands.  They also brought their laws working with lords and castilians to spread their laws of property and trade.  They said prayers that their greed would not overcome them and build churches in foreign lands to practice their faith.  They told tales of the town of Winetha which was fabled to be destroyed by God “like Sodom and Gomorrah, because of its sins; for its inhabitants had grown hard and proud and disdainful, trusting in wealth, and despising God.” They built halls that they might band together and practice their culture among an alien people.  These halls were built in or next to their churches the houses of their faith. They protected each other from pirates, bandits and greedy lords alike. While we might mark the merchants as a necessary evil, it was not always so, there is room in time and history for a synthesis of god, aegis, people and religion.  There is nothing fatalistic about those who work in liquid capital, but as fallen people there will always be temptation and sinners.

11 thoughts on “Liquidity, Aristocracy and Serfdom

  1. Can you explain why illiquid capital owners have different incentives than liquid capital owners?

    I think you are saying that liquid capital owners free-ride on security provided by others in a way that illiquid capital owners do not. I’m not certain that’s what you mean, nor am I sure that it is true.

    “Security” in that sense is also complex: it consists in part of the existence of an effective monopoly of force (which you address), and in part in the existence of a culture of trust (which you don’t address, though it might turn out to be important to your argument).

    I’d really appreciate it if you could expand on this subject.

  2. “Can you explain why illiquid capital owners have different incentives than liquid capital owners?”
    First off when I’m talking about liquid an illiquid capital owners I am trying to establish archetypes. Not all illiquid capital owners are going to behave in the same way nor have the exact same incentives. There’s is a general trend though that the more illiquid the capital the more invested the owner is in their venture and the area around their venture.
    The archetype of the medieval aristocracy was the demesne system their serfs were neither JUST slaves nor JUST wage workers they depended on the aristocracy both for protection and for the land they were granted. Just as the baron ( or prince etc.) depended on their labor for his food. He could not just sell his property to anyone else simply because they would have to establish a relationship with the serfs and defend the property. Maybe a few of these sales did happen, but the baron’s property was established as a product of his and his soldier’s ability to effectively use violence to defend their land.
    The incentives therefore lay with protecting their serfs and their land. They were tied to the land. When baron’s started renting their land out to freemen their workers became more liquid. They were as liquid as modern wage workers, they weren’t fundamentally fungible, but the Baron would have less invested in any individual worker. Since at the time land was a product of effective defense, it tended to be passed down through family. Someone had be raised within the corporation to be trusted to both manage it and its soldiers. This meant that the Baron wouldn’t just abandon the property or for that matter his army at any point because his son needed something to inherit. In the same way the serfs (before the return of city based trade) needed to establish trustworthiness with their baron to be granted land ( usually this meant being married and maintaining a good reputation ). Given the person knowledge and relationships were tightly tied to grants of land again weren’t fungible. The property rights were not granted by some foreign entity they were establish with violence and stewardship.
    Between getting to know a the value of their serfs and maintaining their property through violence Baron’s tended to need very low time preference. Their incentives was to maintain their property for a lifetime. Let’s move to a more modern example. Let’s look at a factory owner as compared to a trust fund child. Let’s say there is a downturn in Tragedyville. The factory owner might sell the factory or the might stay. They might ride out the downturn and stay. They might start having to ship their goods farther. But even if they sell it they wouldn’t be able to do so quickly. Given that their goods are illiquid they have an interest in watching the conditions around them and making sure everything is going well. You see this with wealthy business owners in small towns. Many, but not all, tend to be very concerned with the towns affairs.
    Another simple example is a home owners association or the owner of a bunch of apartment buildings might lobby against building a prison in their neighborhood. Owning houses or apartments ( which are somewhat illiquid) they don’t want their property values to fall. Property ( as in land, houses, farms etc. ) tends to lower peoples time preference and align them ( ever so slightly ) with their community and their own future. They have less incentive to protect and provide for the region as say a medieval baron but the trust fund kid with his liquid wealth can get up and move to anywhere and never look back. There is a lot more going on as to why both the trust fund kid and the factory owner can sell their property as opposed to the baron but that is another topic in itself.
    A separate issue is that wealth and property rights tend to make all goods more liquid. As property rights are better established people are more willing and comfortable to trade goods. This is especially true of goods which cannot be carried. When buy a house and gain the title there is no guarantee in nature that the other person won’t kill you or actually move out. It is both the trust built into the normative commons and the strong property rights protected by the government which protect you.

    “I think you are saying that liquid capital owners free-ride on security provided by others in a way that illiquid capital owners do not. I’m not certain that’s what you mean, nor am I sure that it is true.”
    This is exactly what I am saying. Although I limit it to the archetypes. In a society where security is provided by the state the no one person outside the government ( in many cases not even them ) is directly responsible or effects security of the state. They have been absorbed within the corporation and the positive externalities of defense provided by the military is now funded by the subjects through taxes.
    Anyone who is not the owner of the subjects does not have to actively engage in defense and are separated from violence ( for the most part). This means that they could be traitors and face no personal consequences. The only consequences they face are those enforced by the sovereign. There is no natural force, in the short term, which will punish them if they weaken the defense or sovereignty of their nation.
    In this case I am making a comparison between illiquid capital owners like the sovereign and their subjects. The subjects aren’t free-riding in the sense that many pay taxes however they may do things that undermine the sovereign, their neighbors or their community. They are able to do this because of the degrees of separation from violence and the amount of social and material capital. Among the subjects, the more illiquid the capital the subject possesses the more invested the subjects are in the community. As I stated earlier though wealth, property rights, social trust and normative commons can all increase the relative liquidity of capital. A house is not uniformly liquid in all societies or at all times nor between persons.
    So you are right subjects of whatever variety don’t free ride materially. They tend to pay their taxes. What many subjects, especially those without illiquid capital, do is free-ride of social trust, normative commons and culture.
    ““Security” in that sense is also complex: it consists in part of the existence of an effective monopoly of force (which you address), and in part in the existence of a culture of trust (which you don’t address, though it might turn out to be important to your argument).”
    I don’t address the social trust aspect. It really is a topic on its own. It is deeply related. I can’t go too deep into it here. But to put it in perspective this trust was developed in part from the demesne system which tended to prevent the lower classes from breeding. In part from Catholic Church banning cousin marriage: go read HBD Chick. Also I suspect the formation of cities and the revival of trade after middle ages along with these other factors created the institutions and norms which created the trust we saw in the West 200 years ago.
    Suffice to say culture of trust, the normative commons and high trust outbred populations all lower transaction costs. This is accomplished by creating a standard set of expectations for trade, lowering risk and increasing the efficiency of communication.
    For more information on Social Trust:
    From Econ Talk: David Rose on the Moral Foundations of Economic Behavior

    Curt Doolittle at and

    And from me:

    Sorry for wall text. If there is anything still unclear feel free to ask. 🙂

  3. I’m sure you’re at least close to right. The central point that we can agree on is that the feudal lord is both property-owner and provider of security, and so failing in provision of security impairs the value of his property, and administering his property “irresponsibly” (that needs to be specified better, but I think it’s obvious in context) will degrade his ability to provide security.

    The reason I’m suspicious of the illiquid/liquid distinction is that it sounds like the now-common and false claim that market-responsive capitalists have particularly short-term orientation. That is false because market valuation of assets is based on the best long-term estimate of what they can produce. For this reason, a company such as Snapchat with zero revenue (not profit, revenue) can be valued in the billions on the basis of the profits it might be expected to make in the long term. So even an investor looking for a short-term profit is guided to increase the long-term value of his asset, so that he can sell it soon at the high market valuation.

    That said, there is undoubtedly a tendency to shorter-term thinking now than among medieval rulers. The reason for this is not liquidity of capital in itself, but greater uncertainty about the future. Agricultural land valuable in 1300 is going to still be valuable in 1400, but while Snapchat is likely to make big profits in 2020-2025, it would be brave to suggest it will still do so in 2070-2075. That would be as true if it were the inalienable entailed property of an Earl as if it were quoted on NASDAQ. Regime uncertainty and monetary chaos also contribute to pulling effective time horizons down to decades.

    The point about social trust is that the high point of a trusting society is, if not today, at least in the fairly recent past (probably late-20th Century). That is when supermarkets would have their wares exposed for customers to pick up and take to checkouts to pay for, where credit was given to strangers on a wave of a piece of plastic. That trust is, I believe, now declining (the same indicators are in place, but probably would not be without the vast increase in technological surveillance since the 1970s or 80s replacing declining trust).

  4. “That said, there is undoubtedly a tendency to shorter-term thinking now than among medieval rulers. The reason for this is not liquidity of capital in itself, but greater uncertainty about the future.”

    I agree that there a number of confounding and contributing factors to lowering time preference including uncertainty. However I do believe that in general illiquid capital encourages lower time preferences both in incentives and in selection effects. I’m not arguing that liquidity is the sole or even the major factor for lowering time preferences in the present. What I am arguing is that a ruling class should via illiquid property have a stake in the society they rule and profit from it.

    “The reason I’m suspicious of the illiquid/liquid distinction is that it sounds like the now-common and false claim that market-responsive capitalists have particularly short-term orientation. ”

    I would not characterize market capitalists as having particularly high time preference. I understand and share your apprehension about such a claim. I only claim that on average they have higher time preferences than aristocracy with illiquid assets. which you seem to agree with. “That said, there is undoubtedly a tendency to shorter-term thinking now than among medieval rulers.”

    “That said, there is undoubtedly a tendency to shorter-term thinking now than among medieval rulers. The reason for this is not liquidity of capital in itself, but greater uncertainty about the future. Agricultural land valuable in 1300 is going to still be valuable in 1400, but while Snapchat is likely to make big profits in 2020-2025, it would be brave to suggest it will still do so in 2070-2075. That would be as true if it were the inalienable entailed property of an Earl as if it were quoted on NASDAQ. Regime uncertainty and monetary chaos also contribute to pulling effective time horizons down to decades”

    Again I agree with your general assessment. I would disagree that liquidity doesn’t contribute to shorter term thinking. The fact that you can sell a farm on the market today shortens the time horizon of the owner if ever so slightly. There are clearly much larger problems in the economy than just liquidity, which isn’t really a problem at all. Again I made this point firstly to establish a general archetype of an aristocracy so that people could think about a modern aristocracy differently. I didn’t intend it as a general criticism of modern markets.

  5. Pingback: This Week in Reaction (2015/03/20) | The Reactivity Place

  6. For you, the key feature of the aristocracy is hegemony of violence over a certain territory and the inability to move wealth out of it, hence illiquid capitol.

    I think that’s a good formulation of the tendency for aristocracies to form. Seems to apply to both East and West, although merchant dominance seen in the West as not as common in the East.

  7. A few points, not really disagreeing with anything you’ve said: You left usury out of your model. I assume we agree that the transition from illiquid to liquid capital and the transition from a labor based economy to a money economy are one and the same thing. In order to obtain financial capital, it is necessary to borrow at interest. Since the userer is the only source of specie (or at least the demand for specie will eventually be so great as the usury burden grows among those who have borrowed) the only way to pay back more than you have borrowed is to borrow more. The usurer can continue this rolling over of loans, or he can demand payment in specie. This eventuated in all of the “hard” currency (whatever the underlying asset) being held in the vaults of the usurer, and only debt circulating. The owners of illiquid (not just the landed aristocracy, but holders of even somewhat less liquid capital) engage in rack-renting and other immoral and short-sighted practice to squeeze their tenants until they eventually default.

    The money economy makes it possible to accumulate immense stores of wealth which may serve no social function (despite what Adam Smith says). A feudal lord, whose wealth was based on labor, could increase the number of household servants. Economic growth, more or less necessitated increased demand for labor, which improved the standard of living of the bulk of the population. The money economy meant land-holders could and did turn their illiquid rights to the labor of the tenantry into liquid assets by mortgaging the manor to buy diamond cuff-links. Again, this lead to absentee landlords, rack-renting, default and the eventual ownership of the land by a class of usurer who, now rolling in wealth and the power to issue the only circulating money, would demand the revocation of all laws designed to protect the productive classes of farmers and artisans from the iron law of wages.

    The money economy also tends toward the reduction of wages to subsistence level (the iron law of wages). As capital is more liquid than labor, it can flee to wherever labor is cheapest. Though this theoretically may result in economic growth, capital is restricted by the availability of credit in the hands of the usurer class, while labor becomes more and more unlimited as legal and social barriers are removed.

    You say these are immoral actors, but that is enlightenment non-sense. In fact, the tendency of the money economy is the decline in morality as the moral law is the only defense the ordinary people have against the rich and the powerful. A chaste, humble christian man with a christian wife can live far more comfortably on far less than an unchaste single spendthrift. The spendthrift has to take usurious loans, the mother of his children has to work outside the home for money. It is important to the usurious class that money be seen as the goal, and something like family, to the extent that it exists, be a means to ensure, or at least not interfere with the pursuit of money by all parties, of what is just another contract. Of course all of the money must be paid back with interest base on contracts, which will be enforced by governments which also must borrow the money they use to function from the usurer and engage in permanent rack-renting to try and fail to keep the usury burden in check.

    I guess my main point is that economics is properly a branch of moral philosophy and the issues involved are fundamentally moral issues, otherwise they wouldn’t matter. I agree their is nothing fatalistic about those who work with liquid capital. However, their is something fatalistic about a system based on usury because usury is a mortal sin.

  8. Dear OIW,

    I am not 100% sure I understand the argument perfectly, but if I do, one problem I see is that illiquid capital today has little value. As Europe is getting depopulated, whole empty villages are for sale, in locations that used to be rich and have a high agricultural output, Southern France for example. Meanwhile Google…

    A second related issue is how to even compare the value of illiquid and liquid capital in a fiat money bubble, we have no idea about the real price of things because speculative bubbles generated by play money. But generally it seems that with current agricultural outputs we just don’t need a lot of farmland, and only city property is valuable largely because that is where the well paying jobs are.

    A third issue is why would anyone want illiquid capital. It is against the self-interest. Why own an office building whose neighborhood could become a ghetto, why not just rent it and then move on when it becomes a ghetto and rent somewhere else?

    In short, that it seems that today the owners of illiquid capital aren’t aristocrats but suckers in the investment sense. It’s not a good business.

    What follows from this all?

    • It’s been a while since I’ve written this piece. The point of the piece was to establish a pattern form for aristocracy. I focused on illiquidity as being correlated to low time preferences and tendency to invest. I get your point that many people with illiquid capital aren’t that rich and may soon be in bad shape. There are exceptions though for one example that I know of. There are a number of the silent rich who just aren’t famous becuase they don’t run sexy companies. That being said it’s beside the point and your point about potential danger still stands. What follows though? Whatever capable men might look like today, if they are ever to become aristocrats their contracts/property/stations/tax farms etc need to be non-transferable or at the very least only under the supervision of the sovereign. That’s what follows.

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