One Year Later, Occupy Wall Street, Keynes, and Pyramids

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I certainly do not claim to be an Egyptologist nor do I have any particular or special knowledge of Egyptian pyramids or archeological expertise outside of Indiana Jones in Raiders of the Lost Ark. But there is a kind of historical ubiquity to those pyramids in the Egyptian desert, particularly in what they can potentially represent even to the modern mind. There is no mistaking the reference in John Maynard Keynes' thinking when he extolled the government virtue of, "Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better."

It would seem that the building of the pyramids in ancient Egypt accomplished exactly what Mr. Keynes wanted - to achieve a higher level of aggregate demand through the simple process of doing something.

While there are no historical records that precisely relate the economics of Egyptian pyramid-building, there are some snapshot accounts that fill in the big picture. According to Herodotus, the Greek historian from the 5th century BCE, building the biggest, the Great Pyramid, required:

"Till the death of Rhampsinitus, the priests said, Egypt was excellently governed, and flourished greatly; but after him Cheops succeeded to the throne, and plunged into all manner of wickedness. He closed the temples, and forbade the Egyptians to offer sacrifice, compelling them instead to labour, one and all, in his service. Some were required to drag blocks of stone down to the Nile from the quarries in the Arabian range of hills; others received the blocks after they had been conveyed in boats across the river, and drew them to the range of hills called the Libyan. A hundred thousand men laboured constantly, and were relieved every three months by a fresh lot. It took ten years' oppression of the people to make the causeway for the conveyance of the stones, a work not much inferior, in my judgment, to the pyramid itself. This causeway is five furlongs in length, ten fathoms wide, and in height, at the highest part, eight fathoms. It is built of polished stone, and is covered with carvings of animals. To make it took ten years, as I said - or rather to make the causeway, the works on the mound where the pyramid stands, and the underground chambers, which Cheops intended as vaults for his own use: these last were built on a sort of island, surrounded by water introduced from the Nile by a canal. The pyramid itself was twenty years in building."

A hundred thousand laborers were working for twenty to thirty years to complete one of the greatest structures in human history. It was a massive undertaking, requiring stones to be quarried and shipped down the Nile, and for master craftsmen and raw labor to assemble them. There would be toolmakers, food preparation, security, and all sorts of jobs in between to keep the entire process as efficient as an impatient pharaoh might need.

Given that the population of Egypt at the time was somewhere around 1.5 to 1.75 million people, that would mean approximately 6% of the population. But that figure itself does not include the families of workers (as far as I can tell from Herodotus' account), so the overall proportion of the population that would be directly connected to the project was likely even larger than that. Estimates for exactly how many workers were attached to the project vary, but given the sheer scale of what was done, the economic footprint was certainly as immense as the structure itself.

The ability to undertake such an operation, let alone complete it, was a testament to the wealth of the Egyptian economic arrangement. There is a scholarly debate about whether the workers in the pyramid process were slaves, indentured servants of some manner, or free laborers (in the political sense), but in ancient antiquity they all commanded the same needs: basic necessities. To keep these workers working on a pyramid required a surplus of necessities created from the efficiencies of the production capacity in place at the time.

Some of those efficiencies were obviously tied to the location of the system. The Nile valley and its delta were geographically fortuitous toward, on average, efficient food production, among other primary needs. But for all those natural advantages, such as regular flooding of the fields, it still required some human labor inputs toward productivity. It was productivity in this respect that allowed such a large proportion of the labor force and population to build a structure (in a long line of increasingly intensive and impressive structures) that was so economically useless.

Clearly, the pyramids had cultural utility in the fabric of ancient Egyptian society and how that society was arranged, but from the point of view of economics, they served no purpose to advancing the standard of living for anyone involved in the project. From a purely economic perspective, building the pyramids was a drain on the economic system. It persisted only because the system away from the construction process operated efficiently to afford a productive surplus.

In some ways, the pyramids of Egypt represented the wealth of the pharaoh's system (it was not nationalistic in any sense since the concept of the nation-state was still millennia in the making), but the wealth represented by the pyramids was really the ability of the system to sustain that drain on resources. The productive capacity of the pharaonic society at that time was the true wealth - the pyramids were static and stale monuments to the living economic system of the age.

In that respect, the pyramids were the classic definition of malinvestment. The surplus of wealth, like a surplus of money, was used in a manner that not only did not benefit the economic well-being of society and future society, it was actually deleterious and wasteful. In that respect, the workers or slaves that were attached to the pyramid project were squandered resources as they consumed the true "national" product in an endeavor that provided no tangible economic benefit (this is not denying any psychological benefits to a stable society, only an acknowledgement of alternative uses of wealth).

Instead of building pyramids, that surplus wealth might have been better served to find other more sustainable means of economic advancement. Quarry laborers and the network of shipping might have been put to use in the discovery and procurement of valuable resources like bronze or gold. The overall labor force might have been oriented toward increasing even further the production of food or clothing in order to trade with other civilizations in the pursuit of acquiring resources not present in the Nile system. That would have advanced the living standard of the entire population and aligned the surplus of wealth and labor toward a sustainable and likely long-lived, organic economic process.

But by tying the surplus wealth to a one-off project, the allocation of human and physical resources (capital) were oriented, at the rather large margins of the system, toward uselessness. What might have happened if the pharaoh had died and his successor was not so much a pyramid enthusiast?

Workers on the pyramid project would have been faced with a stark reality. If they were slaves, they might have been eliminated since they represented a huge drain on resources - without the pyramid this pool of labor would be exposed as a massive drain on the system. Some of them might have been put to use in some other tasks, but certainly not on the scale of pyramid building. If workers were free laborers, and were thus "free" to find other means of procuring basic necessities, that would have meant a flood of labor on the "market".

In other words, the orientation of surplus wealth toward pyramid building was an act of what Karl Marx might call the appropriation of surplus labor. In Capital, Volume One, Marx posited that:

"At the dawn of civilisation the productiveness acquired by labour is small, but so too are the wants which develop with and by the means of satisfying them. Further, at that early period, the portion of society that lives on the labour of others is infinitely small compared with the mass of direct producers. Along with the progress in the productiveness of labour, that small portion of society increases both absolutely and relatively."

How a society approaches the appropriation of surplus labor owing to the natural progression of productivity through innovation and progress defines how and ultimately why it succeeds or sinks. For Marx, the capital application of surplus labor was the exploitation of money. I feel little need to argue against Marx on this point, since history has done a fine job on its own. I only use this passage and this idea as a frame of reference for what must happen for any economic system to survive its own success.

If surplus labor is directed toward the idleness of leisure or vainglorious pursuits, those left doing the laboring will sow the seeds of societal discord. That is the essence of the Occupy Wall Street movement, though they fail to see it as such - they want "society" to pay for an adolescence of emotional fulfillment. While they do so, the rest of society is the productive means of directing the surplus of wealth toward these economically useless pursuits. Everyone else has to work so they can live as students, academics or whatever produces emotional satisfaction. Their pleasure and fulfillment are borne on the surplus success of the misunderstood factor of true wealth. They have taken Marx at his word, and inverted it back at what they see as capitalists - rather than be exploited by money, they will do the exploiting by extracting and consuming wealth produced by the labors of others. But it is not the so-called 1% that they exploit.

Modern economics has not been any better in answering the inevitable appearance and apportion of surplus labor or the success of the system. In so many ways, the asset bubbles were nothing more than replays of the pharaonic system, wasting resources in the endeavor of economically useless projects. The Federal Reserve did not care, however, if that was the case because all aggregate demand demands (pardon the pun) is labor resources being utilized doing something, anything. Useless houses in the warm, sunny climates were the monetary equivalent of building pyramids in the Egyptian desert.

And when the "pyramid" building of the housing bubble stopped, the surplus army of labor found itself with little options. The flood of excess labor without an economic purpose depressed that market for labor. Labor's share of national income right now is, by far, the lowest in the Bureau of Labor Statistics series dating back to 1947. In fact, that has been true of every year since 2003. It has been a trend that has developed since the 1991 recession (only interrupted by the late 1990's), falling squarely within the age of activist central banks and this modern belief in economic management through debt and controlled inflation.

The advance of the American capitalist system up to the Great Inflation was in the ability of the free market to redirect and repurpose successful expansion in the service of future growth. That can only be done through the profitability of actual productive activities. The promise of future riches encoded in the success of real economic innovation keeps the growing surplus of labor focused on sustainable activity that increases the overall standard of living. Hardly anyone in the United States today is employed in the manufacture of food, yet the economy continues to exist. The shift from agrarian to industrial was driven by innovation expressed from the desire to acquire profit through productive accomplishments. So the surplus of labor has been able to redeploy in other productive endeavors that keep the system moving upward in an almost continuously rising standard of living.

The key has always been productive innovation. However, the competition from easy money surreptitiously erodes that natural productive endeavor and even the desire for it. As the allure of fast money profits tips the scales against the hard-won profits of true innovation and production, it's as if the economy stops investing in its own success and begins to build more and more economically useless pyramids. The greatest pyramids (in the economically pejorative sense of the word) in human history may be the temples of the financial economy in New York and London.

The surplus of labor created by successful capitalism absolutely needs to find that next productive use for labor or the discord of idleness and misdirection sets in. And that discord manifests itself in numerous expressions and methods - such as OWS, and even the suppression of the labor market. The answer for all of it, the ability to redefine success as more success, is to stop building pyramids and re-appropriate that surplus in the free market allocation of the desire for future profits and growth through actual productive activity. The key is not to get people doing something; it is to get people doing the right something. There has not been any centralized system yet invented that can plan how to engage the economy in that pursuit.

If Marx was right, then capitalism will consume itself in the unequal allocation of success as the implementation of money as the means to distribute the surplus of success concentrates in fewer hands - the 1% as defined by OWS. But he, and OWS, was wrong, as history has shown. The concentration of monetary wealth in the 1% is now largely a function of monetary volatility and inflation. Productive innovation and systemic growth breeds what economists think of as instability; yet it is exactly the kind of instability that a thriving system actually needs to absorb and properly redirect its own success in the creation and implementation of the next big idea (or the accumulations of so many million smaller ideas). That instability is the agent of change and innovation.

Central banks and their monetary tool, the modern pharaohs of Wall Street, have appealed to monetary debasement as the agent to counter change in order to preserve the status quo inside the cloak of economic stability. Stable societies are beneficial, but what defines and embodies true stability is far more important. The implementation of modern pharaonic-like pyramids in the asset bubbles is just the distraction to temporarily placate the surplus of labor from the monetary theft and growing economic void. At least the ancient Egyptians built themselves something to marvel at while doing the same.

 

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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