Book Review: Radical Markets13 Sep 2019
Rio — a city beautiful enough to host the Olympic games, yet home to enough crime to make it one of the most dangerous cities in the world. Rio is massively unequal, and Brazil itself is the most unequal country in the Western hemisphere. Natural abundance overflows, yet most of its wealth is controlled by a few families, the last president was ejected for abuse of power, and her predecessor jailed for corruption. What is the solution from the Left? Egalitarianism — tax the rich to provide for the poor. And from the Right? Such taxation would lead to Venezuela — better to enforce property rights, lower taxes, and get the economy moving enough to help everyone along. What say Radical Markets’ authors Glen Weyl and Eric Posner? Such arguments are outdated and uninspired. Instead, we should put the entire city up for auction.
What, you might ask? Good question.
In any city where many people all want to be in the same relatively small space, one gains immense wealth via ownership of land, which is scarce. This is ethically shady for a few reasons — land ownership generally has to do with who got there first, and the wealth often derives from partially privatizing a public good (apartments near Central Park are valuable, but their owners didn’t create nor own the park). In essence, land ownership seems to constitute a monopoly problem. It seems such a scarce and valuable resource as land, created by no one, should belong to the public, but as soon as you nationalize land, you destroy incentives for private production, and with the government owning all the land, you run into all the central-planning failure economies of 20th century communist states.
Thus we’re stuck. Or are we? Consider a third alternative.
Every landowner names the value of their land + property, and pays a tax on it. The proceeds of the tax are distributed to society, ideally through a UBI. Simple enough, but there’s a catch: you must sell it at the price you named to anyone willing to pay. Thus capital owners are incentivized to report at least semi truthfully — too low of a price and someone can buy your property for less than its worth. Too high, and your wealth gets taxed away too quickly to society.
Weyl and Posner call this a Common Ownership Self-Assessed Tax (COST), and its implications are radical. Consider San Francisco, where homeowners refuse to sell, watching their house values skyrocket as rents eat away at everyone else’s income and thousands descend into homelessness. With a COST, many of those houses could be bought and replaced with multi story apartment buildings capable of housing far more people. If you really want to keep your house, you can name a high enough price to prevent anyone from buying it, but then you must pay the tax, distributed to those from whom you are hoarding land.
A COST solves the land monopoly problem while preserving property rights and incentivizing good economic output. In fact, it creates a new market — one liquid in land, where the land can flow to whomever is most capable of generating economic value with it, thus maximizing economic output. All the while, the tax ensures the benefits are redistributed to society in an incentive-compatible manner.
Where did they get this? Their answer comes from the field of mechanism design, a sort of reverse game theory, engineering-inspired political economics in which you start with the outcome you want and rigorously design a system that gets you there, rather than just playing according to the rules you were initially given.
The spirit of the intro carries throughout the book, as Weyl and Posner propose five mechanisms (four after the COST) to deal with modern day monopoly problems, simultaneously subverting and unifying the Left and the Right to gain the best of both worlds. They believe that markets are the best tool we have to promote human flourishing, yet contend that the most important markets are either monopolized or missing altogether. Posner and Weyl agree with the Right that markets should be supported and strengthened, yet toss the Right’s market fundamentalism out the window out the window as outdated and incorrect. They agree with the Left that the current structure of society is unequal and unfair, yet condemn the Left’s reliance on government bureaucratic elites, envisioned as altruistic neutral entities, who in reality are often corrupt, incompetent, or both. This leaves them advocating a more radical approach that is neither Left, nor Right, but something much much better, in which we design mechanisms to promote markets and more fairly distribute their benefits in a ferociously positive-sum game. They call this approach Radical Markets.
In addition to the COST, Weyl and Posner propose 4 mechanisms. In short:
Quadratic Voting (QV), to solve the tyranny of the majority problem in democracy. Everyone gets a certain number of vote credits. You can vote multiple times, but you must pay quadratically as the number of votes increases.
The Visas Between Individuals Program (VIP), in order to increase immigration while extending its benefits to the host country beyond those to cities and corporations. Any individual can sponsor a temporary immigrant and capture some of the value created by bringing that immigrant over.
Data as Labor (DaL), which means compensating individuals for data produced as labor expended. Everyone is scared that artificial intelligence will take their jobs. Often, however, modern artificial intelligence systems require well-labeled data, which are usually generated by the consumers of the digital economy. If companies profit from this data, should not the data creators (all of us) be compensated for the value we produce? Weyl and Posner argue that by treating Data as Labor, we can both compensate people more fairly and incentivize new development in the digital economy.
Eliminating monopolies in public corporations by forcing institutional investors to choose one company to invest in within each industry in which they invest. Look at the airlines — Delta, United, and American all compete against each other, but Vanguard owns a 7% stake (or higher) in each of them. Weyl and Posner point out that this approaches horizontal integration. Vanguard could surreptitiously induce anti-competitiveness by calling up each CEO and asking them to raise their prices. Consider that at least 40% of US public companies (88% of the SP 500) count either Vanguard, BlackRock or State Street as their largest shareholder, and the idea of subtle monopolies across public companies starts to seem scary indeed.
To be clear, Weyl and Posner’s proposals are not a perfect panacea for society’s ills. They tend to paint in broad strokes, arguing for overall mechanisms while acknowledging that many more policy details are needed to bring their proposals to life. These implementation details matter and will likely be front of mind for readers, many of whom will say: “But I don’t want someone to be able to buy my house while I’m living in it!” However, I implore readers to pause on detail scrutiny, just for a minute, while reading Radical Markets. The authors offer a strikingly different vision of the future, and it would be a shame to be so caught up in chopping down their trees that one misses their forest altogether.