Debt: The Good and the Evil

Debt causes many problems in an economic system, but some benefits as well. How can a new system be designed to only incorporate the benefits?

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Let’s start with the simplest case to consider, a wholly self-contained, up-and-running Just Deserts socio-economic system. The good side of debt is that it can be used to speed up growth of production in an already-growing system. The basic idea is that funding is obtained to finance capital acquisition and operations, which produce enough benefits to cover all costs and repay the debt.

The bad side of debt is that it can be used for permanent consumption costs, growing continually, as the consumer chooses to consume more than his allocation of benefits can sustain. This means that the debtor must continually and exponentially go deeper into debt, meaning that much of his income and all of his holdings will eventually be confiscated by the debt holder. This works for individuals, for organizations, and for government organizations and entities. The organization situation is much like that for an individual, meaning the debt holder eventually collects the title to all the organization’s property. For a government organization like a nation, it does the same thing, allowing current consumption at the price of confiscation of nationally-owned property and also future income, such as taxes. Greece is the preeminent example. The time displacement of the repayment allows bad effects to be unfelt for as long as the term of the debt, and if it is rolled over, successive terms. Since people typically only have the ability to think in the short term, debt is a successful means of further enriching those already wealthy.

In some situations, personnel rotation in a government organization means those who will face the problems of repayment are not those who enjoyed the benefits of consumption. There are many ways to implement such a situation, such as a politician staying in power because voters are happy with the benefits distributed from the debt funds, being short-sighted at best, followed by the politician’s retirement before the debt comes due. Many other means of benefiting by the time difference between incurring and discharging a debt exist, and because of the flexibility such a situation provides, it is likely that no solution can be found other than outlawing or prohibiting this type of debt.

Thus, there is growth acceleration on the good side, and countless scams on the other side, along with all the pitfalls of a myopic view of life. In a Just Deserts economic system, taxes or income restrictions prevent any individual from personally amassing enough funds to make large-scale loans, meaning that there could be small debts, which do not debase someone’s life, but no large ones.

Growth acceleration can be accomplished by other means that loans from individuals; debt from other organizations which can legitimately amass large amounts of delayed benefits could happen. So can other means of obtaining funding, typically meaning some ownership rights in the organization needing or wanting the money are traded for up-front funds. This is the stock market, plus all types of individualized arrangements made between a producing organization and a funding organization. In a Just Deserts economic system, there would be funds in possession of insurance organizations and pension organizations, as well as possibly specialized organizations, the equivalent of today’s mutual and hedge funds, except with necessarily more diverse ownership. Thus, debts for growth acceleration would not be interfered with.

Debts for temporary consumption needs, such as necessitated by temporary disability, or for replacement of productive capacity, such as necessitated by permanent disability, would be handled by insurance funds. Once started, these insurance funds would exist to replace lost benefits for someone suffering from a disability, either temporary or permanent. They would be paid into as part of a mandatory deduction from working wages and salary. The usual objection to such insurance funds is that they drive workers and employers to use a black market, where possible. Whether this is palatable depends on the regulations against it, and the results on the workers who have to choose whether to use it or not. Having high fines and fees prohibiting it, and a very low level of benefits for those who use it might reduce this objection.

Once again, this can be described as a myopic viewpoint. Someone who avoids taxes and insurance withholdings gains possibly in current consumption levels, but risks later problems. Since people do not see later problems as clearly as they do current ones, the black market can burgeon. But with education and experience, it might be reduced substantially in a Just Deserts socio-economic system.

Debt for the purpose of raising current consumption levels would not be possible in a Just Deserts socio-economic system. No organization would have the right to grant such debt. Thus debt in a Just Deserts system is somewhat simplified, compared to contemporary systems.

Now enlarge the domain being considered. Suppose there are external actors, individuals, organizations or governments, outside the Just Deserts system boundaries. They are not constrained by the rules and regulations of the Just Deserts system and can provide debt to those individuals, organizations and government bodies within the system.

There are always two polar extremes in dealing with any behavior that is considered undesirable by some authority. One is to involve a chain of actions, such as detection, confirmation, punishment. The other is to arrange the situation so that the natural consequences of the behavior are so negative that it is discouraged. The latter arrangement does not work well when the natural consequences are not immediate, or not definite. Then the typically myopic individual can not rationally weigh these consequences, and therefore can make decisions based mostly on immediate effects. With organizations, one can expect they are run under rational considerations, but decisions within organizations can be made by individuals seeking personal benefits in the short term, as opposed to organizational advantages in the long term. The same holds whether the organization is a private one or a governmental one. Thus, in the absence of a magic wand that transforms everyone into a rational person able and willing to weigh long-term consequences, and to put the organization’s benefit in front of personal benefits, only regulation will work.

Regulation can have just as many horrible consequences as depending on individual rationality and organizational altruism. If governmental organizations involved in regulations were all full of rational, well-educated individuals with the best interests of the nation at heart, they would work well. The real trick in designing a socio-economic system is to make one that works with venal and stupid people in it. Clearly one major avenue for improvement is to properly train and educate children, but even that can be subverted in the interests of personal benefits and even to further some misunderstandings of how both education and government work. So, no magic wand.

Regulation is made easier by transparency. So is the detection of misdeeds by regulators, if the transparency is so thorough that private individuals, or organizations constituted to serve as checks on mis-regulation, can obtain the same data as the regulators. Rather than make transparency something that is only in effect in special instances, it could be the default situation unless there were compelling reasons to deny it. In the financial arena, this would mean that any individual, organization, or government body that went outside the nation where Just Deserts was the system employed, and violated the principles of it, would be obvious and visible to any organization that chose to inspect the pertinent records. If transparency is the standard, the next level of deception involves maintaining false records that are visible, and a set of other records that are hidden. This would allow debt money to come into an organization, but it would not allow it to be used, as the transparency of most records would show off the entry point of the illegally sourced funding. In other words, it could be put into a hidden external account, but could not be brought into the nation and mingled with internal funds without leaving a trace.

The other difficult situation, besides relations with external non-Just Deserts nations, is the transition from any other system into a Just Deserts one. Specifically, this means that if there were a nation with a large international debt, what would happen to this debt when the nation worked through the transformation of itself into a different system, a Just Deserts one. For example, consumption levels might have been higher in that nation for previous times than could have been justified by the level of production there. This means that some external actors have loaned money to the nation so that it could have an average consumption level higher than otherwise possible. Does the nation repudiate this particular amount of debt, or does it decide to lower consumption levels and pay back the debt? Usually debt is not repudiated unless the debtor is willing to assume there will be no more debt in the future. This is the situation with a Just Deserts nation, so repudiation would not have the same theoretical effect as it would in a nation that was bound and determined to have inflated consumption levels until the dam burst and economic collapse occurred. There are good arguments to be made for both honoring the debt and dishonoring it, and such decisions would have to be made in the framework of the whole transition, by whichever rational, non-myopic, and altruistic people can be found within the nation to make such weighty decisions.

Unemployability

Socio-economic systems have to have some features that cause individuals to want to be productive and contribute to the society in which they live. What works?

Employability is used here to mean that a person has the ability to work in the current location and time. It is a slippery concept, and deserves to have some details added to it so that it can be sensibly used. Let’s start with very simple examples to clarify the concept. Suppose there is a country, Simpleland, with only ten kinds of jobs. An individual in the population is employable if he can perform one of these ten jobs to the minimum standards. This individual may be employed if he has a slot to work in, and unemployed if he does not. So there are really three levels here, employed, unemployed but employable, and unemployable.

The economy of Simpleland produces benefits which are distributed to the population. The distribution of the population into these three levels makes a great difference in the standard of living. If 90% of the individuals are workers, they produce some total quantity of benefits, T, which are allocated to the population. On the average, everyone gets T/N, where N is the total population. If only 45% of the individuals work, only T/2 is produced, and everyone gets T/2N, half the amount of the previous example. Between these two examples, there are two possibilities. One is that in the second, 55% of the population in unemployable. Then T/2N is all that the average will ever rise to. If in the second, 45% is unemployed but employable, the average could rise to T/N if additional production facilities were saved for and built.

Productivity is not a savior in this case. If productivity, p, rises, we can consider what happens. Then in the first case, the average benefit is pT/N, and in the second pT/2N. No relative change between the two cases happens. There is no way in which Simpleland 2 can ever catch up with Simpleland 1 as long as there remains a large fraction of unemployables.

The socio-economic system is likewise unable to change the average received. All it can do is change the allocation of the total amounts of benefits. If the employed receive R times as much as the unemployed, then the employed in either country would receive RpT/N(R – u(R-1)), and the unemployed, pT/N(R – u(R-1)), where u represents the fraction of unemployed.

Allocation systems can compensate for a lack of human capital in the sense that they can raise the living standards of one group at the expense of another. For example, if Simpleland 1 has a socio-economic system strongly supporting consumerism, and it had R = 1, but Simpleland 2 has a socioeconomic system strongly supporting production, and it had R = 11, the employed in Simpleland 2 would have just as high a level of benefits as the employed in Simpleland 1. Of course, the unemployed in Simpleland 1 live at the same standard as the employed, but in Simpleland 2, they are in relative penury.

For amusement, one might make other comparisons between Simpleland 1 and Simpleland 2 when they have different productivities and allocation fractions, but that solely would serve to obscure the point. Nothing replaces human capital. Any nation with significantly less human capital is going to have an average level of benefits significantly less.

Investment might change productivity, p, or reduce the number of employable but unemployed. A different socio-economic system might change the allocation fraction, R. But if the number of unemployables is large, these changes do not overcome this difficulty at all. There is no way that a country like Simpleland 2 can ever match the average standard of living of Simpleland 1, provided that information and investment flows allow both of them to reach their maximum values. The implications of this are that human capital is the dominant variable, more important than productivity or allocation fraction, in determining how well the population lives. Socio-economic systems, such as Just Deserts, just move around benefits, affecting principally allocation.

This is a static picture. Any change in the percentage that is unemployable will be reflected in the average benefits received, and if it goes up, then things will get worse, on the average. If the percentage goes down, things will get better, assuming everything else stays the same. Birth and death statistics change that number. If there is an age difference between the employable and unemployable fractions, time alone will change it, assuming the categorization of an individual is immutable. If, for example, the employables are older, their retirement and death will increase unemployability. If birthrates are higher among unemployables, and there is a good correlation between employability of parents and children, unemployability will likewise increase. If employables migrate out, this will also increase unemployability, as will the immigration of unemployables.

Another dynamic is the movement of individuals between the two sides of the employability category. If employables become unemployables, obviously the fraction of the population that is unemployable will go up. This particular change can come from disability, or some emotional change which takes away an employable’s will to work. Perhaps periods of unemployment can do that. The reverse motion, from unemployables to employables, might come from training, rehabilitation, or having enough time to overcome emotional changes that negatively impact will to work. This dynamic fuzzes the distinction between the unemployed but employable and the unemployable. Perhaps the unemployable category might be further divided into temporarily unemployable and permanently unemployable. The worst situation a country can find itself in is if the permanently unemployable fraction is large and rising. Living standards must go down from this effect.

Having non-productive work for the unemployed does not change the average living standard at all, and reduces it to the extent that non-productive work has costs involved, which must be subtracted from the total production of the economy. Let us leave the binary world behind, and suppose that work can range from maximally productive to totally non-productive. If the benefits for the productive end of the scale do not motivate individuals to try to move to those jobs, then the same phenomena happens. This finally is a point at which socio-economic systems have an effect. What is necessary in a benefit ratio for an individual worker to strive to become very productive? What else is necessary in order for workers to want to do this?

It would appear that a socio-economic system could encourage or discourage individuals to become highly productive, but there may be other factors, psychological and cultural factors, which predominate. Just Deserts is being designed with the idea that huge differences in rewards are not necessary, and a more balanced reward system will work as well or almost as well. But without understanding the psychology of the worker, we might not understand if rewards can be diminished, or if rewards are not the most important variable in setting worker determination and motivation.

For most of history, the majority of workers were in the agricultural sector. There also was little by way of stored inventory of foodstuffs, so motivation was by fear of starvation. Much of the world was also in the grip of a landed oligarchy, so fear of bosses was present. In more recent times, employment has shifted into industry, and mankind’s instincts for altruism and sympathy have become more expressed, so the fear of starvation and of bosses has declined relative to earlier eras. Desire for consumer goods has replaced fear as a principal motivator. This may not be a permanent feature of a modern economy. Recall that consumer goods have only exploded in volume and complexity over the last century, and the interest in them may well die back to a lower level. Altruism can cause individuals to seek more productive employment, if the rewards are sufficient. The Soviet Union and other communist countries, when there were few consumer good rewards for highly productive workers, used media propaganda to encourage altruism. This worked to some extent, but like consumerism, it seemed to have lost much of its strength as a motivating factor. What is left for a Just Deserts economic system to use to cause motivation among workers?

Another related issue is that if the economy has many non-productive jobs, for whatever reason, and there is a spectrum of benefits available from them, for someone who is motivated to seek personal benefits or benefits which are altruistically distributed to closely related individuals, seeking a highly remunerated but non-productive employment position may be just as attractive or more attractive than a potentially highly remunerated productive employment position. Any economy needs such positions in some numbers, but a Just Deserts system must be designed to reduce the attractiveness of such positions in accordance with improving production. Yet such jobs may actually fulfil extremely important functions within the economy. Perhaps a maximum term for someone in this type of position would serve to reduce the attraction away from productive employment. In some military forces, there is a mandatory employment rotation system which limits how long an individual can stay in one type of position before moving on to something else. This may provide some insight into how to maintain a highly motivated and employable population, concentrating on productive work.

Balancing Benefits to Consumers and Producers

Is efficiency in marketing a good thing and something desirable in an improved socio-economic system? Or are there trade-offs that need to be carefully examined?

This post is about one aspect of the trade-offs that exist in an economy between producers and consumers: retail size and the corresponding efficiencies. To develop some simple insights, consider an economy with only a few positions. The economy has a retail sector, and many other sectors, which we will lump together as non-retail, except for the suppliers sector, which makes and sells things to the retail sector.

The positions in the economy are retail workers, supply personnel, other workers, unemployed, retail managers, and retail owners. Let’s assume they are all distinct to keep things as understandable as possible. Consider two alternatives, one in which all retail is of some average size, non-chain, and local, and the other in which some retail is very large, chain, and regional or national. Outside of retail, things are mostly identical between the two alternatives. There are differences, and they go like this. The large retail has more low-level worker efficiency, and gets by with fewer workers. This means that in the first alternative, there are less unemployed people, and more retail workers, per item sold or per dollar in sales. It also means that, in the management hierarchy of the large retail, there are more managers, and the upper salaries are larger, since salaries tend to go upward, sometimes rapidly, in larger organizations. Furthermore, ownership may be more concentrated.

Besides the labor efficiency of the larger retail, it has supply efficiency, in that larger quantity buying may get discounts, justified by cost or motivated by competition. The discounts in part come from the supply sector workers and owners. It would be possibly to consider consolidation of supply firms, but that is an unnecessary complication.

Contrast the two. Prices would be lower in the large retail case, as there are efficiencies to be gained, so everyone’s earnings would go more into retail and less into other sectors. There would be more goods passing through the retail sector. Other sectors would suffer from the redistribution of spending. This has an effect on benefit allocation. There would be more unemployment in the large retail case, so more taxation would have to flow from the population in general to those who are unemployed and need some sort of assistance in order to maintain a tolerable standard of living. Taxation could come from anywhere, but if it is not very progressive, it hits a middle sector of the population, leaving the lower and higher ones with less effect.

So, in one simple situation, the benefits of society are distributed differently in a small-only retail case or a large retail case, and going from small-only to large means unemployment would be greater, more benefits would flow to higher pay managers and wealthy owners than to workers. Other sectors would lose some benefits, as lower prices in the large retail would draw more spending there.

To generalize from this simple example in a single sector, conglomeration tends to move benefits from the poorer portion of the population to the wealthier. Perhaps there are exceptions to this, but that seems to be the trend. Is this desirable in a Just Deserts economy? The question is a very basic one. How much of society’s benefits should be allocated to different classes or percentiles of the population? Government regulation, most likely taxation, can affect this, and can also affect the ability of large retail, or any large organizations in an economic sector, to exploit the potential advantages of size. What should be done?

This question needs to be set into the context of the whole Just Deserts economic system. One principle is the maximum income effect. This might be done with a Maximum Salary law plus a wealth tax, or tax rates similar to those in effect in the United States during the era around John Kennedy’s presidency, when the top rate was 90%. This change has as a side effect, the reduction of major corruption, meaning it would be possible to pass laws affecting large businesses without the expectation that they would be riddled with loopholes designed by those donating blocks of funds to politicians or otherwise arranging for them to be rewarded.

Another effect of this change would be that ownership of corporate organizations and private companies would be different, in that many or perhaps most would be employee owned; others might be stock companies, but ownership would be more widely distributed among individuals. Government agencies charged with amassing pension and other types of funding might be owners as well. Thus, when the two alternatives are compared, the wealthy that are benefited by the large retail are not the exceeding wealthy, but simply those who have arranged to have substantially higher wealth and income. Estimates might be that an asymptote for the upper salaries are five times average salary, but there are many ways in which this might be figured out.

Perhaps the largest of the differences between the large retail case and the small-only retail case is the change in the unemployment fraction. All other things being about the same, small-only is less labor-efficient, and therefore employs more people per dollar spent on retail consumption. To be able to judge what might be better or worse, it is necessary to determine how the situation of more or less large retail could be adjusted by government intervention.

Taxation is the common tool that governments use to affect such things. Consider a market share effect on a profits tax. Profits might be figured in some convenient way, but in general, they would be taxed at some rate. If there was also a mechanism by which market share of any particular retail organization could be measured, the profits tax rate could be increased for larger market share and reduced for smaller market share. This would favor non-chain individual retail organization, as well as local over regional and regional over national.

The tax rate increment relating to market share could be determined in different ways. One way would be to bundle all retail together, and simply look at sales fraction on a national or regional, or even international, scale. Then a table would have to be constructed, akin to the many tables of tax rates that are dependent on such things as income, which says how much bump up there would be for a market share of such and such. The table really would control the eventual outcome of the trade-offs between large and small retail. If the tax rates were much larger for bigger market share, then larger organizations would shrink, and small ones proliferate. If the tax rates were only slightly larger, they would only slow down the agglomeration of small retail into large retail. So, juggling the tax rate table is equivalent to determining what spectrum of organizational size is desired.

Only good data resources would allow this tax rate table to be set up. If the goal is to reduce employment, then it would be necessary to understand just what head counts were needed for different scales of businesses in the retail sector, as well as to understand the secondary effects that happen in other sectors and especially in the supply sector. If the goal were instead to affect the median wage, then a different set of data would need to be collected, being the employment data needed for the first option but also salary or wage and hours-worked information for all employees. Some combination of these goals might also be accomplished by just having these two sets of information.

One thing that has not been discussed adequately in Just Deserts economic system posts is how to do a transition from some other system to a Just Deserts system. Clearly, this can be done very gradually, to allow everyone affected by it to make necessary adjustments in their own personal plans, or it could be done rather quickly, to bring about the effects within a single generation or even less. The two aspects of this speed question relate to evasive possibilities. As is well-known, any type of change in a system of large wealth disparities that affects the upper tier wealth or income will be evaded, or politicized, or subject to lobbying. There does not seem to be any mechanism that can avoid this, and so, it may well be that some Just Deserts system can be theoretically designed, and it will look impressive on paper, but there will be no implementation path that is tolerable to those whom it would affect.

No one wants to go through a violent revolution, as it does not simply make some basic changes, it undermines an economy, disrupts all manner of commerce, causes migration, and leaves everyone full of uncertainty and foreboding. Short of such a revolution, there does not seem to be any way that those who might want to live under a Just Deserts economic system could get their hands on the levers of power. There is no educational miracle on the horizon. Cajoling and convincing is not likely to be effective. Some bright new ideas are needed related to transitioning from something else to a Just Deserts system, and these will take a lot of work to develop and refine.

Productive and Non-productive Uses of Capital

Capital formation by the accumulation of huge wealth by a few has great benefits and great faults. Is there any alternative that might provide the benefits and avoid the faults?

Of the many uses of capital, this post comments on three. Perhaps they are the most important, and perhaps there are others lying under the surface which are more relevant to the operations of a socio-economic system. But for the time being, here are the three that appear to be most relevant to a Just Deserts economic system and the transition to one from some other form of arrangements.

The first one is the one that is most beneficial. It involves the extraction of produced benefits before they are allocated into consumption uses in order to produce infrastructure and facilities, both of which are essential for building up an economy. Without capital for production, the economy cannot flourish, and might not even be able to survive. There are timing effects. Capital might have to be collected for a period of time before something can be built, providing the building time is short. It might be quite inefficient to try and build something on a pay-as-you-go plan, so in order to cut down inefficiencies, possibly large enough to tilt the project to a negative overall benefit, capital must be collected and stored, and then used over a short time. Some projects might be possible with shorter collection periods and others need longer ones. The variety indicates that there needs to be, in any effective socio-economic system, a means of collecting capital that is protected from the demands of consumers.

The method that has been predominant for the last couple of centuries has been the concept of private ownership. There is no restrictions inherent in this method of protecting capital from consumption that limits the usage of the capital, so there is necessarily a great danger involved in this method. If something is to be done, it appears necessary to come up with alternative means of collecting and more importantly, protecting capital from the demand of consumption, as well as restricting its use to socially beneficial means.

The second use is the one which is most detrimental to a Just Deserts economic system. That is corruption, of its many varieties and types. There is simply no solution to the corruption problem other than outlawing private ownership of huge amounts of wealth. Normally corruption produces advantages with a huge multiplier, meaning the amount of wealth spent on corruption is returned ten or a hundred or even a thousand times as the benefits of the corrupt politician’s actions. Wealth caps stop that by making personal contributions to funding corruption impossible and by making the collection of the benefits of being corrupted also impossible. The first barrier to corruption can be overcome by having a body of capital that is not individually owned used to provide the funding benefits, but this has two objections. One, transparency is easier with large collections of capital with widely diverse ownership, so the diversion of money for corruption is easier to trace. Second, once the corruption is finished, how do benefits flow back to those few individuals who seek to benefit from it? If secrecy is in vogue, there is some possibility here, so transparency is necessary. Since there is a tax on wealth, wealth can no longer legally be hidden. So, multiple barriers to corruption exist.

A third use of capital is one which is closely related to corruption. That is debt for consumption. Capital formation for productive use may involve debt, in that the productive use of capital should produce benefits, and some slice of them can be used to replenish the productive capital fund that was used to generate the facility involved. Debt for consumption can be a variant of charity, in which some individuals who temporarily lose the ability to be productive need to have funds for consumption until they can regain their ability to be productive. This debt can be paid back, probabilistically. But debt for consumption that does not go to preserve productive human capital, or other infrastructure for that matter, but instead goes to uses which are not going to lead to production with the possibility of repayment in the future, is a misguided use of capital, and in fact, a means of enriching those with capital. Debt is really a lien on the possessions or future income of the debtor. This only serves as part of the general feedback loop which allows those in possession of large amounts of wealth to gain possession of an even larger fraction of available wealth.

Consumption should only be funded with current production, averaged out over fluctuations, and taken only after the necessary slice for the generation of useful capital is done. Otherwise it is simply an invisible transfer of benefits from the future to present day use. If private capital is allowed to grow excessive, in other words, large enough to substantially fund consumption, then the feedback effects will occur, based on the inevitability of the demand for current consumption. Debt is a means for transferring consumption from the future to the present, or a means for selling possessions for future ownership in return for current consumption.

Thus, of the three uses of capital that were called out here, two are very detrimental to an economy, and one is very useful. Those who promote private ownership of large amounts of capital emphasize the beneficial one, and those who promote the opposite emphasize the other two. Like most things, there are good and bad uses of it. If the tenor of the times is such that the first use is lionized, and great praise heaped upon those who do it, perhaps the bad two uses would only occupy a small fraction of the total use of the total capital accumulated. If the tenor of the times emphasizes the other, indirectly, then they might become the principal uses. A novel socio-economic system has to be able to function well in either condition, so private accumulation of huge amounts of wealth cannot happen in such a system.

Without private ownership of large wealth accumulations, how is capital to be accumulated for the main beneficial use? Wealth is generated by production, and is allocated into capital formation and consumption. But what social organization, what arrangement, what agency or mechanism will there be to best use accumulated capital, and how much of it should be taken from annual production? What are the pitfalls that some simple ideas on this might fall into?

One is the barrier against the demands for current consumption. Current consumption gives immediate satisfaction, and this is reinforced in the human brain very strongly. Whatever allows more current consumption seems to be desirable by those whose consumption will be affected. The concept of private ownership has become so embedded in modern industrial societies that it provides a very strong barrier, and that barrier is enforced by the existence of overwhelming corruption to preserve it. There are other mechanisms used to preserve this arrangement, such as the ownership of almost all mass media by those whose private ownership of huge wealth might be at risk. The same goes for the control of educational institutions via donations and other forms of legal and illegal corruption. These mechanisms are only natural, as the collections of large wealth can spin off portions for use in protection of the barriers against reduction or confiscation.

Can some agency utilize the same barriers to preserve a public holding of capital? The use of the mass media as propaganda organs for the preservation of exorbitant wealth is not something that is done publicly, but in secret. It would not be possible for some public agency to be given the role of mass media owner so that it could preserve the capital it collected against being diverted, more and more, into current consumption. This would be open and obvious to everyone, and the propaganda effect, if it could ever be orchestrated, would simply not work.

Could politicians be bribed to not divert capital needed for infrastructure and productive facilities into current consumption? If financial details become transparent so that wealth taxes can be implemented, it will be difficult to keep such bribery secret. If it is not secret, but written into laws that the salaries of politicians will be reduced if they divert funds from capital formation, then who writes these laws? They would simply be rewritten, unless there was some public mechanism necessary to prevent it. This typically means a constitution. Who is going to approve a constitution that requires sacrifices in current consumption? Perhaps during very good times it could be approved, and harsh requirements put in so that in lean times it could not be changed. Then what would prevent it from being ignored in some expedient way, such as a novel financial instrument which effectively diverts capital formation money into current consumption, perhaps for military expenses at first, then for war recovery, and so on, making it permanent, and then, after the necessary number of decades of reduced capital formation, the inevitable collapse happens.

Perhaps a different approach is needed. Instead of a public agency holding capital formation funds, there might be private funds, individually small, put into different agencies, much like stock agencies and hedge funds in modern America. These private funds would be constitutionally free from taxation, as the taxation occurs before benefits are diverted, by individuals, into them. Managers would not be exempt from the wealth cap, but might be replaced if they do not properly utilize the funds entrusted to their care. So, a stock market plus a wealth cap might be one idea worth considering.

Free Balanced Trade

Free Trade has positive and negative attributes, and it is possible to improve it, so that most of the freedom is maintained while the deplorable tendency for a nation to be exploited by superior exporters can be eliminated.

Free trade is one of those phrases that excites people like a sports cheer. Exactly what it means is not clear, but it does serve as a rallying cry for those who do not like the authority of a government intruding into their affairs. For those engaged in disreputable practices, the benefit of less government is obvious, but many who espouse the concept are anything but that, and simply feel that there is little the government can do to improve what they can do by themselves.

Government bureaucracy can certainly be a lead weight on the conduct of business. If the bureaucracy is populated with a few visionary individuals alone, it might work better, but most bureaucracies simply grow and grow as a location for that inestimable goal: a job with few requirements and high, guaranteed pay. ‘Il posto fisso’ as satirized in the recent Italian movie “Quo Vado?” is a lifetime job with few demands.

Other individuals objecting to government activity believe the government can become an avenue for fanatic power-seekers, who use their position to disrupt what could have been a peaceful and prosperous set of businesses. Different people’s impressions differ, but the idea is that government intervention is not necessary.

People holding the opposite opinion characterize business leaders as corrupt or greedy, seeking to exploit whatever they can for personal benefit. They hold up government as the only possible barrier to ecological disaster, wage slavery, and other ills. These are different ways of looking at the elephant. In the application of government regulation that is discussed in this post, the activity of the government, or some regulatory agency, is critical to its operation, meaning it is seen as a force for good. However, corruption seeps everywhere, and what starts out good can turn into evil. Precautions need to be taken, and vigilance maintained whenever allowing a government agency to decide on the personal or corporate benefits received.

Let’s assume nations are the entities between which trade might be regulated. An empire might regulate trade between states within it, but the principles are the same, even if the regions affected are smaller. Trade is simply one nation making something, and exporting it to another nation, which exchanges something for it, probably some currency, electronically most likely.

Free trade is simply trade without specific taxation, that is, taxation based on the concept that if something is traded, it would be taxed. For most of trading history, taxes on trade, called customs taxes, were the main source of income for nations. Thus, a nation which wants to encourage free trade needs to do its taxation in other ways, such as a luxury tax, an inheritance tax, an income tax, a capital gains tax, a savings tax, a wealth tax, a value-added tax, a poll tax, a commodity tax, a health impairment tax, a transportation tax, or any other type of tax except a customs tax. With a huge range of possibilities, declining to have any customs tax should not be a difficult arrangement.

Free trade is something that can be beneficial to nations, or detrimental. If trade is controlled by one of two trading nations, for example the one which owns the transportation needed for trade, then it can be restricted to some products that will not encourage economic growth in the lesser country, such as commodities. In a nation which is largely dependent on one commodity, it can be a recipe for disaster, as price fluctuations in the commodity can cause large variations in the economic state of the nation, leaving it difficult there to start new businesses. If trade is financed by debt, which is ultimately paid for by transfers of ownership of real estate or other property in the lesser nation, this will leave the dominant nation owning much of what is valuable in the lesser state, leading to a deep level of poverty there and a poor employment situation. These tragedies, for the lesser state, can be prevented by using free balanced trade instead of free trade. They are not tragedies, but aggrandizement, for the dominant state, and free balanced trade takes the ability to exploit the lesser nation away from it. Thus, it will certainly not be a popular measure in such nations, but will be beneficial in the international picture.

Free balanced trade concentrates on product categories, such as manufactured products. It aims to enable each nation to have a robust and diverse economy, much more self-sufficient than with free trade, and much more likely to grow to the maximum possible. Free balanced trade works by one simple tax, a balanced customs tax, which taxes goods in a particular product category if the value of this set of products which is imported exceeds the value of this set of products which is exported. Furthermore, the amount of tax collected is used to subsidize those exporters in this category. Thus, it acts to bring into balance any product category within the domain of the balanced customs tax. The rate of the tax starts small, but increases annually if the amount of imbalance between imports and exports stays high. When the ratio approaches unity, in other words, when imports equal exports, the tax starts to diminish. In essence, it has a feedback effect, so that the tax rate will tend to become exactly that amount needed to balance trade in the different product categories within the domain of the balanced customs tax. It may very well happen that after some years of subsidization, the exporters in a particular product category will be able to compete effectively with no subsidization required in the future.

The tax operates similarly when exports exceed imports in a particular product category. Export taxes are used, and importers are provided with reduced taxes of some sort, or even subsidization. Thus, in each product category, trade tends to balance in value for each product category. The key to the success of this tax is the fine adjustment of the tax rate for each product category. By annual or more rapid adjustments, what was an export deficit will not be turned into an export surplus. The tax rate which encourages the growth of exports in one product category will reduce to a certain amount needed to balance trade. It may be that over time, the tax rates will go to zero, but this is not an inevitable outcome of the process.

The purpose of the tax is to first of all discourage exploitation of one country by another, which is not desirable as it does not make the best use of the personal and physical resources within the exploited country. However, the balanced customs tax, even if properly tuned so that it balances trade values in several product categories, will not prevent ownership issues from becoming an alternative means of exploitation. Ownership issues, where a large entity within a dominant exporting nation establishes some export capability within a lesser nation, and the new capability is owned by them, can crop up soon after a balanced customs tax is installed. These issues can also be controlled by proper application of taxation, if desired, but there is no direct connection between the two issues.

As an example, consider a product category of manufactured electronics. Suppose one dominant trading nation is exporting a large amount of it to a lesser nation, which has only a small amount of manufactured electronics. There would be a balanced customs tax imposed on all imports of manufactured electronics from the dominant nation, and most of this would be turned over to the electronics manufacturers in the lesser nation, provided they used it to grow the capability to export their own electronics manufactured products. The tax rate would grow for a while, as the lesser nation’s manufacturing capability grew. This would have the effect of reducing the amount of the dominant nation’s exports to this country, and would have a more severe effect each year as the tax rate increased. Eventually the lesser nation’s manufacturing capability would increase, and this would both satisfy domestic demand, displacing some imports, and increase exports. Eventually, exporting would begin to be comparable to imports, and the tax rate would gradually decline. It would decline further as the balance was approached, and at some rate, representing some inherent manufacturing advantages of larger or more advantaged nations over others, it would achieve a balance and stay constant. Over long periods of time, this rate would change, but more slowly that it did during the phase-in portion, when manufacturing in the lesser nation was being strongly encouraged.

Education in manufacturing would be intrinsically supported in the lesser country, as would be management capability and other specializations that are needed to run a manufacturing company. This educational effect would have spin-off effects, and other areas of the economy within the lesser country would be supported.

Note that there is little here that has to do with the purported Adam Smith effect, where each country produces what it does best. This economic theory appears to have been generated to justify unbalanced trade, which principally benefits the dominant trading nation. Instead, balanced customs taxes have universal benefits through nations. Financial measures need to be dealt with in similar fashion, and they can be.

Children and Their Training

The best economic system is one with moral people. Two solutions exist for improving a system: making people more moral and introducing means for rendering most immorality ineffective. These means exist.

There seems to be a common tendency to pick one economic system and claim it is the best system, for various reasons. However, there may be no best system at all. What system works best depends on how one defines ‘best’, but also on some external factors. One obvious factor is the level of technology. If the society has extensive and verifiable data collections on almost all transactions and actions within the economy, then it can be controlled in a more delicate way. So, technology level is a large determining factor on which economic system might produce the most manufactured goods, or provide the longest lifetimes to its members, or some other social benefit.

But technology level is not the only factor which can determines how different economic systems would score against a metric to measure which one was best. The members of the society do also. If there are few educated members, specifically few who can master the art of starting enterprises, managing them, rallying support from diverse people, estimate outcomes, and do many other managerial tasks, then the society is doomed to only have few or none of the companies or agencies which could drive progress or even which could exploit technology to produce a good score on a metric. Management talent is one factor, but engineering skills are another. Without the ability to handle technological solutions to problems, such as building long-lasting infrastructure or developing manufacturing capabilities, the society would be short-changed in exploiting what it might have.

There is also a different human factor. This relates to the difference between moral people and immoral people. Moral here is used to represent someone whose behavior is governed by principles, which are known, and immoral refers to someone who seeks to constantly pursue his own advantage, through any means possible. Immoral people pride themselves on deception, finding loopholes in legal regulations, bribing law-makers and law enforcement individuals, and other nefarious deeds, all the while proclaiming their own moral standards.

These predilections, toward virtue and vice, do not come principally from genetics, but from the culture of the society, and specifically what is transmitted to young children. When a child is instructed by someone they trust and respect, the information goes deep within the brain, and is largely not recallable explicitly. However, it determines what other information will be accepted by the child’s brain, as associations with prior information is how the brain accumulates knowledge. This early information determines not only what other information is accepted readily, but also how the child will behave. In essence, morality comes from early instruction and is not forgotten. Immorality is also recorded as an example of how to live. Young children are more recorders of their experiences than thinkers about what they are seeing.

Consider a political entity of any sort, composed either of all moral people, raised to believe in the same moral code and some means of enforcing it, or of some moral and some immoral people, the latter raised to think that anything they can get away with to increase their own well-being is acceptable. Any governmental system or economic system will work successfully for the first case. Moral individuals simply follow the rules of the systems. It may be that one system works better than another, and that is an interesting question to be addressed later. The second case is much more difficult, as there are innumerable ways that an immoral person might seek to distort the economic system for their own benefit.

A catalog of immoral activities might be in order. There is first nepotism of various forms. This involves someone in a position to make a selection of another person for some benefit, or to make some ruling that affects another person or to influence the benefits that will go to some other person. When the person taking the action is influenced by who the person is, meaning which group do they fall into, this is nepotism. Instead of a fair review, we get a biased review. In a society which has a substantial number of immoral people, perhaps moral in their own eyes but immoral by any independent measure, how do you invent systems, components of the economic system, which reduce the effects of nepotism? Nepotism becomes epidemic in some areas when those invited to become decision-makers are selected by nepotism, and are interested in doing more of it. Soon, by exponential growth, the whole system of decision-makers has been corrupted. How would it be possible to stop such behavior?

Only quantitative metrics have a chance at doing so, as words of a language are not defined precisely enough to stop nepotism. Subjective judgment is used for a word-based selection and subjective judgment is simply an open door for nepotism.

Seeking and obtaining protection from taxation is another common form of immoral activity. Taxation is mandatory to support those types of activities and the types of structures that need to be done by the whole population, but who exactly pays what fraction of the total needed? In an economic system where the distribution of taxation is decided upon, not by the population as a whole or a substantial subset of them, but by a few individuals, it would be very profitable to corrupt those few individuals in certain cases. If income and wealth accumulation are governed by a maximum salary law and a maximum wealth law, and the limits were reasonably related to the value of a person’s time, then such corruption would not provide a good return on the money invested in corruption. In any other situation, where income and wealth can be huge, corruption can only be stopped by having all taxation distribution question subjected to a vote by a group too large to corrupt.

In a bureaucracy, immoral activity is engendered by individuals who are rewarded based on consumption goals rather than production goals. This means that, if an increase in reward is based on how many people work for a person, rather than on the value that the entire set of people provide, perhaps divided by the costs, then individuals seeking personal benefit will seek to expand rather than become more efficient. Individuals who were raised to be moral individuals might act within a bureaucracy so as to increase the value per cost provided, but those who were not would seek the opposite. Again, the two solutions of morality training for children and quantitative metrics ameliorate this tendency.

Favoritism is another avenue for immoral activity. This exists whenever an individual or small group of individuals have the ability to divert benefits to one of several possible recipients. Examples are obvious: supply officers who choose which distributor will supply some large organization’s needs; contracting officers who choose which organization will obtain large blocks of work and further how much will be paid for the output, directly and in response to unplanned events; regulators who can approve or reject an application to sell something, provide something, dispose of something, or other material actions. The same two solutions spring up, moral people doing the choosing and quantitative metrics to force the immoral to make choices in the best interests of the whole organization rather than themselves or their favored group. The third solution, dispersing authority so that a large group reviews the decisions, is costly, and might not be as feasible as it would be with a very impactful decision such as the apportionment of tax responsibility.

There would seem to be no more effective way of stemming immoral activity than the teaching of children a moral code. When only very few individuals seek to be corrupt, or who think nepotism is the right thing to do, dissuasion and detection can be effective at low cost. If everyone but a few believes in the same moral code, and believes it should be universally followed, anyone violating it has to be extremely careful in how they conceal their immoral activity. If the moral code teaches children not just to be moral, but to be suspicious and aware so that immoral activity is likely to be noticed, then most of the struggle to produce a Just Deserts economic system will have been won. There are other tools that are fitting for this struggle, dispersion of the most important decisions among some electorate, quantitative metrics that actually relate to the effectiveness and efficiency of the tasks being performed, and a maximum income and wealth law incorporated via taxation or caps on salary and stronger caps on unearned income. Perhaps more will be devised, but these need to be developed in more detail so that it is possible to see if they can work in both the best case of a moral population, and in the not-so-good case where there are substantial numbers who disregard morality in favor of personal or group benefit. This will be a challenge, but perhaps a greater challenge would be finding a pathway to the gradual implementation of the system. It is not worthwhile to invent a system which has no method by which it could ever be tried.

Distributism and the Just Deserts System

Distributism as a popularly discussed possible economic system which was never tried. It provides a convenient discussion point for comparison with both a potential Just Deserts system and the usual capitalism one.

Distributism is a socio-economic system which is characterized by the wide distribution of ownership of productive property. Like any other socio-economic theory such as socialism, there are variations on the idea, perhaps wide ones, which keep some precepts but not necessarily all of them, and also possibly change the means of implementation of those that are accepted.

In its simplest form, Distributism says that productive property, such as agricultural land and factories should be owned by the employees, according to some rule. The theory behind the system originated over a hundred years ago, and then production was thought of as concerning material goods only; thus the distributists thought that property was easily divisible into productive and non-productive property. Leisure was not a good to be produced, and so a public park was not productive property and did not fall under the mandate to be owned and governed by those responsible for the activities needed to continue to provide leisure to the public. Neither was a transportation system thought to be productive, as the moving of goods and people from place to place was not a product. Nowadays that concept has been clarified and the legacy concepts of material-only productive goods has been generalized to other intangible goods. Distributist concepts are not particularly affected by the generalization of productive property for material goods to all property.

Distributism took as one of its benefits the increase in motivation of individuals that arises when their efforts are rewarded both with a wage or salary as well as an increase in the value of the property which produces the benefits. However, such an increase would not occur in a steady-state economy, and if the distributist system does not provide this benefit in a steady-state system, how might it be expected to work in the other two situations, where the economy is shrinking or when it is growing? There may be great value in distributing the ownership of property to the population, but motivation is not necessarily one of them. Perhaps Distributism sees workers as comprising three categories: those who will work industriously in any situation; those who will never work industriously on their own but will seek to do only the minimum forced upon them for survival by the system; and those who are motivated only by the opportunity to receive more benefits if they work harder and smarter.

If the third category is a substantial fraction of the total, Distributism will show a higher productivity if ownership of the means of production allows this category of worker to produce more. How might this happen? For a few classes of workers, they could spend more time if they owned their means of production, and could work themselves to exhaustion if they chose to. For workers in mass production, it is hard to see how an individual in such an operation, even if a part owner, could increase his hours of work except in some unusual circumstances. In those circumstances, it would make no difference if he was a part owner or not. The assembly line, or whatever the production method was, will not run extra hours simply because certain individuals wish it to.

Just Deserts as a socioeconomic system might result in the same arrangements, but for an entirely different reason. Distributism believes that the distribution of property to a large fraction of the population will improve the efficiency of production, and this is a sufficiently important issue that it should be done. Just Deserts believes there is no way individuals can legitimately earn enough to have huge differences in the amount of property owned, and so there is no way that such ownership disparity could happen, except by legacy ownership, and that would be gradually erased as the new socio-economic system were put into operation.

The question of how to arrange for ownership of things well beyond the ability of an individual to own is not clearly decided. Employee ownership is one example, but stock ownership is another, and community ownership yet another. All three are used extensively in our current economic arrangements, and all three seem to work well. For the first two, there are employee owned corporations that successfully compete with similar corporations where ownership is by the sale of stock; neither category seems to have an inherent advantage that propels them to dominate the other. Community ownership is used for certain classes of things, such as roads and schools, but there are certainly examples of roads and schools which are privately owned, by stockholders, and they seem to both work about the same. There are also, in some countries, extensive public ownership of utilities or even ordinary corporations, and they do not quickly crumble.

Long term effects might differ, but it would seem that a socio-economic system with a diversity of ownership types might have some advantages. The three categories of ownership might be originated in different ways. Just Deserts does not prohibit private ownership, but simply makes it impossible for someone to accrete sufficient unearned income as their wealth so that there would be orders of magnitude differences in the amount an individual would own, compared to the mean or mode. It might be that ownership was not by individuals, but by households, but this should make little difference in the way the society would function.

One of the major advantages of unfettered capitalism is the ease by which large quantities of resources can be amassed for the purpose of starting new businesses. There is a great tendency for those without large amounts of excess capital to use their income, perhaps totally, as the basis for their level of consumption. For Just Deserts to work, a mandatory fraction would have to be withheld for the purposes of amassing capital that could be put to the task of creating new businesses, when such were necessary. There would need to be other withholdings as well, such as for old age and disability insurance, health care insurance and other individual expenses. But in addition to these, there would have to be a capital fund withdrawal.

There is little obvious or immediate benefit to the individual from such a capital fund withholding. It would be subject to claims against it for consumption purposes. Some sort of social barriers are necessary to prevent this.

As any large block of capital, collected capital would be subject to corrupt use. Capitalism has few barriers to the corruption of government and internal agents of companies and corporations, such as supply officers, but in cases where there is no monopoly or cartel operating, there is competition. Competition eliminates some mis-uses of capital. Poor matching of supply and demand serves as another barrier to the poor use of capital. These would have the same effect under a Just Deserts system as under capitalism. One type of corruption in capitalism involves the obtaining capital under false pretenses or without the proper checking of the planned uses of it. This would also exist under Just Deserts, except that the source of the capital would be somewhat different. The source under capitalism might be an individual or a group of individuals with high wealth, whereas under Just Deserts the equivalent source would be an agency designed to make good use of withholdings from workers.

As noted before, the benefit from corruption under capitalism is to increase the income or wealth of the person causing the corruption; under Just Deserts the same could be true, but there would be a massive difference in scale. An individual or small group of individuals under capitalism could, if they were wealthy, engage in corruption whereas the group would have to be so large under Just Deserts, it would be unlikely to occur. Of course, if the scale of corruption goes down, it would be possible to have some, but the effect of it would be much less grand, meaning much less money would be diverted because of the corruption. Thus, Just Deserts makes corruption somewhat less likely, but by no means impossible. A Distributism system would have much less accumulation of wealth, as property, by some means, stays widely distributed. If a more general Distributism system were installed, so that not only productive capital was widely distributed, but all forms of wealth, then the same conclusions about corruption that pertain to Just Deserts also pertain to Distributism.

One proclaimed advantage of Distributism is that the dispersal of capital would make production more efficient, by motivating large numbers of individuals to work harder with the capital they had. Just Deserts has even a better claim to this, as not only is capital more finely dispersed, it is productivity which is rewarded with higher income, just as it is under capitalism. Under Just Deserts, the only way open to obtaining a higher standard of living is to earn more by producing more. Capitalism rewards hard workers, but it rewards the holders of unearned income even more, and allows rewards to accrue which are not connected with productivity. By focusing the attention of everyone on productivity and reducing the propensity for corruption, Just Deserts might be seen as the socio-economic system which actually generates efficiency in the economy, as Distributism and capitalism were reputed to be, but do not necessarily.