Corruption and Governance

Corruption is hard to even bound and catalog, and even harder to eliminate. Here are some obvious alternatives.

One of the reasons for corruption being endemic almost everywhere is the huge number of ways it can be conducted. Virtually anyone in governance who makes decisions with some discretion or options can be subject to it. This means government of any level, and also large bureaucracies that have governance over some limited domains, such as purchasing agents. A list can be made that seems to go on forever: judges involved in deciding on evidence or sentencing including incarceration and fines, police with minor offenses or when scrutiny is not present, permit controllers and inspectors regarding both timing and details, license grantors, prosecutors with discretion to pass on cases or plea bargain or try, detectives with a choice of cases to attend to, contractor selectors and those who approve on change orders, infrastructure designers and approvers including eminent domain questions, materials specifiers, those establishing tariffs and taxes and fees, medical personnel deciding who will be treated and who will not, lawyers able to mount an effective defense or offense or simply go with an ineffective one, those who route traffic, those who bargain for wages and benefits, those who organize protests or do not, those who choose sites for expositions or conferences or major sports events, and many, many more. This is simply a partial list of those who might have the opportunity to seek out or respond to corrupt offers.

The mechanisms for corruption can be diverse as well: secret meetings between the parties or agents of them, communications via public means or private means, in code or unencrypted, with payoffs specified or left vague, basic understandings of how things work that do not require meetings, and certainly others. Guarantees might exist or not. Partial payments may happen or not.

Payoffs, that which the decision-maker receives, can be legal or illegal, which depends on the laws of the jurisdiction involved. Some almost humorous situations exist where the potential corruptee, to coin a word, is also responsible for anti-corruption law, and so can leave loopholes to avoid any illegality for his/her chosen method. Payoffs can be direct or disguised as something for services rendered, either around the time of the corrupt act or later, even much later. The payoff might be a promotion, such as a judge to a higher seat. The payoff might involve a friend or relative of the corruptee rather than the corruptee him/herself. The payoff could be a legitimate cover, such as a book advance for something that will be ghost-written as part of the payoff. The payoff could be in the form of donations to any cause at all, one which benefits the corruptee or his/her friends or relatives or anyone they favor.

Corruption can be done as a barter trade, where one decision-maker does something for another, who returns the favor. It could involve a triangular trade, where A makes a decision to benefit B, who makes a decision to benefit C, who makes a decision to benefit A. There is almost no limit to the ways that corruption can happen, who can be corrupted, how and when the benefits arrive for the corruptor and how and when the payoff arrives for the corruptee. It could be as simple as a bottle of vodka for a form being filed properly or a billion-dollar tax break. It could be an expenses-paid vacation at a tropical resort or a box seat for a sold-out sports event, all in exchange for simply purchasing something or causing something to be purchased. It could be a new home at half price in exchange for a permit to build a hundred homes in a restricted area. It could be a political donation in return for using one’s influence to mask something that might otherwise be objected to by the public. It could literally be anything.

In a socio-economic system that is being devised to be an improvement over existing systems, how should corruption be handled? First off, should it simply be ignored, and the socio-economic system be constructed to be as immune to it as possible? Alternatively, should it be a main focus of the design, which mechanisms employed to reduce it? Is it even possible to minimize it, given the variety and diversity of ways in which it can occur?

One aspect is that it does take some time to set up, if on a large scale. A new appointee or electee might not be ready to commit such acts, and time is needed to soften his/her resolve to remain free from such a taint. Others might be quite ready from their first day to compromise their position. Besides the readiness or unreadiness of new position-holders to commit to corrupt actions, there might be some time needed to develop the trust involved and to generally determine how to manage the corruption. New agreements would need to be set up. Thus, some partial amelioration might be obtained in a system which requires frequent change of individuals for any position which might be subject to corruption.

Short duration appointments also eliminate one motivation for corruption, which is to secure the position for long periods. If the socio-economic system forbids this, then there is no need to utilize corrupt means to preserve a position. Although a loss of efficiency is unavoidable, that loss needs to be traded off with the gains that less corruption provide.

What exactly are the losses caused by corruption? Possible losses are as diverse as the types of corrupt actions that could be taken. Consider first purchasing and contracting decisions. If there is simply a loss of some percent in costs, this would be almost not worth much effort to stop. If the corruption could lead to a doubling or tripling of costs, then there should be some efforts to catch it and stop it which might entail a cost of a tenth or so of the total cost involved. These efforts would involve verification of designs, testing of materials, and inspection, inspection and inspection.

The other side of this aspect of corruption is that of the consequences of being found out. If there are almost none, then corruption is being aided and abetted by the system. If they are severe, the opposite situation happens. One part of this puzzle involves specifying who can discover and investigate the corruption, which includes whistleblowers. A thoroughly corrupt governance apparatus will punish any attempt at whistleblowing, so there might to be said to be a critical mass factor in corruption. When it becomes too entrenched and widespread, it will act to preserve and protect those guilty of it.

This feature means that there might have to be anti-corruption actions that are very different in a situation where almost no one is corrupt as compared to one where almost everyone in governance decision-making is. For the low incidence situation, whistleblowing and the protection provided to those who do it should be a serious deterrent. But for the high incidence situation, something outside individual action will be the only course possible. A periodic review of all possible corruption situations by investigative teams with broad powers would seem to be the only way to clear up a network of corrupt individuals.

One typical slogan used for the battle against corruption is more transparency. Some types of payments leave trails, such as financial transfers or sales of items for less than they are worth. Other types of payments leave none whatsoever, such as the promise of a promotion within some number of years following a judge’s decision on some matter. Since promotions are largely a matter of some single or multiple individuals’ review of qualifications, they are not subject to any transparency checks. Nor are extraordinarily high payments for simple services, as the selection of the amount to pay for a service of any notable is subject to the whim of the payor, and who can decide if such amounts are reasonable. Thus, some corruption is beyond the reach of any agency, as it is wholly within the bounds of potentially non-corrupt transactions, and the intent might have been not recorded or if recorded, well hidden. The other side of this unassailable corruption is when the corruption is perfectly legal, there being no law against the particular type of arrangement made. It is particularly unassailable when the same group which uses a particular type of corruption is the group which writes the regulations or laws which define the boundaries of behavior that is acceptable or not.

This last problem can be remedied in a new socio-economic system by ensuring that anti-corruption laws are written by a specialized task force which does not have any other responsibilities that could lead to them being subject to anyone’s desire to corrupt. They simply take action when needed.

Thus, anti-corruption activities include: forced short duration of any position where corruption might arise; protection for whistleblowers; a periodic special task force for investigating corruption with no fixed agenda but the responsibility to look for it everywhere possible; a specialized legislative task force with no other responsibilities than to write laws to prevent corruption, including transparency requirements and also boundaries on acceptable behavior. One further step is to made the holding of such a corruption-prone position sufficiently worthwhile, in and of itself, so that anti-corruption measures will not severely diminish the cadre of applicants. It does no good to have a strong anti-corruption tenor if it means that there are hardly any capable people interested in undergoing the scrutiny necessary to hold such positions.

Whims and Time in Economics

Here is a simple way of categorizing possible socio-economic theories into lottery and non-lottery types, and how they use time in their selection of goals.

For any new socio-economic theory, the logical starting point is to choose the goals that the socio-economic system will try to achieve. Just like one designs a refrigerator with certain goals, or a bridge or any other man-made thing, a socio-economic system needs them as well. Without goals, the system would be built from the ground up instead of the top down. Ground-up designs serve to preserve the status quo, or to try and satisfy several competing constituencies. If the real purpose of some novel socio-economic theory is to curry favor of existing important clients or groups, ground-up is the way to go.

The ground-up approach does not run headlong into the problem that a top-down theory has: figuring out what goals to design to. There aren’t any that come from anywhere, except someone’s whims. So the choices in designing some new socio-economic theory are two-fold: find some favored group to design the system to prefer and reward more greatly, or come up with someone’s whims as to a rule or principle that the system should adhere to.

Most ground-up socio-economic systems just grow and evolve, without anyone ever trying to codify them into a set of simple principles that are coherent and serve as the driver for the entire theory. Instead, there are some slogans that are used, or perhaps exposited on, that are repeated as a sort of justification of some particular part of the mash-up that such a ground-up system usually represents. When one group grows more strong, the slogans are re-used in a different context, or a few different ones are chosen from the bag of nice-sounding slogans. These are used as justification for the modifications of the previous system.

Since these systems have functioned in most parts of the world for most of human history, why would there ever be a need for a top-down system? The difficulties in coming up with such a system are very great, as they have to take into account all manner of details of human psychology, civilizational development, technology and its changes, and more. Systems which are a mash-up of existing customs simply work because everyone knows how the system works and can follow it, and the means to modify it arise out of power of various sorts, such as political influence, financial pressure, military or police force or some other. Once some center of new power arises, the positive feedback loop starts to work and the power of the new center grows, modifying existing ways of organizing the economy and the society. Society evolves and the existing mass of economic customs evolves to match it.

Nice economic treatises can be written proclaiming that the existing system is the best of all possible systems, so that there can be a feeling of completeness and rationality among all those who care about such things. The treatises can be written for any particular system, as long as the system is more than just a hodge-podge of uncorrelated and inconsistent customs that are not stable. Having such justifications often means that some goal is chosen which will serve to justify, more or less rationally, the main contentions of the existing system. Choosing a goal for the purpose of validating some existing ground-up system does not accomplish the same as choosing a goal and then deriving from it a top-down system. They are of opposite natures.

For a novel top-down system, the most significant problem is the lack of acceptance. No matter how appealing the chosen set of goals are, nor how consistent they are implemented across the whole of society, there is little motivation on the part of those in power to make changes in more than a superficial way. The preservation of existing power is a very strong urge, and since power dictates what economic system will be used, typically something like the status quo, it would seem there is almost no point to developing a novel socio-economic system. Only if the existing power structure were near collapse, leading to a vacuum, would there be any chance that a new theory might be accepted. And even in this situation, a socio-economic theory that favors the new holders of power would be better than one which was created without reference to the existing order of things.

Putting the acceptance problem aside, one benefit of developing a socio-economic system from a clean slate is that the science of economics might actually be started, with some clear basis. This set of methodology might then be used to analyze and decompose some of the ground-up systems that have been or might be proposed. A whiff of science, as opposed to more development of details, could actually improve thinking in this area. In might even lead to a surprise, if some existing socio-economic theories prove to have a good fit with the more top-down approach, even if they have arisen as justifications of existing customs.

Where would a goal for a novel socio-economic theory come from? Anyone interested in creating such a theory could likely invent several, and they would each be no more than this: some random idea, which might be called a whim, that the mind of the individual thinker comes up with. In keeping with the previous discussion, such an idea would have to define who does the production, how is the distribution allocated, and what restrictions are there on consumption. They would not have anything to do with the details or mechanisms by which these three choices were brought into being, or what type of structures were invented to enforce or preserve them. Such structures might include ownership laws, social obligations, financial institutions, governance forms and obligations, police powers and so on. All these are details on the three main choices, and for any set of choices, there could be multiple ways of having written records, hierarchical political structures, tax laws, or whatever. The details are simply the details, and bothering to emphasize them just obscures the fundamentals of the theory, which are those three choices.

The selections of these three choices might be graduated on simplicity, with the simplest being that everybody has to do some fixed amount of work, with some measure as to what constitutes work; everybody gets an equal share of the production, and consumption is limited by the need to save x percent of the production whenever there is a surplus over some fixed threshold. The theory has to define the two ‘everybodies’ in these statements, and perhaps has to figure out how to vary x year-by-year. The fixed amount of work has to be defined as well, even after some equivalence has been created between different types of work. The total amount of production scales with this fixed amount selection, but pushing it too high would mean that there was the possibility of exhaustion of individuals. Most likely there would have to be some rules on the tradeoff between leisure time or non-productive time in general, and time devoted to production.

Another extremely simple theory has production being doled out by a lottery of some structure, and distribution given by exactly the same lottery, with either one draw for both or separate draws for production and distribution. There are no end to the lottery ideas that can be used. They could be based on attributes of the individual, such as some genetic traits or some learned traits, or on the parentage of the individual, or on the geographic location of the individual, or pure chance. A combination of these effects could be used.

These two classes of theories, the non-lottery ones and the lottery ones, cover a wide range of possibilities. There is no justification for choosing any one over any other, in the top-down point of view. They are all whims, in other words, just the selection of some individual designer of the theory, based in fact on his experience and education. The universe does not tell us what to do. The individual designer could delegate his choices to some historical sources, of which there are many, but this simply means that they are either some older whims of some person, or they were the result, covert possibly, of a need to justify the advantages of some particular power-holder or power-holder-to-be at some past era.

Time comes in at this point through the back door. A previous socio-economic system with a justification, or some previous whims of some possibly very convincing authors, might be used by some designer of a novel socio-economic theory to derive his new system. But there is another way that time should enter. Almost all theories, certainly the ones which are based on justifying some status quo, but also ones which are based on some individual system designer’s whims, are based on current time. They talk about selections based on what exists now. One alternative is to choose a goal with a long-term perspective, and then try to derive the rules for production, distribution and consumption from that. A long-term perspective might state that the chosen rules should be selected to maximize the length of time existing resources will last, or maximize the growth rate of technology over the next long duration, or support the improvement of the genetic stock of mankind, or preserve some ecological properties over some long period, or many others. Mankind has not devoted much theorization to long-term perspectives, in fact, almost none. Maybe this type of socio-economic theory would provide some insights that the short-term ones do not.

Balancing Productive Efficiency and Other Social Goals

Allowing larger firms to crush small ones might be good from one measure, but not from another. A socio-economic theory needs to determine what measures to endorse and which to relegate to second-order choices.

Typically a larger organization can be more efficient than a smaller organization with the same outputs. They might have larger factories, larger shipping quantities, larger supplier discounts, more political pull to obtain tax breaks, better and wider distribution networks, and more besides. In general, there can be a positive correlation between size and efficiency, meaning that their costs can be lower for the same goods. This typically implies that unless there are some compensating advantages, such as individual location, the larger organization can drive the smaller one out of business.

In the larger socio-economic picture, is this always desirable? Is production efficiency the single goal that needs to be always sought? The question harks back to the question about what should or could be the goals of any new socio-economic system. This has the same two answers: one is that the status quo is best because those who benefit from it have the power to change it, and the power to approve it, and since they are benefiting the most, they find innumerable reasons to preserve it. Perhaps the most powerful one is that no changes are necessary and no uncertainty arises. The other is that there are various normative goals that could be set, but they are somewhat arbitrary, and depend on the individual who is determining what is ‘best’. Each individual was raised with some implicit preferences, and these suborn their thinking so that some particular, but arbitrary, arrangement is the one they recommend. Neither of these has much to offer.

Perhaps one way to start considering alternatives to the ‘Wild West’ system in which the bigger company usually kills the smaller one is to make a list of possible goals. The Wild West system of the maximization of production efficiency ignores the other two components of a socio-economic system, as described previously. These are distribution and consumption. The same Wild West system can be applied to distribution, with the largest distributor crushing all smaller ones, or absorbing them. Consumption is different, although it could be slanted to use much of the same words. Via the many social mechanisms where disparity is promoted, especially the positive feedback ones, consumption could be restricted more and more to those on the top of the disparity pyramid, which could be called, almost as a joke, maximizing efficiency of consumption.

A basic idea of the Just Deserts socio-economic theory is that rewards from effort should be related to the quality and time of the effort, rather than from other effects, such as a lottery of results, corruption being involved, various feedback loops, and so on. If the reward-effort correlation is too little, motivation is damaged and one of the drivers of social improvement is lost. If the reward-effort correlation is too great, motivation is again damaged and replaced with different motivations, such as might involve some moral crimes or other distortion of agreed-upon social arrangements.

This goal involves rewards allocations, and does not talk about the milieu in which these rewards and the associated effort are embedded. It talks about how to compute rewards based on both instantaneous effort and past effort, such as was involved with training or otherwise preparing for the current bout of effort. But in some socio-economic arrangements, because of the presence of more productive capital or because of special social arrangements such as hierarchies of control, there would be more production on the average from the expense of some individual effort. That efficiency would relate to the individual, not to the aggregate of individuals. Let’s use a simplified example to illustrate and explore this feature.

Suppose there is a nation completely isolated from all others, having 100 citizens, all capable of work, and it lives on only one product. The product is made in a large factory or alternatively in a set of smaller ones. The large factory employs ten workers in production, and uses ten more workers to build and maintain it. It makes 100 units of product in one unit of time, which is just what the nation needs. The smaller factories employ fifty workers, and use fifty more to build and maintain them. Together they also make 100 units of product in one unit of time. Clearly the efficiency of the large factory, or more specifically, the average production efficiency of the individual workers in that factory, is five times that of the smaller ones. If production efficiency per individual was the goal chosen by this nation as the basis for its choices, the large factory would be preferred, and there would be twenty workers employed, and eighty without anything to do. On the other hand, if production efficiency on the average was the goal chosen by this nation, the smaller ones would be equivalent in this measure, as both produce one hundred units per unit of time, and the nation has one hundred workers.

This example is easy to interpret, as it discards all the details that obscure the problem, which is the usual distribution of talent among workers, the distribution of ability to work among citizens, and a multitude of other real complications. The example does show, however, that a seemingly small change in the measure of the goal makes a tremendous difference in what alternatives can be considered. Production efficiency in a plant versus production efficiency in a nation sound similar, but are actually quite different in effect.

One aspect of this situation is that there was also a hidden assumption that the desired consumption level was one unit of production per citizen per unit of time. For some production items that might be the case, and for others, not. If all one hundred workers worked at one of five large factories, then the nation would produce five hundred units of production per unit of time, and this surplus might be distributed one way or another. Perhaps the surplus would be beneficial and perhaps it would be harmful. There are also ways to implement a type of full employment, where workers rotated in and out of the large factories employ, having to do only 20% as much work but each one resulting in the same amount of production as if they worked 100% of their time in the smaller factories. Another aspect might be that two or more large factories produce surpluses which can be stored for use in bad times, and then shut down temporarily when inventory becomes saturated.

Even an example simplified in the extreme has complexities that need more details to be added in order to be able to develop any insights. If the national goals included maximizing production efficiency of the nation as a whole, with no surpluses needed or desired, there are two ways to do it and also combinations of them, where there could be one larger factory able to produce 50% of national production and several smaller ones together making the other 50%. What kind of criteria might be used to be able to judge which of these is desirable? If we are bent on developing a system based on the just deserts concept, then the case which employed all of the workers would have all of them receiving the same rewards, and the case which employed only part of them would have more rewards going to those who were employed and less to those who were not. We have in this example created a situation where all workers are equally capable and equally interested in working, but by some lottery, only a part of them have employment and the associated larger rewards. That might not seem to be in keeping with the just deserts socio-economic theory, but the theory does allow for lotteries to determine rewards, but only to some extent.

If the rule is to correlate effort and reward to a certain degree, then the theory must take into account the situation where there is no opportunity for effort. Perhaps other theories assume there is always opportunity for effort, and this may be their downfall. One insight might be that situations with lotteries being a large factor in determining effort or rather opportunity for effort to be expended, just as situations where lotteries are a large factor in determining productive efficiency per individual, some sort of rectification is needed. Lotteries are not necessarily efficient, nor do they have any other moral benefits.

One tentative concept for the socio-economic theory of just deserts is that opportunity lotteries should be restricted to some small change in reward, perhaps something in the ten to fifty percent level. This implies that there would be some way of measuring what effort might be applied if an individual won an opportunity lottery, but that is a discussion which needs much more time and thought. The question of how regulating or rectifying an opportunity lottery might affect motivation needs to be addressed, as well as how the rectification process worked and how it could be structured to avoid gaming. How could it be possible to tell who would work if they had opportunity, and who is simply hoping to avoid work by playing the opportunity lottery.


Seeking Clarity in Economics

Economics is a grab-bag of different items, and if someone were interested in coming up with a new comprehensive theory of economics, it is not possible without including a huge amount of social arrangements.

Economics is such a muddle as the main concepts have not yet been well defined or accepted as the main concepts. An incredible amount of work goes on in accounting details, while the important points remain obscure. To seek clarity in economics, these main concepts must be defined and made very explicit.

One can paint the label of economics on a wide variety of topics, and many of these topics have great amount of detail in them. One problem with making definitions is that in order to achieve clarity, there has to be some agreement on what the principal topics are, and then let the rest be subsumed under them. First some negatives need to be listed. Main topics in economics do not include: money, debt arrangements, productivity, taxation, pensions, investments, and precious metals. These are subtopics that need to be looked at as part of a larger picture. They are details, and although the details may be more involved and therefore more interesting than the big picture, they are still details. Until the big picture is chosen, they remain unconnected and rather incoherent, even if the details that are discussed are defined with precision and clarity.

The principal concepts are products of activity and consumption of those products. This is what ensures life or death, and quality of life as well. Everything else is details about how these two items are distributed among the population, and how they change with time. Production and consumption are done by individual humans. Activity is any action by a human. Some actions can be highly productive, such as the finding of a new source of food, and other activity can be destructive, such as setting fire to a new source of food. Consumption is any activity that uses up some product.  Intermediate consumption, which is used to produce some other product, is bundled under production, not consumption.

It should be obvious that starting with these definitions does highlight something essential, but it should also be obvious that economics is not a stand-alone subject. Certain details, with carefully prescribed limits, can be treated separately, but the big picture of economics includes all the social arrangements that affect production and consumption. Thus there is no subject of economics from the big picture point of view. There are a hundred little prescribed subjects of economics, but they should really be connected to the big picture of socio-economics, or whatever name is preferred for the larger subject of how production is accomplished and how it is distributed for consumption.

Socio-economics is all about the rules or customs that might be used to make arrangements for production, distribution, or consumption. It would likely be useful to creating a new economic, or rather socio-economic, theory, if there was a breakdown of the topic, so the way would be clear to connect all the myriad details in various categories of economics. Rules for production could also be called a theory of labor and capital, as those are the two components for production. Alternatively, the time of an individual can be spent in production could be the measure. Productivity, the rate of production per unit of time, can be increased by the availability of what might be called the tools of production, which could be any of a thousand things involved with construction, manufacturing, agriculture or any other subset of production.

Productivity, in some areas of production, can also be increased by some psychological effects, which can be referred to as motivation, or attitude, or interest in the production. In other areas of production, there is little variation due to psychological variables. A third area that affects productivity is the skill or talent of the individual. Besides individual variation, there is an effect due to training. Given this simple division, one of the top categories in socio-economics could be called production, and the subcategories under this, time arrangements and productivity factors.

In time arrangements, a slightly deeper description is the arrangement of who does what production and for what time. Inside this are the social arrangements that set the rules or customs for who does what task of production. On the productivity side, there is the question of who uses what tools of production, and who receives what training. If there is a social hierarchy or some way in which some individuals make decisions for others, there is the question of who makes the decisions as to who works, for how long, at what task, with what tools, and with what training. Then there is the question of who enforces these decisions, if they are not done at the individual level, and how the enforcement is accomplished.

The second of the top categories, distribution, is often linked to production, but there is no reason for this as they are separate actions that can be taken with no consideration of one another. Alternatively, there can be linkages of many different types, set up by rule or custom. To be very clear, for each unit of production, there is some distribution of it. Who gets what, under what circumstances and who decides and who enforces these choices, mirroring what has to be defined for production.

For both production and distribution, there can be more or less centralization of the decision-making. Systems can be defined with as much decision-making down at the lowest levels, and alternatively, there can be a society-wide set of rules or instead, a set of decision-makers who make choices, revising them as they choose as well. If the society is working according to certain rules, what are they, and how are they changed with time, by who and in what manner. If the society has a group of decision-makers, how are they selected and how are they changed.

Consumption is the obvious third top-level category, but it does not have as much detail as the former two. With consumption, there may be some rules as to timing, as to when consumption can be done or how much product that is distributed needs to be saved or preserved, for those items which are not perishable in short periods. Rather than put re-distribution under one of the consumption options, it seems more coherent to put it in the distribution category, and leave only the choice of consume or save under the consumption one.

Rules for either of these three top-level categories can exist, meaning that, if they are complete enough, all the individuals can understand how these processes would work, if the rules are followed. Owing to the complexity of almost any society, the rules cannot be complete, and there has to be some method by which different interpretations can be judged. There also needs to be a choice of who codifies the rules, and how the society comes to accept them.

There would seem to be a blurry division between a set of rules that require some individuals to make judgments about their implementation, and a set of individuals who make decisions in lieu of rules. How much arbitrariness is allowed, or in other words, does the set of decision-making individuals have to follow some unwritten rules or customs, or can they just decide randomly? Another aspect is the complexity of the rules. If they are very simple, all can understand and remember them, but some interpretation may be necessary frequently. If they are very complex, few can be aware of them in all their detail, and there would need to be an available source within the society to know the rules and to explain some aspects of them when a situation arose that required it.

The implications are that someone interested in devising an economic theory cannot simply do that; instead a socio-economic theory has to be devised which has multiple social arrangements within it and many separate rules. It would be mandatory for the socio-economic theory to describe the decision-making hierarchy for deciding on production, for deciding on training, for deciding on distribution, for deciding on savings of production, for deciding on the production of productivity tools and their distribution or use. It would have to describe how enforcement power was arranged for and how it could be used, with details as to what limits would be necessary. It would have to describe how rules, if there were any, were to come into being, how they would be communicated to everyone who needed to refer to them, and whether the choice would be simple rules with a set of interpreters or complex rules with a set of explainers. Then the enforcement question relative to the rules needs to be answered. Once these choices were made for a socio-economic theory, the next level of details could be examined.

These requirements seem formidable, but if they can be done, there is a further question as to how could such a socio-economic theory be judged. If there were many of them, which ones might be preferable? What are the criteria by which such a theory should be measured? There are many factors that could be used to make a prioritization of such a set of theories. Finally, what would be the use of such a theory? If any society is already functioning with one, why would the status quo not be the most attractive? One that was already accepted and tested might have these grounds for being chosen. In other words, we are back to the question of what is the goal of a socio-economic theory? Perhaps it has no answer.

Constructing Taxes with Feedback

It is possible to balance trade in the way Adam Smith envisaged it, but it needs to be done with some clever methods of affecting trade.

Feedback taxes are those which have rates that change according to some condition, and could be used to drive that condition to some chosen value. They cannot be constructed without some thought, as improperly designed feedback taxes can have undesirable effects, such as instability or abuse. Here we will discuss the construction of one example, a tax on trade, which is assumed to be done for the purpose of driving trade between two nations into a balance, at least in some types of goods.

For an example, take the situation where one country wants to establish a trade balance with another country in manufactured goods. Exactly what constitutes manufactured goods has already defined by the customs laws of the first country, so there is no question as to what they are. Exactly what constitutes manufactured goods from the first country is also well defined by customs law, so the task remaining is to try and construct some taxation rule, perhaps with subsidies, that uses feedback to accomplish this task.

What is not desired is to have this balance be achieved by a ban on trade between the first country and the second country. While this would accomplish the stated goal of the tax, to balance the trade in manufactured goods between the two countries, it causes two problems, at least, or one problem with two aspects. This might be called the Adam Smith problem. In his famous book, The Wealth of Nations, Smith discussed how two nations might improve the welfare of both by each manufacturing what they did best, meaning for lowest cost, and then trading their individual products. This maximizes the total goods produced and the total consumption in each nation. Of course, this type of trade does not exist today, and it is replaced by a situation where one country manufactures all goods, trades them to the other in return for debt, which is gradually turned into ownership of property in that first country. Smith did not deal with unbalanced trade, and to take advantage of his insight into how to mutually benefit, it might be possible to construct a tax in such a way that it does not eliminate trade between the two countries, but brings it into balance in the sense that Smith envisaged it.

One aspect of the Adam Smith problem is that trade could be driven to zero by taxes that were too high. The other aspect of the Adam Smith problem is that some item, chosen by the first country as its desired manufactured good, would be produced at low quality, so to take advantage of the benefits of the tax law. The second country, in order to maintain some trade, might simply buy goods of low quality or with other flaws. This defeats the purpose of Adam Smith’s insights. In order to function, the tax would have to affect all manufacturers equally, to the same degree, so that competition would ensue between them. Competition would eliminate low quality production in favor of goods, by manufacturers in the first country, which were higher in benefit to cost ratio that others. So one guideline for constructing a tax is that it cannot be too specific, but must equally cover all manufacturing.

Specific item taxes are designed to benefit some individual manufacturers or some group of manufacturers, and do not conform with what Adam Smith proclaimed as a means for improving production in a mutual way. Protection such a tax might provide would serve other purposes, such as ensuring that some vital product was always internally available, and could not be cut off in an embargo by other nations. This does not necessarily improve the economic situation of a pair of countries that are affected by such a specific item tax, as would be the intention of a tax designed to utilize the benefits Smith deduced.

A flat level tax, such as 50% of value, has major disadvantages relative to one which has feedback built into it. When such a tax is imposed, it comes as a shock to the economic arrangements of those manufacturers involved. If the tax is across the board on manufactured goods, the shock is universal. Companies typically do not have such flexibility, unless they are extremely profitable, and can stand to work with substantially reduced profit. On the other side, imposition of a flat tax provides a shock to the consumers of such products, as the amount available would be reduced abruptly, as manufacturers cut back in response to less revenue.

There would be some adaptation within the trading market after the imposition of a flat tax. It might take considerable time for the market to adjust to this tax, as some manufacturers go out of business and others reduce production. Prices would also have to be adjusted, as there might be negative income when the tax is imposed. A new point where supply and demand balance has to be found. This point is not necessarily where productivity is maximized or the total benefit of both countries added together is maximized. Because the tax level chosen is arbitrary, it is very unlikely that it would happen to be chosen just where productivity was maximized. On the other hand, if the tax were adjusted frequently, this introduces such instability into the market that production would certainly fall. Uncertainty has costs, and these costs can undermine the profitability of even an efficient manufacturing firm.

One way to mitigate the economic shock of taxation is to introduce it gradually. A small tax to start, with annual increases, allows the manufacturers and consumers of the manufactured products traded between these two nations to know what their additional costs will be, and to therefore plan on this basis. This reduces the uncertainty. It does insist on changes in trade levels, with each gradual change in the tax rate. This cannot be eliminated as the entire goal of the tax is to change trade levels. Whether a single abrupt change can be tolerated is a question; slow gradual changes allow businesses to change what they manufacture, change customers, or make production changes that affect costs.

One way to approach more closely the Adam Smith ideal of each country manufacturing what they can most efficiently produce is to have a universal tax on manufacturing trade, with a gradual change, but one which is automatically adjusted in amount. The adjustment rules can be tailored to both produce balance in trade volume and be slow in changes to allow business planning to be maximized. Such a combination might look like this: an increase of 5% in each successive year until the trade imbalance drops below some threshold amount, then an increase of 1% in each year until the trade imbalance drops below a second threshold amount, followed by a change of 0.1% in whatever direction the trade imbalance indicates. In this final phase of the tax situation, if the trade from country two to country one is positive but small, the tax would increase by 0.1% each year until that reverses. If the trade from country two to country one is negative but small, the tax would decrease by 0.1% each year until it reverses. At the end of this process, the tax level would be fluctuating by a small amount each year, not enough to cause any significant disruption of business on either side of the trade exchange, but only affecting marginal users and producers.

The feedback trade tax is also resilient to changes in costs. If one of the two countries invents some novel transformation of the manufacturing process for some particular item, the trade would shift to take advantage of this transformation. If the transformation were done for a particular good which was highly traded, the trade imbalance might slip out of the final band and enter the second band, where incremental changes are larger. These incremental changes would accumulate until the entire spectrum of manufactured goods was adjusted, leading again to a balance of trade, but in a different allocation of products. Thus, the procedure is robust against any type of change.

If both countries adopted such a feedback trade tax, would there be any possibly different results? The problem with feedback taxes occurs if the steps taken are large. In this case there could be instabilities, resulting in taxes swinging wildly year to year. When both countries are introducing changes, this is more likely. The clear barrier against it is to have the incremental changes in both countries be small, so that if it happened that they both aligned, the changes would not be too abrupt.

The advantages of such a tax comes from its components. A gradual change allows business planning. A target value of zero net manufacturing trade allows the Adam Smith efficiency gains to be fully experienced. Tapering changes allows a stable state to be approached. Automated changes in tax levels allows changes in manufacturing efficiency to be accommodated in the most efficient way possible.

One way to gracefully accelerate the change to a balanced trade situation would be to take the tax collected and distribute it as a subsidy to those manufacturers in the first country who are exporting to the second. This subsidy would speed up the change to manufacturing larger quantities. Another way to make worldwide trade more efficient would be to apply a tax in the first country to all countries which trades with it. This would allow a more efficient distribution of manufacturing around the world, instead of only in the two countries in the example.