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?

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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.

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.

Law-Evaders Beat Law-Writers

A just deserts economic system, in which everyone is limited to their earned income, has inherent abilities to reduce corruption, largely because of the necessary economic transparency that is implicit in the system.

Everybody is somewhere on the spectrum between totally opposed to corruption, cronyism, nepotism and the like, and totally committed to tolerating a situation where certain people are using these political means to advance their own goals. You might say the extremes represent the optimists and the pessimists, with most people in between. At certain periods the center rises up to join the optimists, and some new laws get written for whatever system exists that will outlaw or make more difficult some form of corruption that was exposed. Then comes the long period during which the corrupt people figure out ways to evade the laws, come up with new ways for corruption to flourish, and after some time, things are right back where they were before the orgy of anti-corruption activity took place.

Law-writers work with an irremovable disadvantage, and perhaps more than one. Everything they do is open and clear to everyone, so that anyone seeking a loophole in the law can take advantage of them. The law is static and slow to change, but law-evaders can sometimes move quickly. They work in unseen ways, and can try anything they think of to evade the law.

Corruption is sometimes a ‘quid pro quo’ and sometimes direct nepotism. Direct nepotism is where a corrupt person with influence or decision-making authority decides that some individual will gain a benefit, such as a lucrative, do-nothing position, or a high-profit contract, or some other benefit where the personal slice is large. The individual chosen would not have received the benefit except for the actions taken by the corrupt person. In many cases, there would be no such benefit except for the actions taken by this corrupt person; in other words, the lucrative position was created solely for the purpose of satisfying the corrupt person’s wishes. This differs from a ‘quid pro quo’ example in that the person receiving the benefit receives it because of who he or she is, not because of what he or she will provide back to the corrupt person.

The other type of corruption is easily understood as a hidden trade of benefits. In the simplest instances, the corrupt person provides something to a donor, such as a tax break, a waiver of requirements for an activity that increases the profit on it, a pardon of some wrong-doing, a minimization of fines paid or time served, access to someone else corrupt, a re-writing of laws relating to monopolies or cartels or an order to not prosecute these, or any of a myriad of other things; in return the donor provides something to the corrupt person, such as a immense lecture fee, or a book contract with little requirements but a large advance, the ability to participate in a mock investment designed to be lucrative, the elimination of someone either physically or contractually, high-profit contracts for a company owned by a spouse, sibling or child, and many, many other options.

The last of these might be labeled indirect nepotism, especially if the beneficiary is not financially connected with the corrupt person, but it is better to draw the primary line between types of corruption between direct nepotism and ‘quid pro quo’ corruption as the distinction is more clear and more useful.

These are only the simplest options. There can be delayed benefits, such as a lucrative, do-nothing position for the corrupt person himself following his tenure in the decision-making role which affords him the opportunity for corruption. There can be three-way arrangements with a donor providing benefits for corrupt politician 1, who is the donor providing benefits to corrupt politican 2, who closes the loop by writing laws or making regulations or restricting law enforcement relating to the original donor. There is no limit on the variations in these schemes, and therefore, a group of law-writers who are interested in limiting corruption can outlaw some schemes, but more will immediately spring up. Where there are corrupt politicians, there will be corruption. Morality might prevent some individuals from corruption, but corrupt people will use corruption to replace these moral ones with others more amenable to the corrupt schemes.

Fortunately, the economic system of just deserts provides a substantial remedy for this situation. If total income is limited for every individual or household to some small multiple of the average income in the governed region, then there will not be enough in any single person’s pocket to make any substantial corrupt payoff. To see the extent and inherent limitations in this bulwark against corruption, it is necessary to consider how it might be evaded.

First, could there be small instances of corruption, where the amount involved was an almost negligible portion of the average income in the jurisdiction? This is certainly true, and indicates that what is done by a just deserts income limitation does not change morality, only the practical, over-all effects of it. Large corrupt contributions make the disparity between those only receiving their earned income and those who arrange systems within the economy to provide them with ten, a hundred, or a thousand times as much as any human being could rightfully earn. Morality is something effected by teaching people, often the young, about what is considered right and wrong within the society. Efficiency in the society is effected by establishing laws limiting income to earned income.

Second, could there be cabals which get together to amass enough resources for a large bribe, or its equivalent, which would allow them to receive some benefits beyond, perhaps far beyond, their earned income? The amassing of resources could certainly occur, but with a limitation of income to earned income, there are no avenues for moving large amounts of benefits to the members of the cabal. There are no avenues because to enforce a limitation of income, income must be known, as well as other data. This means economic transparency has to be universal.

Economic transparency has been the bane of corrupt people ever since there was central data systems which allowed it to be possible. There have been litanies of protest against economic transparency, by invoking trigger words such as ‘privacy’, but they do not amount to anything other than pleas to allow unearned income to be received without anyone being aware of it. Transparency does no good unless there is some means of using it for detection of prohibited income, and then taking some sort of action, judicial or otherwise, which overturns the forbidden process and reverses its effects. This means that there must be some agency which has the power to access this data, meaning that transparency is available at least to this agency if not to everyone, and which is motivated to find and reverse the results of prohibited activities.

It must be very obvious that if there is only one such agency, and only this agency has the authority to inspect economic data, they would be immediate targets for corrupt offerings. Once the agency concerned with ensuring has been ‘fixed’, then there is no further barriers to non-earned income enriching those who cause this corruption, as well as others. The situation would seem to be dependent on the degree of transparency, but it may not work that way. If the ability to examine income and other economic data is more widespread than just the agency charged with enforcing the economic rules of the society, and that agency does not take action, the population will very quickly come to realize that these rules are simple paper only, and have no meaning in the actual activity that underlies the society. The number of pessimists, as defined at the beginning of this post, will soon rise as more people become tolerant of what has become the unwritten rules of the economic life of the society.

So, if this agency is the keystone of any barrier against, not only corruption, but against any usurpation against the economic rules of a just deserts socio-economic system, how might it be shielded against corruption offers, as well as threats of a more diverse type? How might it also be protected against apathy, born of years of success in imposing these rules, both on the part of the enforcers, and on the part of the population? When a population passes through a revolution or a large change in the economic system, it might be largely enthusiastic about the new system, for a period of time, but then, as difficulties arise, or simply as years pass by, the enthusiasm dies away, and corruption begins to find a way to slowly infiltrating the system. Those who are in charge of enforcing the new rules grow tired of their tasks, and begin to think of the pleasures that a little unearned income might provide them. Thus, the aspects of disparity that were so striking and unappealing, which led to the imposition of a just deserts economic system, would fade away, and the very local considerations of a small amount of corruption seep in and begin the process of undermining the rules.

Thus, the problem of maintaining a just deserts, non-corrupt economic system may be just as difficult as the process of setting one up in the first place. Any effective socio-economic system must have some processes, like rotation of personnel, that militate against the boredom that would inevitably set in.

Corruption and its Cures

There are three main categories of corruption: political coruption, accepted small corruption, and individual corruption. Each can be mitigated.

It seems like a nice courtesy to define clearly and explicitly what it is you are writing about, as words are so slippery and full of alternate meanings. When a reader comes upon something that appears interesting, he/she may be carrying some baggage in experience, so that the meanings of the words, especially the topic words, may have different nuances or even serious differences in meaning from what the author intended. This means there is wasted time on both the author’s and the reader’s part, and we all despise wasting time.

By corruption I mean an individual with a hierarchical job to do, a job in a hierarchy, where he/she has a specific task to accomplish, altering his behavior so that some personal benefit will accrue to him/her or some one or some group that he/she favors. Consider some examples:

Example 1: A politician has input into tax laws and can insert a special clause favoring some tiny subset of people if he chooses, and it will most likely pass due to the methods by which laws are checked before being passed. The politician, in return for a contribution to his favorite charitable foundation, will insert a tax clause as requested.

Example 2: A judge in criminal cases has to choose amounts for fines for guilty parties involved with financial crimes. The amount could be equal to the amount gained or more, or with the right inducement, somewhat less, leaving a surplus for the benefit of the convicted criminal or his family, partners, friends, or whoever else was the recipient of the largess of the criminal before he was caught.

Example 3: A bureaucrat is responsible for completing forms for the public, relating to some function, like driver’s licenses, or registering a deed, or any of the hundreds of things a citizen might have to do. The bureaucrat ordinarily finishes his task within a month, or within a day if there is a gift included, such as a box of candy or a bottle of vodka.

Example 4: A building inspector has a long list of technical points that can be used to hold up construction projects, some for a long time and some expensive to change. For a bit of work on the inspector’s friends’ property, or some materials for such work, these technical points might be waived as insignificant or not safety-related or discretionary.

Example 5: A mid-level manager in a supply department of a large corporation has a selection of which supplier to use for some large purchases, but they are comparable. With the provision of an arrangement for a free dinner for the manager’s family in a top-level restaurant, the choice becomes straightforward.

Example 6: A professor is on the board set up to review new students’ applications, and for many students, a favorable choice by him/her will make all the difference needed between acceptance and rejection. Instead of sticking to academic or other university-related issues, the professor tilts his/her rating based on personal biases.

Example 7: A professional athlete manages to miss some key shots in a championship game, losing the match, which is much to the delight of a gambling syndicate. The syndicate is very generous in their expressions of gratitude.

Example 8: A fireman, finding a shoebox-sized metal container filled with currency, manages to get it away from the scene of the fire while the building burns down. The contents are not returned to the building owner.

These examples are only a few of the hundreds of possibilities for what might be included under the label of corruption. In the process of trying to find a viable new socio-economic theory which has more elements of fairness while not losing the positive aspects of older theories, what should be done about corruption? Which types of corruption should the system be designed to minimize? How should this be done, and what might be the cost to the system of having anti-corruption measures installed within it?

The first level, in the first example, might be referred to as political corruption. The quid pro quo by which a politician might be influenced can range over a tremendous domain, involving third parties in a variety of ways. All would be legal in the absence of a specific agreement to take some political action in return for some other action. Specific laws might be written to control some particular one type of action, but since there are literally hundreds of options, these laws can easily be outflanked. Only by going to the common core can they be controlled as a body. There must be laws of just deserts which control the common core, which is excess inequity of wealth and income, which makes possible political corruption. If wealth of any household is no greater than, say, five or ten times the average, there is no surplus available for corruption. If the income of any household is no greater than a similar ratio from the average, there is no opportunity for the products of corruption to be realized by a household that is a beneficiary of some potential corrupt political act. If these two measures do not exist, then corruption will find a way around any existing structures to make the inequality greater, and the feedback effect will take over and lead to great inequality.

The solution, in fact the only solution, to political corruption is the same as the regulations or laws or what-have-you that relate to income outside of corruption. With investment following a Churchillian directive, and unearned profits being taxed and used for the good of those whose work earned the benefits, and human labor being recognized as impossible to vary in value by more than a factor of five or ten, then corruption would be intrinsically controlled.

Judicial corruption, as illustrated in the second example, is almost eliminated by the same cure as political corruption. When no party to any lawsuit has excess wealth or income to use for corruption, and no defendant in a criminal case has excess wealth or income for use like this, there is little opportunity for corruption to exist. A related question concerns corruption involving corporations. Would the legal counsels for a corporation have motivation to do judicial corruption? Perhaps if their income might be diminished by a factor of two if they did not, they would. A corruption corporation might arrange to have a judge get a delayed promotion in return for a favorable or slanted verdict, so the possibility does not disappear, but only diminishes in range.

Transparency is often described as a mitigation for corporate corruption, including that which occurs around a court case, but just as individual corruption in a world where extreme inequality exists can find clever ways to occur, so might clever ways to disguise payoffs be found. Having independent watchdog agencies to monitor corporate finances and behavior is often touted as another means of curing corporate corruption, but the response to this is to corrupt first the process of monitoring as well as influence the regulations for transparency, thus enabling further corruption to go forward. Perhaps layers upon layers of watchdog organizations, which monitor transparency as well as behavior, might be necessary.

The remaining six examples are simply illustrations of individuals doing small-scale corruption of differing varieties. No high-level formulation of a socio-economic system is going to eliminate the possibilities that exist here, but there is one essential and very important difference. Examples 3 through 6 can exist in small numbers, as exceptions to the general way that people in these positions behave, or they can be the more-or-less accepted way of behavior, that no one quibbles with but just lives with and works around. To have a society that operates efficiently, and in which people are supposed to receive benefits according to the effort they expend and the talent they accumulate, then the routine acceptance of corrupt behavior on a small scale cannot be accepted. This means that not only will there have to be laws regulating it, there needs to be public awareness that such behavior is not accepted. There has to be methods by which it can be reported, and there must be organizations that are held to high standards that investigate it and work to diminish the amount of it until it only exists by exception, not by routine. Once this is done, the socio-economic system will be largely free from corruption.

It is much more important that political corruption be ended, by instituting just deserts taxation of excess capital gains and income, including all devices used to hide it. This type of corruption, once it becomes well-known, is like a poison in society, and would be used to justify all other types of corruption. The role of high-level examples in society can be great, and if there was transparency in this area, so that all political figures were known to be operating with no corrupt payoffs, neither to themselves or to those they favor, then low-level corruption would be easier to have reported and ended. So, from a top-down fashion, corruption is at least viewable as a curable disease, as long as the just deserts medicine can be made to be tolerable.

Unearned Income and Winston Churchill

Churchill wanted to put a tax on land sale profits, in a specific way, as he felt some were unearned and therefore more deserving to be taxed away. This concept is intriguing, but regrettably not the Rosetta Stone to a new system.

The term “unearned income” became famous with economists David Ricardo and Henry James, who used it to denote the appreciated value of property which was not from development of itself, but of the surroundings. The idea was that this was done without any significant contribution by the owner, yet he or she reaped the lion’s share of this appreciation. A very famous speech by Winston Churchill in 1909 is often quoted to define the problem, if there is assumed to be one, with a landowner making possibly huge profits on land without having exerted any effort whatsoever to receive them. Instead, Churchill spoke about the profit arising because of the labor and expense of the general community surrounding the property, near and far, who improved the potential utility of the land without any development of it having been done. Churchill favored that the unearned profits from the sale of such land be taxed by the state and used for the good of the community, whose efforts produced it.

The general principle of taxing unearned income more than earned income has received support from many quarters, and seems to be an acceptable principle upon which to base a taxation system. However, there has been no end of controversy and change in what is considered unearned income. This blog has as a goal, a better way of defining it, and a better way of taxing or otherwise regulating it.

It is a natural way of human existence to avoid tax, and tax avoidance mechanisms are as ubiquitous as tax plans and almost as prevalent as tax payers. Even more prevalent are the paid experts who promote the income and wealth of their sponsors as earned, or whatever label receives less opprobrium. The same experts are at the ready to explain or rather excuse any tax avoidance scheme in terms relating to personal choice or corporate advantage or professional practices or some other rationale for its use, other than stating it to be exactly what it is. In contrast, there are a few individuals who simply label tax avoidance schemes for what they are, and state they are proud to have located and made use of them. All this obfuscation makes it somewhat difficult to exactly define what is ‘unearned income’, if there is anything like this, and what should be done to tax or regulate it. To deal with this murky situation, some basic principles need to be enunciated.

The first point to be made is that unearned income does not exactly exist. All income is partially earned and partially unearned, and the difficulty is in deciding how much of it is one and how much is the other. The land value appreciation gain that Churchill spoke about is one of the easiest and simplest ones to describe as it is almost binary. In Churchill’s picture, the value gain is unearned if the landlord does not develop the property, but the development, if it appreciates, produces earned value. Things aren’t binary in economics, but quantitative. The landlord invests his money in a piece of property, and could have instead put the money into a CD or some other investment. The lack of interest paid for undeveloped land represents a loss, as compared to the interest from other investments. Annual tax, even if small, represents another cost of holding the property. Thus, taxing the gain of a piece of undeveloped property at 100% would eliminate all potential interest in such investments. However, a tax at 100% of the amount over some multiple of the average gain of investments, plus tax costs, would be a better approximation to the return of unearned income back to the community which created it. What multiple to use is debatable, but it should not be large, perhaps somewhere between one and a half and four.

Churchill also used the same speech to promote the annual tax on a piece of property, as distinct from tax on the appreciation recognized in a sale, as dependent on the potential value of the property, as opposed to its original value. Sometimes and in some places, the exact opposite is done; zoning is a tool for maintaining artificially low appraised values, and limits on tax appraisal changes annually is another. The taxation on an annual basis, as opposed to the tax on the sale profit, is simply a moving in time of the amount of the taxation, if the mathematics of tax rates is done correctly.

The label ‘monopolist’ was used in Churchill’s speech, and this again is because of the nearly binary nature of land. There is little land created on the planet’s surface, and only by reclaiming wetlands, dredging dirt for use in artificial islands, or using polders to force back the sea. One can claim that a particular piece of land is held as a monopoly, if it is in a particular location that cannot be bypassed, but otherwise, land is somewhat fungible. The owners of all the land in some particular location might be said to have a collective monopoly, but so could all the owners of a particular stock or anything else. Supply and demand slides into monopoly as the owners form a cartel to dissuade individuals from selling before some process increases the price substantially.

A real monopoly would exist if some individual or band of individuals obtain rights to all of some land, just as they would if they had obtained all the rights to some resource, like oil, or some invention that was patented or some drug which was likewise limited. These monopolies have not been similarly singled out for extra taxation, as Churchill did with land, but they could be with similar justification. The basic point of the singling out needs to be clearly stated. Churchill felt that there was little justice in allowing unearned income to be lightly or inconsequentially taxed, but he felt that justice was done better with a mere 20% tax on land profits. Others have written that societies need to harness the labor, capital, land, and resources they have available to them so that these four quantities could be put to the best use in increasing the living standards of the population, or at least some of them. The Churchill 20% tax would not do that.

In designing a new socio-economic system, or even trying to see if there are any better ones possible, it is necessary to be specific about the goals of the society. Should this goal of increasing the living standards of some subset of the population be one which shapes all the tax and regulation policy of the governance mechanisms? This one, as are most others, has some appeal to it, but like all goals, it is arbitrary as well as being poorly defined. Should a socio-economic system be defined by setting down a few goals and then building up the details of the system to accomplish them? Soviet communism had a simple slogan, something about changing the distribution of the products of society to be based on needs rather than productivity, past and present. Other systems have had slogans as well. The alternative is to be more Churchillian, and stick with what we have but modify it a small amount in the direction we think would improve it.

These are just two of the many ways to conduct planning for a society or for a project or anything else. One is to set a destination, which might be listed as a set of goals, and then try to get there. The other is to keep doing exactly what is currently being done, and just make small corrections. Both work well in many instances. The first one is more appealing if the general opinion of the existing socio-economic system is negative, and then a new plan or a new set of goals might be chosen to break away from it. The second one, obviously, has appeal in the inverse situation, where the general opinion is that things are not so bad, and can be corrected. The second one also arises in the instance where it is recognized that no one at all can figure out how to design a new socio-economic system from scratch, and that any system should have some experience with it before it is adopted. Since one cannot experiment with a whole society, it means that there is no way to make a new socio-economic system that is acceptable to the population. Theoretical justifications as to how a system would work are not likely to be correct, as there is no body of experience and no general theory of sociology and economics which would assist a team of designers in figuring out the details of the new system.

Are these latter opinions justified? Is it indeed impossible to come up with a whole new system, and the best that can be done are minor course corrections, perhaps a large amount of them in an never-ending stream. How exactly would we know if minor course corrections will take us in a desired direction or steer away from it or lead us into unknown territories, if there is no competency in sociology and economics? The lack of experience and the lack of theory seem to be an inhibition to small changes, as well as to large ones. So, let’s just keep trying.

The Basics of Capital Formation

Capital formation has to be understood in order to be put into the proper place in a new economic theory. Just as with other concepts in economics, such as debt, there are details which obscure the actual nature of capital formation. These details need to be cut through in order to develop a good new economic theory.

Capital will be defined here as physical capital, including anything needed to increase productivity of labor. It includes a wide range of items, which are not usually lumped into one category. It includes tools for craft work, ranging from a hammer up to a robotic assembly line. It includes transportation items, including vehicles for transporting goods up to cargo aircraft. It includes communication, from post offices to communication satellites.

Many of these items are dual use, meaning they serve consumption uses as well as production uses. This is especially true with transportation and communication. There is not much difference between transporting a 75kg person on vacation and a 75kg person going to work and a 75kg box of commodities. Separating out these uses takes a little diligence, but that is a task for another day.

Besides physical capital, there is knowledge capital, which is the information needed to build the physical capital, to maintain it, and to operate it. It has to be generated and it has to be preserved before being put into use.

Both physical capital and knowledge capital have to be paid for, or “formed”. For a long, long time, the metric used to measure these has been labor. A field plowed in ancient times by humans pulling a plow might look the same as a field plowed by a plow pulled by an ox, but the custom is to say that there was more labor in the first field, and less but more productive labor in the second field. If there was some measure of the value of the plowed field, and the first one took six man-days to do it, old economic theory might say the value of the labor for a day was one-sixth of that of a plowed field, and if the second one took one man-day to do it, that the productivity of that batch of labor was five, induced by the capital of the ox and the associated ox-driven plow, together with the knowledge capital of how to maintain oxed and how to plow fields with them.

The simple example illustrates the ghastly mess that traditional economics finds itself in. There are no good metrics. Because so little can be comparatively measured, the task of measurement becomes a problem for society, and the introduction of money is treated as a solution for this. If there is a large enough community, and plowed fields become a category of exchange, there can be a translation of plowed fields into currency units. Then the value of the plowed field can be defined in economics as whatever someone pays for it. There are multiple obvious flaws with this system of valuation, and they undermine any theory of economics, and any discussion of capital formation. Some sort of market trading everything is a mandatory requirement for setting the value of things, and only certain types of markets will suffice.

The existence of a monopoly or cartel on any type of goods or services destroys the concept of value for necessities, as the holder of the monopoly or the cartel participants can choose a range of prices and have them paid, meaning the value of this good or service is not well defined. For goods and services that are not necessities, there might be said to be a tradeoff between alternate consumption items which fixes the transitional value of an item. If the monopoly controls a whole set of alternate consumption items, such as all foods, we are back to the lack of value situation.

Markets have only existed for certain items in history, typically long-distance trade goods. The distribution of consumption goods was handled in a different way, up to a few hundred years ago in some places, and up to a shorter time in others. Instead, there was a social hierarchy, and the responsibility of the higher levels was to ensure that the lower levels received a share of consumption goods. Let’s call this situation, a pre-market situation.

In a pre-market situation, capital goods had to be provided for out of the share of consumption by those making the divisions. Those making the divisions could simply order the distribution of labor to be such that capital goods were produced by some fraction of the population or by some fraction of the population’s labor time. Alternately, some fraction of produced goods could be saved and given over to a subset of the population for the purpose of supporting their efforts at capital formation.

In the market situation, capital goods were part of a market, and so some consumption goods could be used for the production of more capital goods, by the choice of those who participate in the market. In both the pre-market and market situations, capital formation was subtracted from current consumption. The decision making as to how much of what capital was formed depended on the vision of the decision-makers, who implemented their decisions either through a command hierarchy or through a market choice, or a combination of both. The combination occurs when a leader of a group, call it a company but it could be any group, participates in a market to obtain some precursor materials, brings them into the company, and then commands some of those in the group to produce capital goods out of them instead of producing consumption goods.

Markets are not necessarily better at deciding on value than command decision-makers. Those who participate in markets are limited by the information they possess, by their ability to consider the variability of future events, by their personal preferences, and certainly other factors, just as are command decision-makers. Markets in stable situations might tend to produce some values for items, perhaps optimal in some undefined sense, but in stable situations experienced command decision-makers also do much better. Monopoly effects ruin markets, and a large command hierarchy might avoid this peril, but it has its own perils.

There would seem to be a different source of values, and that would be the preferences of those who make command decisions or who participate in markets. Their vision as to the utility, in the longer-term, of capital formation has an important influence on the growth of capital within some area. A decision-maker who sees some utility in more capital formation can use a market or the command hierarchy to attempt to form this envisaged capital. Having such a vision distorts the market somewhat, and influences the remainder of the command hierarchy.

Thus, capital formation happens, not by some magic in a market, but from a vision of a high-level decision-maker, who does two things mentally. One is to envision the result of diverting current production from current consumption into capital formation and to see that the longer-term result is preferable. The other is to assess alternate uses of diverted current production, for example into inventory to average out production over some future period, and to compare this use with that of capital formation. The decisions are all about long-term benefits versus current consumption. The decision-maker must also assess the needs of the population he takes responsibility for and their desires as well, and make a decision as to how much current consumption can be reduced to pay for either capital formation for enhancing long-term productivity or other expedients for easing potential hardships such as the maintenance of an inventory.

Sometimes the vision of a particular decision-maker might be accurate, sufficiently, to produce some long-term benefit from the diversion of current consumption. Alternately, the result could be desultory and produce little for future consumption. This is often denoted as the risk involved in decision-making.

Decision-makers can make inaccurate decisions, however we might measure inaccuracy. If they have advisors who have more, and more diverse, experience, there could be an improvement in accuracy. One of the advantages of the last century stock market is that investors would seriously investigate a company before buying stock in it, and the stock price then represented information for the decision-makers in the company that they might use. The institution of the board of directions might have been founded for just such a purpose. Of course, stock markets can just become a means of gambling, satisfying whatever emotional needs gamblers have.

For a new economic theory, what has been discussed here is important. It means that the choice of decision-makers and advisors is critical to the success of a society following the new theory. These decision-makers make continual decisions as to the allocation of current production, into a variety of possible capital formation options, as well as many others. How the consumption fraction for this allocation is obtained is less relevant, as it might be from something labelled a tax or a mandatory investment or a mit’a, a mandatory labor allocation used by the Incas, or temporary conscription, or something else. The principal issue is the selection of the decision-maker, their education and experience, and the domain over which they make decisions, and the scope or depth of their decision-making in the hierarchy. Just as debt is only one means of allocating current production, mit’a and other mechanisms are just particular means of forming capital. What matters in an economic theory is not the details of the mechanism, but how the current production is allocated. A good economic theory is one in which the best decision-making for this allocation is ensured.