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.

Centralization and Decentralization

Centralization of decision-making has obvious advantages but also some serious catastrophic failure modes. How can the degree and extent of centralization be managed in a socio-economic system?

In designing a new socio-economic system, hopefully free from some of the built-in catastrophes of previous inventions, one important question relates to the centralization of decision-making. The opposite is decentralization, but there is actually a continuum of alternatives lying between these two extremes. The continuum extends in two dimensions, both in the degree of decentralization, meaning the level in a governmental hierarchy where decisions are made, and the scope of decentralization, meaning the number of different decisions that are being considered for centralization. The oversimplified answers are to centralize everything to the highest level or to decentralize everything to the lowest level, and like all simple solutions to complex problems, they are designed to ensure the built-in catastrophes will happen. To minimize them, something different is needed.

What goes wrong with centralization of decision-making? The same problems exist with any monopolization of control. The person or persons at the top, making the decisions, don’t make them well, and then everyone affected suffers from the choices. The first reason that centralized decisions might be poorly made is uncertainty. If the information necessary to make the best choice is not available to the decision-makers or their subordinates or advisors, then they are forced to make an arbitrary choice. If the decision-making were decentralized, there would be many different choices made, and after a period of time, the results of these different choices would be available for comparison. The best could be evaluated, and more information used for future iterations of the decision-making. This would imply that decentralization might be a good temporary expedient to use until the data was in and the best choice was clearly visible, but the counter to this is that conditions change, and therefore what constitutes best might change, meaning evaluation via decentralization is needed again. The conditions might not be the thing that is changing, but the alternatives might be, as new ones are devised and made available for widespread use. Thus, in a stable, unchanging situation, centralization might be a good decision from the single point of view of efficiency, but not otherwise.

The second problem with centralization of decision-making is the drive to uniformity when uniformity is not the best solution. It is easy for a centralized decision-maker to do some sort of evaluation and make a choice that will be implemented everywhere. However, this is based on the assumption that there is a universal best choice. What is best for one area or for one group or for one time might not be best for another area, group or time. This is referred to as the local conditions situation. For centralization to work well, there would have to be knowledge of how local conditions affect the outcomes of a certain decision, and that local knowledge would have to be available to the centralized decision-makers. Efficiency takes a hit here, as the evaluation of a set of alternatives would have to be done considering the variations in local conditions. Uniformity has a great appeal, as do all simple solutions, but it is often a totally false assumption that uniformity would produce the best results in all conditions. Even what is defined as best may differ when different locations, groups or times are considered, and if the definition of best varies, then uniform solutions cannot hope to achieve this local best except in fortuitous circumstances.

The third problem is actually a set of problems collected under one label, and the label is corruption. It is so much easier to have corruption in a centralized system than in a decentralized one, as a monopoly of control can be exploited by the individual making the decisions at the center of power. Corruption does not simply mean that the decision-maker takes some benefit in order to make a decision favoring a particular party. This is only one of the many facets of corruption, and perhaps the most well-known and appreciated one. However there are more. A centralized decision-maker can have a different agenda that the one appropriate to his position. The centralized decision-maker might have his/her own interests at stake, and therefore seek to have some benefits received for making a particular decision. The ways in which this could happen and even be disguised are manifold. But the agenda the centralized decision-maker has might not be oriented around maximizing his own benefits. After all, benefits are asymptotic in that more and more of something often produces less and less enjoyment and appreciation. They are psychological individuals who feel good about counts of things, but for many individuals, they obtain their enjoyment other ways and tilt their decisions according to these ways.

One is simply the human lust for power. The ability to control aspects of the lives of others provides enjoyment to others, and has for the entire history of humanity. This might explain the desire for the monopolization of decision-making, but it does not portray the whole spectrum of agendas that a centralized decision-maker might have. One is a hidden antipathy to some location or group. Decisions can be made which disfavor the location or locations or group or groups that the antipathy is directed toward. The more subjective the decision, the more that antipathy can be concealed.

The inverse is just as possible. Nepotism toward one’s family or friends might be fairly obvious, but nepotism toward some location or group, the opposite of antipathy, can also be easily concealed.

Furthermore, it does not have to be simply antipathy or nepotism which drives the decisions of a centralized decision-maker, it can be a preference for control of some particular aspect of the lives, of everyone affected or of some subset of the population. Decisions have side-effects, sometimes dramatic ones which in the long-term diminishments overwhelm any short-term benefits. A corrupt decision-maker can promote his preference of opinions by shifting the choices he/she makes. Over the long-term, these effects would be felt.

Self-benefit, antipathy, nepotism, and side-effects are not simply present in top-level decisions in a centralized decision-making arrangement; they can appear at any level. If decisions of a certain category are decentralized to some lower level, the exact same phenomena can appear at that level. It would not have the wide-ranging effect that a single monopolistic decision would, but it would still have a local effect. Preventing this might be seen as one justification for centralizing decisions. Local corruption is overridden by higher-level control. Unfortunately, the higher-level control is just as prone, or possibly more prone, to corruption. There are other means that a newly designed socio-economic system can mitigate corruption.

One is transparency. Transparency is easier to obtain at small local levels, where interpersonal contract is common. Knowing someone as an individual is more likely to reveal their tendency toward corruption than only hearing about a decision via some disseminated ukase. Establishing transparency at high levels of concentrations of decision-making power might be very difficult, and can be countered by having specialists at providing deceptive façades for the justification of all decisions. Investigation of such decision-making by other specialists, perhaps self-appointed ones, can be made difficult by the denial of access or simply by having a unified front of interface people, all of whom are familiar with the façades.

Thus, there are tremendous disadvantages to centralized decision-making, but there is one advantage that is similarly huge: efficiency. If the same decision has to be made thousands of times, as opposed to once, it stands to reason that the same level of attention and scrutiny to the details of the decision cannot be afforded. A centralized decision-maker can have a large staff devoted to a single decision, and even with this, the costs of making the decision once are much smaller than making it at the lowest level of governance. To make a decision properly, in a complex situation, there might be much academic or otherwise collected information and theories to be located and digested. It might be necessary to hire a specialist with a background in some certain area to review this data, and it might even be necessary to have a team appointed to do this. The costs of a decision are not the same at the lowest level and the highest level, as there is considerably more data to analyse when considering a decision that would be implemented on a very wide scale, but the costs do not scale up proportionally with size, perhaps increasing instead only logarithmically. It might well be that at the lowest levels, the cost of an objective decision are simply too high, and some subjective choices would need to be made. Perhaps the solution would be to copy some other location’s decisions, or to keep the prior decision barring some obvious failures, or to simply make a haphazard choice based on incomplete information and inadequate models and interpretations.

There are some clear antidotes to the poison of corruption and the poison of inefficiency. One is to make decisions at the lowest level where the resources would be available to make a thorough decision, perhaps not at the highest or lowest levels, but somewhere in the middle. The other would be to invent methods of ensuring transparency, and of training sufficient specialists that there is no shortage of people able to investigate decisions. Perhaps jocularly, another solution would be to raise everyone up in the society to expect corruption of various types to pop up everywhere, as well as inappropriate subjectivity. People tend to be raised in a trusting environment, without adequate warning and training for the situation that exists in the real world, and countering that some formal way might provide another mitigation for the problems of centralization and decentralization.

Monopoly Taxes

Monopolies are ubiquitous in a socio-economic system, and should be treated from the first in designing such a system. This post discussed their variety and a means of taxing them so as to minimize the negative effects.

A monopoly is a corporation or interconnected group of corporations acting together who control a large fraction of the market share of some class of product. One could have a monopoly in a commodity, such as corn or steel or lithium, or a manufactured product, such as the works of Mark Twain or cell telephones or automobile exhaust systems, or even services, such as plumbing or visa applications or computer repair. These are examples of the class of products, or services, which could be affected by a monopoly. They could also be wide-ranging in scope, such as with a supermarket corporation which controls all imported food, not some individual food commodity, or a fossil fuel corporation, or a electrical energy corporation or many other examples.

Monopolies might be good as they could be more efficient than a myriad of other smaller companies which together met the demand for the product, or provide less expensive products, if they were able to use monopoly strength in the inverse direction, such as by demanding from non-monopolistic suppliers that they maintain low prices. They could have superior products, as if they demanded employees or subcontractors to have a high level of education and experience, as with electricians and doctors. They could have less environmental burden if they occupied less space with some centralized distribution network. Surely inventive public relations people from monopolies could come up with even more benefits.

Monopolies might be bad as they could raise prices and profits on the products they supply, as they were free from the effects of competition, or free to a sufficient extent such that their benefits outweighed their non-competitive pricing. There could easily be a time effect, with a particular monopoly using the benefits, as seen by consumers or clients, during the period of formation of the monopoly, and later a net deficit, as the profiteering from these same customers and clients became more and more dominant.

In a novel economic system, being designed to provide benefits across society, what should be the treatment of monopolies? If the government or governments in the jurisdictions being considered become involved with economics, they could well encounter monopoly situations, and may want to decide on some regulations. What to do?

There are two feedback loops involved here. One involves the growth of the monopoly. As it becomes larger, mastering a larger share of some particular product, the benefits may kick in, and its efficiency may assist in eliminating competition, simply by being more efficient or convenient for consumers and clients. The other effect that happens is that they obtain more economic power, such as saved capital, which may allow them to purchase their competition, or otherwise influence them to go out of business or merge. This can happen if monopoly effects occur in one geographic location first, allowing the amassing of capital, which is then used in another geographic location, and then another, enlarging the area where monopoly effects occur.

The second feedback loop is the typical one where the corporation begins to suborn the politicians involved in governance, so that any regulation to remedy the ill effects of a monopoly is thwarted before it is ever begun, as the corrupted politicians simply use their own public relations messages to obscure its existence or otherwise excuse their failure to take actions. Thus, two strong feedback loops serve to initiate and encourage monopolies to come into existence and grow and eventually take over the market for some product.

Infrastructure costs can assist in the formation and activity of a monopoly. If the initial costs of a transportation network, such as an airport or highway network, or a distribution pipeline, such as for water or electricity or information, or a collection system, such as waste disposal or a stock market, are very high compared to the remainder of the costs involved, no competition can afford to build a similar system, and if the infrastructure is owned by some entity that also provides services or products via the system, a monopoly is immediately in force, even without any other actions on the part of the provider. Thus there are two distinct classes of monopolies, one which is thrust into being by the necessary existence of a single network of something or other involved with a product, and another which arises without the aid of any item of infrastructure.

There may be other classes of monopolies which depend on the unique existence of some single item. For example, if there is only one known mine of a particular ore that has sufficient content of a particular commodity, and the mine is owned by one competitor, an instant monopoly exists. The same happens if the number of mines is plural, but they are all owned by one competitor, or one competitor makes covert arrangements with the owner or owners of the mines which will lead to the generation of a monopoly and the subsequent enlargement of profits for all those involved with that commodity. If patent or copyright laws disallow the use of some unique information, this is also an instant commodity.

Regulations, perhaps written by those politicians with close connections to the purveyors of a particular commodity or a service, which control the sales of it, might serve to create a monopoly. There might not even be a corporation involved in the commodity or service, just a number of individual purveyors who prefer to have entry into the group of those allowed to purvey the commodity or service limited to numbers which ensure high profits or costs to that limited number. Thus commodities can arise from limited and controlled supplies, which might be something as physical as a mine or something as intangible as regulations. This latter effect might actually be involved with improving the quality of the commodity or service, or might only be involved in giving the impression that the quality of the commodity or service is improved by the regulatory throttling of the supply. This is another effect of a monopoly that does not necessarily fall into the beneficial category or the malevolent category, but somewhere in between.

What should a socio-economic system do about such monopolies? They can only come into existence if the governance either organizes them or otherwise condones them, as with almost any other good or bad effect in the system. The socio-economic system has to work in such a way to foster monopolies for them to come into existence, and there may be multiple components of the system which have to be involved, such as finance or communication or regulation. It is necessary to go back to the goals of the socio-economic system to find out if monopolies, or a particular one, has a net benefit according to these goals. If unlimited inequality of benefits received is a goal of the system, support for monopolies would be the consequence of that choice of goal. If limitations on inequality of benefits received, distributed and consumed is a benefit, then some monopolistic arrangements might be negative in net benefit. Like everything else in a socio-economic system, the arrangements that are best are wholly dependent on the goals that are chosen. As noted elsewhere, fundamentals of the system are the allocation of benefits and their total quantity, and other goals that might be chosen, such as the ratio of manufactured products per total energy consumed, don’t have the tight connection with the population being served.

To solve the negative aspects of monopolies, government regulation can be utilized, where regulation might include both taxation and permissive or mandatory laws. Taxation is a flexible tool, as monopolies are usually involved with the provision of necessities to the population, and permissive and mandatory laws tend to interfere with it in a less gradual manner.

One form of taxation might be a simple tax based on market share. If a list of commodities can be created, and the data collection capability of the region is sufficient, market share by entity, corporation or partnership or anything else, can be calculated and a tax level on revenue or profit can be established to accomplish some aspect of the goal of both maximizing quantity of the product while ensuring its allocation is not too exclusive. Taxes on revenue is more effective as profit can be disguised very easily if management and ownership are not separated, as an individual can receive either a bounty based on fractional ownership, if that is not taxed too highly, or he could be granted a position within the entity and paid a large salary, if that is not taxed too highly. It must be remembered that human beings within a socio-economic system will incessantly game the regulations, so some ingenuity is needed to prevent the more obvious gaming tactics from being universally employed. Of course, corruption must be dealt with in this area as well as in every other area, where corruption is defined as the seeking of personal benefits by someone charged with promoting society’s benefits.

An example of a market share tax might be one on, say, the distribution of natural gas. In a region where there is only one supplier, meaning the whole region is supplied by a single corporation, there would have to be first the opening of opportunity for competition, by the ownership by governance of the means of distribution within the region and the delivery to the region. Then competitors might be taxed so that competitors with revenue under 10% of the total market share were taxed not at all, and a positive rate applied, related to higher market share. The rate would steepen as the market share approached 100%. The taxation rate curve as affected by market share would have to be chosen so as to encourage competition, in other words, to overcome the feedback effects of market share, which eventually tend to produce a monopoly and its excesses.

Any such taxation scheme would involve the definition of multiple quantities, such as the region served. And such definitions would affect the profitability of the corporations involved, and therefore would be subject to the possibility of corrupt dealing. Thus, some standards would need to be found that could be applied in default, with some requirements for special justification for deviations from the default standard. Like everything in a socio-economic system, complexity abounds.

Debt and its Administration

If there are to be public agencies involved in capital formation, they need to have some method by which corruption can be avoided. Perhaps there is only one.

In a different post, debt was debunked as an important consideration in economics. It is just one of many accounting rules that affects, along with the others, what the distribution of the products of a society is. Debt may have an interesting history, but that does not make it special in the bin of things that affect distributions. Why it is singled out for such prominence does not appear to be obvious.

Like every other transaction, debt is a two-sided one. Some access to society’s products is transferred from one individual to another when some new instance of debt is thrown into the accounting mix. In other words, some products, perhaps unspecified, are transferred from one individual to another. Since society is composed of individuals, they are the only consumers of products in the final analysis. Groups of individuals can be given many different names, and then the group can be the recipient, but the group’s allocation is transferred further to its members, according to whatever rule the group has chosen to use. The ramifications of some group’s ownership of rights to some of society’s products can be onerous to list, involving contingencies, inheritances, rights of refusal, and anything else clever people can think up. These do not need to be considered in the overview of a new economic theory. The point is simply that there are products and individuals to whom they will be distributed.

One of these groups can be a nation, meaning some geographic body of land, and all those who have rights to some products owing to the nation. Those who have rights is a group which is figured out by those who have rights to do so, and these typically are the same thing. In other words, it is a circular loop. Citizens, if we use that term to represent the individuals with claims to the products of this particular piece of land, determine in one way or another, their own membership in the group. Again, clever people can think up all types of ways to make such a membership complicated, but again, it is of no consequence to the creation of a novel economic theory. Most groups have some rules by which existing membership controls new membership, so nations or other blocks of land are not much different from other types of groups. The labels for membership are different, but the concept of membership is simply that.

Debt is a transfer of some particular formulation of product access rights from one individual to another individual, or perhaps groups of individuals on either side of the transaction. It is a curious thing that when the groups are large, like nations, or with obscured membership, like banks, there are statistical lists of the amount of debt granted. Likewise, for individuals and most groups, there are lists of debts owed that can be accessed under some conditions. The other side of the picture is not so transparent. Individuals who have granted debts to others do not have this publicly listed and available to anyone wishing to enter into a transaction with them. Thus it is hard to know what the average creditor has for debt. This means that while some statistics are available on debts owed, there are less on debts owned. Although this may be curious, it does not affect any development of an economic theory.

One aspect of debt that may differ from some other rules is the clear specification of timing of transfers. All transfers have some timing requirements, for example, taxes need to be paid by some deadline. Debt has deadlines for making some payments that can be more extended than others. This has use for some business arrangements, and for some personal situations.

An economic theory needs to cover capital formation, motivation, efficiency and productivity, and distribution arrangements. There can be no debt granted if there has not already been some capital formation. Capital formation comes from distribution arrangements. If some individual or group has not been granted an excess of society’s products, they will not have the capital to grant a debt. So, prior to the institution of debt, there has to be some arrangements for some individuals or groups to accumulate more than an equal share of society’s products, or else some individual or group has to reduce their consumption below what their allocation is, and thus save some capital. This is the heart of capital formation: some individuals or groups must consume less than they are allocated, either by them receiving an excess of their consumption rate, or by them reducing their consumption rate below the allocation rate.

Debt is granted for charitable causes, to assist some individuals or groups, or for profitable causes, so that the grantor can in the future possess even more of an excess of goods over his consumption rate. This latter situation is one of the positive feedback loops that leads to ever-increasing disparity in the distribution of society’s products. Determining how to adjust these loops so that the goals of maintaining and improving motivation and efficiency is a principal goal of any economic theory. One way, no limits at all, has been experimentally tried for a few centuries and it leads to extreme disparity which stifles both motivation and efficiency, as well as undermining the stability of whatever social arrangements were used to support this process. Another way has been tried for a few decades in a large arrangement, and in small situations for much longer, and that is to abolish it. This leads to shortage of capital formation, as well as eventual motivation disarray. So it is clear that some middle way is necessary.

Middle ways have been tried, and they can only be tried when some governance exist with the power to overrule any arrangements made between individuals and groups, so as to further efficiency, motivation, and capital formation. This typically proves to be unstable, as the governance tends to be corrupted as disparity grows, which is exactly where it should be uncorrupted and working to regulate it. This, of course, is the second famous positive feedback loop, which involves more corruption of government when disparity increases, and the corruption tends to increase disparity even more.

These obvious and well-known points indicate that economics and politics cannot be treated separately in a theory. Thus, an economic theory must be as well a political theory. Exactly what a political theory would include is not clear. One aspect is capital formation, just as the economic theory must include it. Capital formation can occur as part of the first positive feedback loop, where debt is used to increase disparity, or as part of the second positive feedback loop, where political corruption is used to increase disparity. However, it is not necessary for there to be large disparity for capital formation, if the political theory side contains some feature which will make it work. Note that capital formation is not solely the accumulation of capital, but also its use, meaning its allocation and management.

Corruption is possible on the part of whoever is in charge of capital collection and allocation within a governance agency involved with capital. Corruption means simply that some individual has two agendas, one being the agenda of his position, which is to improve the productivity of society by allocating capital under some rules for its return, in other words, debt, and the other being a personal agenda, which is to improve his own position, the position of some others that he favors, or some group that he is a part of. If a political theory is to be created, it must cover how to deal with this most common situation, of the administrator of capital with dual agendas.

Some obvious alternatives for the management of the administration of capital and debt are to have multiple individuals involved, to have watchdogs monitoring the behavior of those individuals, public scrutiny of those individuals, transparency of the personal situations of those individuals, clear and strict regulation on how such individuals are to make their choices, and others. Each of these is also subject to corruption, and it is certainly possible to conceive of a whole league of the corrupt, each aiding and abetting the others in the concealment of it. For every device that is used to prevent corruption, there is a counter to it, involving yet more corruption. Since corruption was or is rampant in most societies, historical and current, there is no clear miracle cure for it. One thing is clear, however, corruption takes time to install itself in any administrative organization. If there were regulations stating that those involved had something like term limits, or were subject to some periodic review or vote to stay in the position, then this might be another defense against corruption.

One idea might be universal term limits for anyone in a position where corruption might be an issue. Term limits are typically despised by individuals involved in some administrative position, as climbing to a high level in an administrative hierarchy takes a long time, as does becoming efficient at the position, as does finding and training good subordinates, as does many other miscellaneous tasks. However, term limits is the only solid defense against corruption, provided it is close to universal.

How Much is a Computer Worth?

Does the cost of a computer teach us anything about the value of labor?

Let’s talk about a specific computer to make the discussion simpler. The example will be a standard computer, produced by the millions, which sits on desks everywhere. You plug it into the wall, connect a display, keyboard and mouse, and you can compute with it. You load in a program to process data, put in the data, and you get some output.

Now let’s talk about two of these. One sits somewhere where it processes data from some major corporation, or bank, or government institution, and the output is used for far-reaching decisions, affecting large amounts of money, many people, or both. Another sits somewhere where it processes data from a small business, maybe a little restaurant or a retail outlet for mass-produced clothing. The computers are identical. You could swap one for another and not know the difference except for the serial numbers. Is the first computer worth tremendously more than the second one?

No. They cost the same amount. They are made of parts which each individually cost the same. You can get another one to do exactly the same processing of data at some computer store or on the internet. It is just surprising to some that a computer which processes incredibly important data affecting incredibly important decisions costs the same as the one which processes mundane data affecting almost no one. Why is this? Why doesn’t the use of a computer change its value, and allow the computer store or the online site to charge hundreds of times more for the one which is going to be used for the important job. Why don’t they ask beforehand what the use is and charge accordingly? Obviously charging by the value of the use would make more money for such computer distributors.

The reason is that fungible objects have prices set by the manufacturing cost, not the value of the use. Competition among manufacturers of computers sets the range of prices that can be charged, and more powerful components change the price, not more powerful uses of the resulting computer. A bigger hard drive or a faster CPU can get a bit more money for a computer, but only by a factor of a few, not by thousands.

If there was only one computer in the world, it might be worth some immense sum, but when there are computers in every nook and cranny, the price of a computer is pretty much fixed. One distributor might make a few percent more profit by having a better return policy, or having faster shipping, or something else, but this amounts to some minor percentage, not a factor of hundreds or thousands.

Identical computer, near identical price.

What about the wiring of the computer? If it is connected to a printer in the retail clothing store is it less valuable than if it is connected to a printer in an important office in a major bank? No, plugging it somewhere doesn’t affect the value? How about if it is loaded with an expensive software program rather than an ordinary, run-of-the mill software suite? Nope. Computer still costs the same. What if it is attended by important people instead of unimportant people? No change. Computer still costs the same. There is simply no getting around the fact that fungible objects have a price set by manufacturing costs, plus distribution costs, rather than by their intended use.

Let’s consider the software in more detail. If one software program is written by a good programmer, from instructions he or she has received, and another is written by a good programmer, also from instructions, but different ones, and program length and complexity is about the same as the first one, is it worth more? Software programs aren’t identical, but the cost of programming it is fairly fixed by the length and complexity of it. If you think of a data input – data output type of program, there might be 20 items to consider for each of two programs, and 20 conditions that have to be examined, and 4 outputs get computed. The cost of the program is measured by the cost of the programming, and would be about the same. If there were side conditions, such as speed of computation, there might be some percentage saved by having a more efficient program, but this doesn’t have much play in simpler situations, such as the one we are considering. The cost of both the computer and the program it runs is governed by the cost of construction. Period. If one program is used in the bank’s high official’s office and the other is used in the retail store owner’s office, they are still both worth about the same money. We do assume both are tested programs produced by experienced programmers, rather than some spaghetti code put together by a neophyte, just as we formerly assumed the computers are not made in someone’s garage out of random components.

How about if they are networked; does that change the price? Suppose the first computer in the example is connected to another, identical computer, in another giant bank and both of them are connected to a third, identical computer, in a third giant bank, and so on. Has the computer now become worth a thousand times more that it did for the retail store owner? No.

What if the government of the land where these two examples lived made a law saying that computers for high-importance tasks needed a special license, which required extensive fees and long delays and a very restricted quota. Every such computer would have to be registered, and grave penalties imposed for violating the regulations. Only a few would be available each year. Suddenly, the high-importance computer is worth thousands of times what the low-importance computer is. By throttling the supply, the demand price goes up. A giant bank with a high-importance computing job can easily afford to pay these fees, and high-importance computer brokers would be there to collect them. There would be extensive opportunities for corruption and crime. Thus, it now becomes clear how to make a computer worth thousands of times what an identical one would be worth. The same mechanism would work with the software.

Let’s compare this electronics example with a biological one. People can process data. They have brains which are composed of layers of neurons, but the number of neurons doesn’t vary by very much, and the speed of operation doesn’t vary by much, and the organization of the brain is pretty much the same. One measure of intelligence is IQ, and it is a bell-curve distribution. There are lots of people around with IQ’s of 130 or most any other number short of the extrema. In many jobs, intellectual ones, people function like computers, in that data comes in and decisions come out. Why are they paid so differently?

Education and experience provide the rules by which decisions can be made. The goal of education is to replace experience as much as possible, but unlike computer algorithms, no complete set of instructions is available for decision-making, and therefore it is somewhat random in outcome. People simply do not have the solid rules needed for a good computer software program, so there is nothing available except relying to some degree on chance. Why are different individuals paid so differently, and especially why when there are no good rules for them to follow, nothing derived from repeated exercises in similar situations, and nothing from theories of management and personal relations? What we do have is a natural human tendency to form hierarchies where individuals are stacked over one another, and guilds where various procedures are instituted so that supply of certain training is limited. While these both have some benefits, they obscure the fact that people in our modern era are largely fungible for employment, and if guilds and hierarchies did not occupy such dominant roles in our culture, the value of an individual would be much more closely related to the cost of raising a person plus the cost of educating him or her. In other words, like computers and software programs, people would have a value related to their inherent costs. Like government throttling of supply of computers to high-value uses, these two factors can greatly raise the cost of an individual to an enterprise.

People do not even have the variation in price imposed on computers by the technological progress in the field of semiconductors and other related areas; people haven’t changed much at all over the last few millennia. So, the intrinsic value of people is much more likely to be within a range of a few times average salary, on an annual basis, or lifetime earnings, on a lifetime basis.

This has to do with something in economics called ‘just deserts’, which means that by and large, people get something proportional to the value of their contribution. ‘Just deserts’, if applied to computers, would entail the same government bureaucracy discussed above, but even larger if it was not simply restricted to only computers in very high-value operations. Perhaps the theory of ‘just deserts’ does not make any sense at all, but is simply a simplistic explanation, unrelated to economic reality, of the observation of the huge disparity in the worth of different individuals caused by the non-economic actions of guilds and hierarchies.