Transition and Flight Capital

One of the multitude of means by which novel economic systems are throttled to death before they can be wholly tested is the flight of capital from the region where the new system is being tried.

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Any novel socio-economic that proposes to redistribute the rewards of production, either or both present and past rewards, is going to cause a reaction by those from whom something will be taken. Supposing that the novel system has a new definition of what is fair and just is allocating benefits, and purports to do this once it is inaugurated, the first reaction is going to be by those who will lose something, and if they have amassed political power, this will be used to block the novel system from ever being tried. Political power often encompasses blackmail, espionage, assassination, media control, information control, legal delays, moles inside opposition organization, distraction of the public, bribery, public relations efforts, and multiple other mechanisms by which those who have accumulated power act to keep it and enlarge it. It makes little or no difference what the previous socio-economic system was, it will have, after some settling in period, resulted in political power being accumulated in a few hands, and these mechanisms will be available, regardless of the name applied to the political system.

This conflict is one of the most elementary and ubiquitous ones. Wealth and power gets concentrated in a few hands and is used to preserve this arrangement. The only possible opposition is a large movement of those not having wealth or power, and since it takes some very unusual circumstances to motivate a large mass of people to make grand changes to an economic system, such changes are very infrequent. Often in the history of the world, they have been violent.

One conceivable alternative is a soft revolution, where changes in taxes or anti-corruption activity are put in place by some other means, such as direct voting or mass replacement of corrupt politicians followed by a choice of new laws by the new team. This might happen gradually or suddenly, but even if happens suddenly, there will be warning signs that some of those with wealth and power can recognize. The traditional means by which the wealthy and powerful stop such things can be tried, and perhaps they succeed and perhaps they don’t. However, some of the wealthy and powerful may estimate that the blocking measures will not succeed, and proceed to take alternative measures to maintain some portion of their wealth and power. One example of this is emigration from the region where they were formerly in control but in the future may not be to a different location where they can still have some or all of their wealth and use it to re-establish political control in the new region, or even remotely in the old one. This is loosely referred to as the flight of capital.

Given the despairingly low probability that any novel system of economics will be put in place, it might seem frivolous to think about this manner of avoidance of it by those with wealth and power. More important is thinking through how a transition might be effected, or how political power might be devolved to the powerless sufficiently that they can break the feedback loop that keeps them powerless and a small minority wholly in control of the economy. While that certainly is more important, there might be some details about the new socio-economic system that can reduce any bad effects of flight capital or similar means of evading the new system.

Once again, there is a bottom-up approach and a top-down approach. The bottom-up approach involves figuring out in advance what financial mechanisms could be used to move vast amounts of capital out of a region that was beginning to warm up to some novel socio-economic system that involved some redistribution of wealth and income. Once the list of mechanisms is decided upon, there can be some plan for an instantaneous application of counter-mechanisms which will stop the flight of capital. This is a fool’s errand. First, there are more methods on the hidden list of mechanisms than on the list of mechanisms compiled by the officials of the new system. The ones not found will be the ones used. Most likely, the number of unknown ones exceeds the number of ones that are known. Wealth and power can spin off a tiny percentage of itself to ensure that many mechanisms exist that are not known, perhaps never having been used before. If it costs 1% of some huge amount of wealth to ensure it travels to a new region, this is simply a cost to be born by the wealthy and powerful. So, the idea of figuring out methods that will be used and blocking them is simply too difficult.

The top-down method focuses on the people who have all this wealth, and involves requesting them to turn over their holdings, hidden and visible, to whatever agency of the new economic regime is supposed to get it. There are difficulties here as well. Mobility is so easy in our era, that finding these people and making them available to some new agency would be virtually impossible. Long before the new system was in place, the people with wealth and power would have disappeared.

This is not to say that there would be zero results from either the top-down or the bottom-up approach, but instead, they would only have some percentage effect. More than enough wealth would have been transferred beyond the jurisdiction of the new regime so that those who possess it would hardly notice the difference in their capabilities. Thus, some means of mitigating the effects of capital flight upon a new socio-economic system need to be developed, rather than putting any hopes in the concept of preventing it.

The point to concentrate on is the prevention of the destruction of the new economy, the one where a novel socio-economic system is going to be tried out. It is through the mechanism of foreign ownership that the new system would be most damaged, so that is the feature which must be examined. If those with wealth and power in the region simply move outside it, and continue to possess the same wealth while abroad, they can continue to dabble in corrupting the new regime, possibly with a mind toward returning after it fails with the new economic system. This means that some methods of insulating a new economic system from external influence must be installed as part of the new system.

If ownership by non-employees was allowed, or some equivalent in debt burden, then this external control might be possible. Thus, it is clearly an important component of the new system that ownership of companies, corporations, and any other form of business be connected with those who work there. There are obvious means of corrupting the importance of this regulation, such as by having only one employee listed on the books, the former owner possibly, while everyone else working there is an independent contractor. This needs to be corrected, by making the ownership of the corporation fall into the hands of anyone who works for it, in the guise of an independent worker or otherwise. Are there other scams possible which concentrate ownership but maintain the label of employee-owned enterprise? Certainly, if the distribution of ownership was disproportionate to the justly-measured contribution of the employee to the corporation or company.

Debt is a lukewarm version of ownership, so it too must be separated and put into the hands of those who contribute to the society, rather than those who do not. Some public agency would need to hold debt. There are a great many problems involved with conceiving such an agency, but assume for this discussion that it has been done successfully. Thus the transition problem boils down to figuring out how to transfer ownership of both enterprises, and debt associated with them, when a new economic system is put in place. Wealth in the previous economic system would have been manifested in ownership being concentrated, by the wealth feedback process, in the hands of a few. How could a transition be done legitimately?

The third member of the triad of means for distributing benefits in a society is taxes. It is what is left. Thus, there would need to be wealth taxes that would accomplish the redeployment of ownership of enterprises and of debt. Another aspect of unjust income and accumulation of wealth is the concentration of ownership of real estate. A third prong of the taxation for transition would be a tax on real estate, but a progressive one, designed to revert ownership of much of the real estate to those who contribute to producing the benefits of the society.

Evasion of income taxes is a game that is played world-wide, and so any transition taxation rules would have to be thought out carefully to have the desired effect. One tool is the unique-to-America plan of making any citizen liable for taxes, despite his location or employment situation. If this was a common, world-wide situation, then anyone possessing citizenship in a country and simultaneously possessing unearned wealth would find themselves liable for a wealth tax. There would need to be a corresponding tax levied on the relinquishment of citizenship in the nation or group of nations that was introducing the new economic system.

Having taxes in the laws of a nation does not mean collecting them. Someone who owns property within the nation can find liens placed upon it, whether it is a corporate asset or a piece of real estate. Thus, for someone to successfully evade taxes of the transition variety, they would have to sell or otherwise transfer ownership of property out of their name. This means that the transition taxation legislation would have to be able to look through the possible maze of ownership arrangements down to individuals who actually own the property. One means of evasion would be to have sham owners with citizenship outside the nation with the new system. They would be beyond the reach of any laws, so therefore the transition taxation would also have to affect foreign ownership. This would only be necessary if other nations around the world did not have similar economic systems and were not cooperating on taxation.

Exactly how this is done might make a substantial difference in whether there are large negative effects of the transition. There are some alternatives, and they deserve a separate treatment.

Market Share Taxation

Controlling monopolies via market share taxation might be barely possible, but if it were used, the economy would benefit.

Taxation can be a versatile tool for accomplishing a goal within a nation. Usually only a government has a taxing power, but fee is simply another name for a tax, and it can be applied by any organization at all. In any monopoly situation, such as a government holds, or an organization holds by dint of some legislation, taxes or fees can be levied by whatever rate the government chooses, or an organization’s directing personnel decide. They can be objected to and those taxed can revolt in different ways, but taxes are nonetheless a versatile means of moving the distribution of benefits around in a society.

There is absolutely no reason to believe that benefits will go to those who do things most useful to society as a whole, however that is defined. If one wishes to design a taxing system to attempt to reallocate benefits according to a measure of social benefits, the measure must be determined first, and then the taxation rules can be searched for that maximize it. Even though the measure is not fully determined, there are some situations where it is obvious that no reasonable measure is being maximized, and the economic rules in play are producing something undesirable.

One such undesirable outcome is the generation of monopolies or oligopolies in various sectors of the economy. Yet monopolies are the inevitable outcome of simple economic systems. In other words, simple economic systems must fail in a predictable and understandable way. It is because more balanced economic situations are unstable and do not last over long periods. These balanced economic situations might take one or two centuries to revert to the monopolistic end result, and anyone examining them in the interim might find them to be working well. They do work well, but only temporarily, and with a gradient leading to disaster. It is the long time necessary for the collapse to occur that makes the intermediate situation look like an excellent choice of economic system. The problem with this economic view is that it is too short-term. Economics should be examined both with a short-term viewpoint, but also with a long-term viewpoint. The long-term viewpoint will reveal flaws that are hidden to the short-term observer.

What is needed is a taxation system that takes a economic set of rules which are slowly unstable and lead to monopolies and oligopolies and change them so that the system becomes stable with the stability region in a desirable situation. This necessitates examining the cause of the instability. What happens is that economic advantages accrue to size, specifically market share. Efficiencies occur, which make it possible for the larger firm to overcome the smaller, and absorb it. These efficiencies can occur in the marketplace for the particular goods involved, or they can occur in the political arena where corruption occurs. As everywhere, those with more wealth can more easily induce corruption leading to a greater collection of wealth. Thus, market share or size is the dominant variable which must be addressed to produce a stable economic system.

The obvious solution is to have a profits tax that is progressive, based on market share. If we set five percent as a threshold, any firm in a particular market which has five percent or less market share pays one rate, but one which has more, pays more. For the sake of making a specific example, suppose the tax rate is 20% for under five percent market share, 30% for five to seven, 40% for seven to nine, 50% for nine to eleven, 60% for eleven to thirteen, 70% for thirteen to fifteen, 80% for fifteen to seventeen, 90% for seventeen to nineteen, and 100% for above nineteen. This example is not something realistic, but just something to serve as an illustration. There can be no monopolies with twenty percent of a market, as all profits would go to the government and none to shareholders.

There are obviously many ways that a corporation could evade this taxation scheme, especially with the possibility of corruption of those who define market share. Any scheme for taxing progressively on market share would have to be carefully thought out to eliminate in advance those tricks that might be used to avoid or evade the taxation. It should be obvious to anyone with awareness of how modern economic systems work that the transition to a new tax system is very difficult, and will be objected to by the strong forces in the economic system which have managed to corrupt the previous system to their own advantage. The transition question is something that needs to be addressed separately.

There will be a price to be paid in the economic system for eliminating monopolies and oligopolies, during some of the time. When a monopoly is in the process of growing and eliminating or absorbing its competition or opponents, it often does this by using the natural economic advantages that size offers. One of these is the ability to be more efficient in whatever it does, such as manufacturing, mining, textile production, service provision, product distribution, sales retail and wholesale, and so on. During this phase of the existence of a monopoly, the benefits of efficiency will partially flow to consumers, while the rest flow to those directly benefiting from the corporation or company becoming a monopoly. If market share taxation occurs, it will eliminate these additional benefits, both to consumers and to the shareholders of the potential monopoly organization.

This benefit is temporary but real. If monopoly is not stopped, it will eventually reduce the benefits to consumers and turn them more to shareholders, including owners, lenders, executive and higher managers, supplier executives and others. Thus, market share taxation comes with a temporary price to be paid. On the other hand, non-monopolist companies and corporations will benefit from the control on monopolies. The benefits of size will be diminished or eliminated, allowing competition to occur in other factors only. This will eventually benefit the entire economy, as monopoly advantages often are frozen in, and the situation of a monopoly serves to preserve and protect itself as a primary goal, as opposed to the normal goals of providing goods and services in a better way to the population.

A monopoly can be a detriment to its own workers. It is conceivable that a monopoly could be employee-owned and therefore immune to a desire by shareholders to minimize benefits allocated to employees, but the alternative situation seems more likely. In order to achieve monopoly status, efficiency is one tool that can be used, and efficiency can be simulated by a reduction in pay for all but shareholders. Thus own-company workers might suffer as the monopoly continues its drive for a capture of 100% of market share. Similarly, workers in competitive companies which are driven from business, bankrupted or otherwise eliminated, suffer from the loss of work, and might be forced into a lower economic situation. Workers in competitive companies which are absorbing by a burgeoning partial monopolist may have their positions eliminated or their wages or salaries reduced to those paid by the monopolist company. So it could be said that, while there is a temporary detriment to some consumers during the period that a monopoly is becoming entrenched, there is a permanent benefit to workers who are excluded from the shareholder group involved with the monopoly. Which is a better economic situation, one which has some benefits for consumers or one which has some benefits for productive employees? There is also a benefit to almost all members of the population, in that the amount of corruption will be a bit less.

How would it be conceivably possible that a system which reduces the power and wealth of some group of important people in a country could be adopted? In a new country, these rules for progressive taxation of market share could be put in place, which might slow the rise of those who could block such a set of taxation rules in an older country. However, there is not much space left on Earth for new countries. The alternative is that taxation power would have to be taken from a corrupt government, and the only location for that taxation power is in the hands of the electorate. This is not a good location in some social situations, and might be in others. In order to have power devolve to the hands of the electorate, it has to be realized that this is a huge increase in time consumption for such decisions, and therefore the number of questions put before the electorate must be severely minimized and then reduced again, down to only a handful. The second requirement for putting taxation power in the hands of the electorate is to provide them with complete information, which means that the media monopolies must be controlled first. But which comes first, control of monopolies in media or the granting of power to the electorate to install taxation rules to control the existence and formation of monopolies? We have a Catch-22 situation here, and resolving it will take some intense imagination.

What Should Be Measured in an Economy?

It is hard to define an economic system if no one can agree on what the proper measures of its goodness are. And there is even a deeper issue – culture and its transmission.

If two economies are to be compared, there has to be some measuring. But what is to be measured? As technology progresses, more and more data is collected about the economic affairs of individuals, companies, corporations and government organizations. But how should this be distilled down to a few simple, easy-to-explain numbers that tell us which economic system is better?

The word better, when defined in some very specific and quantitative terms, can have literally hundreds of precise, actionable meanings. There is little need to cite examples, but for the record, one can compute the total economic transactions made, the amount of energy consumed, the amount of food produced, the number of vehicles on the roads, the average square footage of the dwellings of the individuals, the ratio of the top quintile’s average earnings to the lowest quintile’s, the amount of taxes collected by the highest echelon of government, and on and on and on. One could also write justifications for many of these measures, going around and around without settling on anything. Perhaps this could become a parlor game, in which everyone has a chance to define their preferred economic measure and then there is a secret vote on the best.

Why not have ten different measures? Then different systems could be compared, and one might be better at measure one and another at measures two and six, while yet another is great at measure nine. If we want to make a recommendation of a system, or define some details of a chosen system, there has to be a decision as to which measure, or weighted sum of measures, is to be used to make the call. Having ten measures get us no nearer to recommending an economic system than having none.

If we ask for preferences for different measures of an economy, every intelligent person might come up with a different one. A person who grew up hungry might have strong feelings that food production per capita or food consumption per capita might be the best measure, although that is a measure, which if used for an economy, would push the population towards obesity. Mean square footage of dwellings is a measure for someone who grew up in a cramped and crowded dwelling, but not for someone who grew up in a large and lonely mansion. Someone with military experience and an appreciation for its need might think that the level of spending on armies and navies that can be afforded is the best and safest measure, while someone who grew up with a parent who was excessively sympathetic to the poor would thing some income parity measure is the best. One can go on and on about this as well, as there are so many possible experiences that can be the subconscious or conscious background for a preference for a measure. Maybe the idea of having some vote on what is best would be good, except that would not please those who believe in monarchy or oligarchy, unless the vote were restricted to the royal family or those who were in the top 0.1% of the economic food chain.

Is there any measure possible that does not depend on the feelings and even the whims of the particular economist who is being consulted on the issue? Many could certainly proclaim that some simple or complex measure had this measure, but when dredging up the basis for it, it comes down to emotion or self-interest, or perhaps the self-interest of some group. What therefore is the point of trying to figure out an improved economic system, if there cannot be any agreement on what constitutes ‘best’ or ‘better’ or even ‘good enough’?

What alternative exists for defining an economic system and recommending it for adoption? One could simply ask an individual to design it, without bothering about any qualitative measures to validate that it is somehow, in some way, the best one. Who could be asked? Those who already control the economy? The current system, with some modifications to solidify this control and sweep even more wealth, income and power into their hands, and make their acquisitions permanent and irrevocable, and also inheritable, might be the obvious answer. Another possibility is to discover the god of economics, and find a bit later on those who can get messages from this god inside their minds. They could write down the messages and the information could be fitted together to make up an economic system. Or some other group might be asked, like the top generals. What might their response be?

Defining ‘bad’ isn’t nearly so difficult. If people are dying from starvation, something is wrong, and the system failed. If population is being drained by migration to other lands, again, something is wrong, if the motivations for the population decline are based in economics. Then things get fuzzy. If people are chafing about having to spend time in commuter congestion everyday because of the price of housing near work, perhaps the economic system is bad in how it zones land. If there are long lines for obtaining the necessities of life, even though they are available, possibly the part of the economic system relating to distribution is faulty. Universal complaints are an indication of an error in economic system design, unless the constraints are so tight that one complaint cannot be satisfied without creating another, potentially worse, one.

There could be very many economic arrangements that do not give rise to universal complaints, meaning that the set of ‘good enough’ economic system might be quite large. This means that if we use popular outcry as a measure of the goodness of an economic system, the bin of acceptable systems could be quite full. And the willingness of a population to object to some aspect of their economic system might vary quite a lot, with some more stoical populations willing to put up with situations that a more clamorous one would take to the streets with. Here, media has its effects as well. Where media plays a large role in people’s lives, in other words, occupies a great deal of their time, the advice of those who control the media, filtered through the various message-giving instruments a media system has, might make a difference in what is acceptable and what is not. Again, somewhat murky.

This brings us back to the same point made elsewhere. Culture plays a large role in defining what is desirable and what is acceptable in economic systems. Take corruption as an example. There are many different kinds of corruption, and it can be overt and obvious to everyone or concealed behind all manner of legal constructions and privacy rules. One population, of a homogeneous culture, might regard petty corruption as just a part of life, something everyone knows about and everyone participates in, while a second population, also homogeneous, might find it horrendous and seek to expunge every single instance of it. The second population might regard legal corruption, where laws are written to allow many kinds of payoffs to politicians without any law being violated, as ignorable, while a third population might see legal corruption as no different than illegal corruption as it was based on the same thing: politicians selling their vote for some sort of benefit to them or their relatives or some affinity group or former colleagues, or whatever. Thus, culture plays a large role in public outcry and in defining the bin of acceptable economic systems.

Popular culture does not simply appear in a puff of smoke and be learned and wholly accepted by a population. It is something accumulated over time, but more importantly, passed on from generation to generation through the means of training and education of the younger generation by the older. This means there might be populations without any culture at all, where they might be homogeneous or heterogeneous, but they simply do not pass on values, opinions, motivations, heritage, and other bases to the next generation, but allow the young to pick up what they can from wherever they can. If this is the state of a population, almost anything can fit into the bin of acceptable economic systems. It also means that any individuals who want to be able to structure the economic system to fit their definition of good, better, best, can do so most easily if they can convince a population to stop transmitting their culture from generation to generation, and leave it in the hands of some specialists. And as a last step, the specialists have to be willing to climb aboard the support train for the economic system preferred by those who have the means to disrupt intergenerational transmission of culture.

It is certainly possible to devise an economic system that has some laudable attributes, and perhaps one which can be shown to meet a variety of measures of goodness, but as long as the culture is determined by those who prefer another system, good to them and perhaps not so good for the large majority of the population, there is little need to work too hard to define its details. Unless, of course, there is some means by which such a better economic system can gain the attention of the population – an unlikely event.

Choosing Goals for an Economic System

Having very few goals for a new economic system makes it more likely there will be no conflicts. Here we discuss the most fundamental goal: survival.

If an economic system is being designed in a top-down manner, coming up with one or more top-level goals is the place to start. Current economic systems have many goals, and the problem with that is that they sometimes compete, not in the sense of being opposite, but in the sense of giving contradictory guidance in certain situations. It is better to have fewer goals than many. Often goals for an economic system which are set up early in the history of the system are added to or modified in later eras. So, in designing an economic system, it is important to choose few goals, but also to choose them in a way which makes they less liable to change as time goes on. Societies change as technology changes, so this factor is one which should assist in the choice of goals.

In early eras, there was a clear goal. It was to benefit the upper echelon of society. Ever since there was a top leader, it has been the leader and his court or companions which have been the recipients of most of the benefits of the society. This group may represent one percent of the total population, or twice that or half that, but in any economy, the beneficiaries of the economy are a small fraction, and they are those who command the economy. In different places it has been military leaders, and in others the descendants of military leaders. In later eras, the benefits flowed to a top layer of individuals who had ownership rights on much of the land in their vicinity. Even later, it was a group of owners of businesses who prospered far more than anyone else. Later than that, it was the owners of financial establishments who received the lion’s share of the benefits of the society. In other societies, it was the higher castes which benefited the most, in the sense of having a higher living standard, or more freedom from want.

Only in very recent times has there been much discussion of a wider distribution of benefits. There was never any discussion about whether it makes much sense to have such a wide distribution of benefits. In one aspect, it is a question of the division between the use of the products of society for infrastructure and common defense and other society-wide tasks and for direct consumption. The direction of a large share of the benefits of society to a small top-level percentage of the population means that this group’s consumption uses will not use up the whole amount of benefits allocated to them, and therefore there will be an amount available, usable for any benefit to the whole of society. Traditionally, the control of the allocation process has been in the hands of a such a small percentage of population, and this has resulted in the provision of things that the society needs to gradually improve. Over periods of time, this allocation pattern has resulted in the economic growth of societies.

There are some quantitative measures that might be discussed. Society needs a balance between these different allocation factors, and the fractions allocated to lower class consumption, to upper class luxury consumption, to various societal needs, to supporting economic growth, to supporting technology development and deployment, and other ones that might be critical to the improvement of a society. The wrong set of values for these fractions might lead to social collapse, or revolution, or loss of defense capability, or simply stagnation or negative growth.

If there is one goal for society that seems to transcend others, it is self-preservation. If there is something in a socio-economic system which causes the society to split in two, or to descend into turmoil, or to lead to invasion, or to give rise to waves of criminality, or some other ill, then this is perhaps the strongest indication that this particular socio-economic system is flawed and not to be recommended. It is not that there is some unique lack in a bad socio-economic system, but instead a departure from a range of values which worked. If too much allocation goes to upper class luxury or to the process of altering the allocation fractions via financial manipulations or corruption of the political tax-levying process,then the socio-economic system may get into trouble.

There are feedback loops which definitely change the allocation of benefits, and if these are allowed to control it, instead of themselves being monitored and controlled, the system may depart from the range where the society is successful and may move into a danger zone, where one or more of the pitfalls of a system can arise. Some strong controls would be necessary in order to thwart these feedback loops.

Perhaps the strongest feedback loop is the one where wealth is used to concentrate wealth further. Because of the diversity of mechanisms by which this can happen, only direct controls on the accumulation of wealth can control it. Controls on income alone might be bypassed, if there are ways that, covertly or overtly, can add to the wealth of particular individuals. Wealth controls can be done by different formulas, and can be thought of as some type of property taxes. There are few historical instances of progressive property taxes, where it is not the value of property itself which is used but the concentration of property ownership which is the important variable. However, this seems to be the only taxation method which will control corruption and excess allocation to the leadership cohort.

Why not give gigantic amounts of benefits to the leadership cohort? There needs to be capital amassed for many purposes in a society, and the old method of having the leadership cohort take it and use it for socially beneficial purposes did bring society this far. There are three reasons for looking for a better way of allocating benefits. One is that the allocation of great wealth to a small minority works for some range of allocation, but because of the feedback effects of wealth concentration, it always increases until there is a breakdown in society. The second is that the provision of social benefits is voluntary on the part of the extremely wealthy, and may be very distorted in the choices of what is to be supported, with vital needs being shortchanged while frivolous expenses increase. The third is that as society becomes more aware of economics, unearned income, solely for the purposes of capital accumulation for valuable purposes of the society will appear and be appreciated as a wrong solution.

All three of these reasons can be collected under the goal of having a society which continues, instead of breaking down in one of the many ways that societies can suffer or even collapse. It is curious that this goal, the preservation or survival of the society is analogous to the first goal of any living organism. Survival is built in to the genetic programming of all organic creatures, and it makes sense to also attribute it to social arrangements. Once primates, and subsequently humanoids, divided themselves into clans or small groups who cooperated rather than competed, the concept of clan or group preservation made sense. So not only does this primary goal of living organisms match that of the proposed goal of the socio-economic system which we are trying to design, the same goal is present in the organization of humans and earlier, humanoids, into cooperating groups. It is almost a tautology that a group which does not concentrate on self-survival will disappear and be replaced by a group which does concentrate on self-survival. Thus, there should be little reason to dispute this goal as being the most elemental one for a socio-economic system.

What about other goals? There are an uncountable number of possibilities, all of which arise from some emotional connection between a person and a concept. Take justice. Each person can define what justice is, and there will be some discrepancies between one person’s take on this and another’s. The same goes for all of these emotionally derived goals for a socio-economic system. There may be some core to some or all of these concepts, but which of them might be taken as preeminent enough to be used to define the structures, organization and procedures of a society attempting to live under a new socio-economic system. Self-preservation does not have much of the heightened enthusiasm associated with it as a fair society, a just society, or other similar concepts, but as discussed above, it is much more fundamental.

Are any further goals other than self-preservation needed to define how a socio-economic system should be structured? Do the mechanisms of a society help to define how it might be defined? In order to fully utilize the goal of self-preservation can be used to define the whole structure of society, there has to be a model of how human beings behave. Only by understanding, well and in detail, how humans would act within a society can this goal be fully utilized.

Balancing Benefits to Consumers and Producers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Productive and Non-productive Uses of Capital

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

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

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

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

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

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

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

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

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

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

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

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

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

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.