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.

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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.

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.