📗 Radical Markets, by Eric Posner & Glen Weyl

My friend Hector slid this book onto the table in between two mouthfuls of Ceviche. Lovely present.

This is a very ambitious book – diagnosing problems with our society today and proposing concrete suggestions at the highest level: how we should vote, how we should organise private property, should we be paid for our data, how immigration should work. Many of these proposals have design goals I agree with: reducing bureaucracy and centralised power, and pushing more power to the people. It’s still very early days though and not much of this has been tried in practice (other than e.g QV used in Gitcoin grants, which is pretty awesome). But this book definitely gets you thinking, and I’ll be following along in Weyl’s project to push these forward: RadicalXChange.

Enjoy the notes! Ho ho ho.

Preface

  • Premise that markets are, and for the medium term will remain the best ways to organise society
    • But the most important markets today are monopolised or entirely missing
    • The Right has been too timid about the social changes necessary to let markets flourish
    • Agree with the Left that existing arrangements generate unfair inequality and undermine collective action. But the Left’s flaw is thinking the elites should be given more power and will fix it.
    • “We must decentralise power while spurring collective action”
  • Henry George, follower of Adam Smith but more concerned about inequality
    • The most important “Georgist” economist was William Spencer Vickry
    • Studied the power of auctions to solve major social problems, spawned the field of mechanism design (discussed in the context of crypto in this lecture I did) and earned a Nobel for it
    • Vickry auctions used by Google Ads

Foreword

  • By Vitalik and Jaron Lanier
  • (Recap of the problems with big tech platforms, censorship, erosion of trust, inequality)
  • “Designs like Wikipedia can reinforce the illiberal idea of a singular storyline and perspective guided ultimately by a new elite instead of by pluralism”

Introduction: the crisis of the liberal order

  • Inequality between countries has decreased with globalisation
  • But inequality within countries has increased:
  • “60% of the income from the top 1% comes from capital rather than wages” – this share has risen in the last few decades and is 4x larger than bottom 90%
  • Productivity growth decline in all wealthy countries
  • “We were promised inequality in exchange for economic dynamism. We got inequality, now dynamism is declining”
  • Stagnequality: lower growth combined with rising inequality (rather than rising inflation in stagflation)
  • Historically, fascist or ultranationalist movements have risen as the social fabric is fraying
  • Government institutions face crisis of legitimacy
  • Modern market economy combines government support for trade (contract and property law) along with government protection against abuses (tort law and regulation)
    • Way more capable than a “moral economy” (local economy based on trust)
  • Rules of a true market
    • Free market: can buy anything as long as you pay the price
    • Competitive market: cannot fix prices, collude, exert “market power”
    • Open market: anyone can access
  • “One-person-one-vote gave majorities the power to tyrannize minorities. Checks, balances, and judicial intervention limited such tyranny, but did so by handing power to elites and special interest groups.”
  • “In international relations, efforts to enhance cooperation and cross-border economic activity empowered an international capitalist elite that disproportionately benefitted from international cooperation and faced nationalist backlash from the working class.”

1. Property is monopoly: creating a competitive market in uses through common ownership

  • Real estate development. “Holdout risk”, person who knows their land is needed for a project and can jack up the price. Avoided through secrecy, shell companies etc.
    • Or governments do it invoking “eminent domain” but that is political and prone to corruption
  • In times of feudalism & serfdom, lots of property was held communally. Now private property: allocative efficiency (most efficient use of the property is found) + investment efficiency (if you own it you care more for it)
  • But landowners often just inherited and collected rewards for others work. A form of monopoly (the game Monopoly was initially called The Landlord’s game). Workers wages flat in Britain from 1750 to 1850.
  • Self-assessment in history. In Ancient Athens, liturgy referred to the responsibility of wealthiest 1000 citizens to fund operations of the state. Any member of liturgical class could challenge another citizen he believed was wealthier to antidosis (exchange). Person challenge would either assume liturgical responsibility or exchange all possessions with the challenger!
  • Common-ownership self-assessed tax (COST).
    • Common ownership model rather than traditional private property. The citizen who offers the highest bid (in the form of a rental payment) possesses the object until outbid by another citizen. Money collected from rents is used to fund public goods / social dividends.
    • Possessors become lessees from society. Lease terminates when higher-value user appears. Yet it’s not central planning.
    • Sharing economy & people valuing experiences more than things is a sign of this starting to happen.
  • Looks like RadicalXChange rebranded this: “Self-Assessed Licenses Sold via Auction (SALSA). SALSA is an innovative licensing structure that cuts through the false dichotomy of public versus private ownership. Under SALSA, a private individual holds an asset so long as she maintains the highest self-declared value for that asset in a public marketplace, standing ready to sell the asset to any willing buyer at their declared price. It promotes both efficiency and equality in a range of settings: commercial land, public road usage, bike and e-scooter sharing programs, just to name a few.
  • Higher prices from the “endowment effect” (you value more what you own) discouraged by the tax, reduces a barrier to trade
  • Most promising near-term application is radio spectrum. Currently very lengthy legislative process for FCC to buy back & repackage parts of the spectrum, because previous owners holding out.

2. Radical democracy: a market for compromise in our shared lives

  • Today: 1p1v, one person one vote.
  • Long tradition of attempts by democratic governments to limit majority rule
    • People’s court in ancient Greece with veto rights
    • “If a majority be united by a common interest, the rights of the minority will be insecure” – James Madison
    • Checks & balances systems, “mixed constitutions”
  • Opposite problem: gridlock. Analogous to holdout problem in private transactions.
  • Problem discovered by Condorcet very early is strategic voting: “make your vote count”. Example: “no more than 10% of German public ever were strong supporters of the Nazis”
  • Politics is concerned with creating public goods, eg clean air, military defence, public sanitation.
  • Every citizen’s voice should be heard in proportion to how important that good is to that citizen.
  • Economists Grove, Ledyard, realised the price individuals should pay for influencing public goods should not be proportional to the degree of influence an individual has, but its square.
    • “No longer would 51 people who barely care about a problem outvote 49 incredibly passionate”

Why voting must be quadratic

  • “Imagine that a town wants to decide on the right amount of pollution to allow. The first bit of pollution allowed enables the residents to carry on valuable economic activity, but less so as pollution increases (reflected by the downward-sloping demand curve below). Meanwhile, pollution exerts an increasing marginal social cost on the town (a little pollution is okay, but it gets more dangerous as it increases). One resident in particular, Nils, has bad asthma and so is especially harmed by pollution. The town’s marginal cost of pollution without Nils is labelled MCA below and with Nils is labelled MCB below. The externality that Nils imposes—what an economist would call the “deadweight loss”—is the grey triangle, which shows the decline in total welfare as the town moves from its pollution amount without Nils to its pollution amount with Nils.”
  • The total welfare can be measured in increased output from the economic activity with the plant (dollars x quantity, and quantity maps to pollution). As Nils moves the curve left he reduces welfare by a square of how much he moved it
  • “Thus, imposing a quadratic cost on Nils’s voting is the only way to ensure that his private cost of voting aligns with the town’s overall welfare.”

3. Uniting the world’s workers: rebalancing the international order towards labor

  • “Capital, goods, and highly educated labor flow rapidly across borders, generating significant wealth, while less educated workers tend to stay at home”
  • “Today migration offers few benefits to and imposes some costs on most workers in wealthy countries, who are already left behind by the forces of trade, automation, and the rising power of concentrated finance” + tribalistic human instincts -> rise of nationalist movements
  • Today companies e.g Google can sponsor H1B visas, and families can under Family Reunification policy. Very bureaucratic & subjective processes. What if this ability to propose was extended to everyone?
  • Visas Between Individuals program (VIP)
    • Anyone can sponsor a migrant, subject to conditions. Revshare agreement between sponsor and migrant
    • Precedent: the J-1 program where Americans can sponsor people to be au pairs
    • Precedent: Bahrain and Oman host one migrant for every native. Singapore two migrants for every 3 natives. Designed to be able to share benefits of migration more broadly with natives.
    • But in some of these countries: neglect of the rights of the migrant labour force
    • Yes, more migration will likely suppress wages for some jobs. But now many of the people hurt by this can also participate in upside as sponsors
  • “Many of the sophisticated cultural elites most likely to object to this sort of unequal relationship should contemplate their own relationship to migrants. […] know nothing of their language, culture, aspirations and values […] They benefit greatly from the cheap services these migrants offer and rarely concern themselves with the poverty with which they live”

4. Dismembering the octopus: towards a radical market in corporate control

  • Defining “institutional investors” e.g Blackrock, Vanguard, Fidelity, State Street. Diversified, and passive.
  • “Economic research suggests that diversified institutional investors have harmed a wide range of industries, raising prices for consumers, reducing investment and innovation, and potentially lowering wages”
  • Monopoly examples. Rockerfeller’s Standard Oil, US Steel, American Tobacco company. Too much financial and political power. Sherman Act in 2890 forbade “combinations in restraint of trade”. FTC created in 1914, sharing enforcement responsibilities with DOJ’s antitrust division.
  • From 1970s, antitrust authorities lost track of ways in which capital markets reconfigured themselves to maintain monopoly power.
  • “Institutional investors have enabled investors to avoid these rules by knitting together the interests of the biggest firms that dominate any particular market”
  • Could imagine each institutional investor advice CEOs to forgo price competition within a market. Even though technically passive they hold sway as largest shareholders, board members, say in comp packages, etc.

Restoring competition

  • “No investor holding shares of more than a single effective firm in an oligopoly and participating in corporate governance may own more than 1% of the market”
  • Would improve governance because institutional intermediaries compete on relative performance against eachother. So if they can only back 1 horse they would have an incentive to do better governance relative to the rest of that market (held by its competing institutional investors).
  • You could still do diversification by buying several institutional investors.
  • Posner & Weyl think this is not litigated because large law firms don’t want to go against institutional investors and lose their portfolio co’s business.

5. Data as labor: valuing individual contributions to the digital economy

  • Technofeudalism“. You work for the platforms for free, scale of tech giants, “you are the product”, etc.
  • The share of income going to labor in the largest tech cos is 5-15%, which is lower than any industry other than extractive ones such as oil, and dramatically lower than service-sector companies like Walmart where labor’s share is roughly 80%.
  • AI, as much as fields or factories, offers a critical role for ordinary human labor, as suppliers of data. Data as labor.
  • Data may have increasing returns as AI attacks more useful problems
  • “Google quietly subcontracts 10,000 human raters to give feedback on the quality of its search results”
  • Why the platforms don’t pay users. 1) url (usage, revenue later), importance of network effects; 2) changes intrinsic motivation for users. What is entertainment today would start to feel like work. 3) would make users aware of scale of data collection “creepiness”.
  • Could it make people feel as active producers and participants in the creation of value?
    • Not AI, but “collective intelligence”
    • People could feel pride in their role helping build the AI, if it’s helping us all

Conclusion

  • Caution: these are all ideas that should be tested out in very small scale first.
  • One downside is all these proposals push additional burdens / power to individuals, who may not want them
  • QV & COST could be gamed by sophisticated people

Epilogue: after markets?

  • Central planning failed because of communication and computation. People’s valuations are private information.
  • I, Pencil – story of the pencil which no one person knows how to make but society makes through trade and price signals.
  • Markets can leverage distributed computing and parallel processing for the whole population
  • If the total computation capacity of computers exceeds humans’ in, say, 2050, does central planning become viable again?
    • Seeing early signs of incredible centralised planning enabled by computers: Amazon, Uber
    • Netflix guessing what you want to watch
  • Afterword:
    • good reception to the book across political spectrum
    • crypto communities enthusiastic as pushing power to the edges

Further reading

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