Eric Posner and Glen Weyl propose radical reforms to resolve key market design problems for better democracy and globalization.

Chanel Holden

2021-02-10 06:28:00 Wed ET

Eric Posner and Glen Weyl propose radical reforms to resolve key market design problems for better democracy and globalization.

Eric Posner and Glen Weyl (2019)

 

Radical markets: uprooting capitalism and democracy for a just society

 

The world economy continues to grow with better economic lives and standards in the current decade. At the same time, poverty, hunger, and warfare etc are on the decline. Both the speed and distribution of technological progress can be uneven, especially in the historically rich parts of the world. The recent rise of populism can threaten open democratic state rule of law. Also, many macro economists express their political anger and anxiety toward immigrants and specialists. However, most moral considerations lend credence to the view that the great improvement among the many poor must outweigh the harm to the few rich. The rich countries that have introduced substantial policy changes such as the Sino-U.S. trade war, Brexit, and Chinese Belt-Road infrastructure etc start to find that these cures tend to be worse than the diseases (not only for themselves but also for the rest of the world).

In their recent book on Radical Markets, Eric Posner and Glen Weyl propose some radical reforms on the basis of market design principles. Posner and Weyl disagree with the status quo and view the current state of global public affairs as intolerable. In an alternative view, radical reforms are vital and essential in some specific areas such as private property protection, democratic development, immigration, global institutional stock ownership, and safe and open data exchange in the modern new era of digital information technology. These radical reforms revolve around the use of auctions or other market design mechanisms in various forms.

In each chapter, Posner and Weyl analyze a specific class of social problems and then suggest a radical solution. This fundamental perspective is Western-centric. For instance, Posner and Weyl delve into the labor market effects of migration from poor countries in light of global trade, finance, and automation in most rich nations. The separate social problems such as institutional equity ownership concentration and big data exchange tend to prevail only in Western countries such as America, Britain, France, Germany, and Russia etc. Each essay illustrates a social problem through specific examples and historical facts. In several cases, Posner and Weyl indicate that the current institutions are defective. For this reason, it is vital for key policymakers and legislators to radically alter some rules and regulations in order to improve socioeconomic conditions and circumstances in the broader business context.

 

Private property protection can help solve the hold-up problem of monopoly power concentration.

The hold-up problem arises from both parties that refuse to cooperate in economic transactions. The resultant misallocation of private property can cost almost 25% of income. From time to time one of the parties may maintain monopoly power over the ownership of valuable private property that leads to the prohibitively expensive hold-up problem. Many economists such as Ronald Coase and Oliver Williamson analyze how well private property works when there are severe hold-up problems, information asymmetries, and externalities etc. As the Coase theorem reflects, the ultimate ownership rights for private property often flow to the parties that engage in the most productive uses of such private property. This economic insight shines fresh light on the efficiency gains that emerge from the commercial privatization of state enterprises worldwide in recent decades.

In some cases, the free and open market solves the hold-up problem relatively well through tender offers and many other ways of repackaging private property rights. Useful remedies range from Pigouvian taxes to moderate regulations. This market design mechanism applies to several industries such as media, telecommunication, finance, energy, air and road transport, and Internet service provision etc. In many Western societies, the government builds and then entrenches national champions. This entrenchment can help improve reputation and profitability for tech titans (e.g. Alibaba, Baidu, and Tencent in China), mega banks (cf. Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo in America), and other tech service providers (e.g. AT&T, Sprint, T-Mobile, and Verizon in North America).

With ubiquitous monopolies, the hold-up problem of private property protection can often depend on a key self-assessment wealth tax with mandatory sale at the strike price. With a firm commitment to sell at the strike price, self-assessment can be an effective and credible solution to some hold-up problem that often involves assets with substantial information asymmetries and externalities. The hold-up problem is specifically severe in commercial real estate and venture capital. In these particular cases, business owners can often choose artificially low transfer prices in order to avoid hefty taxes and other operational costs.

In this specific business context, Posner and Weyl propose the radical remedy that all private property rights such as capital goods and technical improvements must be subject to a 7% annual self-assessment wealth tax. Posner and Weyl contend that a properly chosen self-assessment wealth tax helps solve the hold-up problem of monopoly power concentration. Business owners self-select to disclose the true intrinsic value, so the parties that manage to direct assets to their most productive uses can purchase these assets at fair value.

In the residential property market, for example, each prospective buyer is uncertain about the fair valuation of the current owner. This valuation can be high if the prior owner has invested in some renovation; whereas, this valuation can be low if the owner has taken a job in another state. The Posner-Weyl self-assessment wealth tax depends on all the best likelihood of success that the current owner wants to sell in due course. The low probability of sale to another buyer with higher valuation would lead to an economic welfare loss. The law of inadvertent consequences can counsel caution when push comes to shove from time to time. In most cases, it is easy to check that the owner self-selects to set the price at fair value of equilibrium market design (rather than his or her own capricious valuation).

However, the owner cannot get the fair value of equilibrium market design. Instead, the owner receives this fair value minus the self-assessment wealth tax. In effect, this wealth tax combines all the valuable and specific solutions into a one-size-fits-all contract. In this wealth tax contract, the seller must commit to all fair value well in advance. In its fundamental spirit, the radical reform of self-assessment wealth taxation arises from the theoretical and empirical literature on optimal taxation and tax incidence etc by Harberger (1962), Mirrlees (1971), Diamond (1998), Prescott (2004), Piketty and Saez (2013), Piketty (2014), and many others.

Economists tend to neglect 3 other impediments to trade: laziness, incompetence, and malice. Private property permits lazy misanthropic owners to hoard assets (not for gain but out of sloth). This hold-up problem seems to have been prevalent under feudalism (when landowners were less likely to value thrift, prudence, or hard work) as the best of all monopoly profits is a quiet life. Hence, the self-assessment wealth tax disrupts the quiet life of a lazy monopolist by forcing him or her to generate at least some income to sustain sufficiently high valuation to the next buyer. We can apply the same logic to the other impediments to trade (malice and incompetence). In essence, the self-assessment wealth tax turns assets over to someone who can better use them in present value terms.

 

Radical democracy works well when the incumbent politicians can reconsider the collective wisdom and intensity of voter needs and interests.

Radical democracy replaces ordinary votes with either quadratic votes or storable votes (or even some combination of these alternative votes). The early creators of modern democracies build and then entrench a new political order. However, these early creators seem to be uneasy with their handiwork. Several problems can arise from this context. For instance, politicians and lawmakers may inadvertently fail to protect minority rights. Also, there can be paradoxical victories for bad candidates. The tyranny of majority rule may help establish strongman dictatorship. Moreover, modern democracies often tend to ignore the professional views of experts. All of these problems reflect the inability of democracy to give consideration to both the collective wisdom and intensity of voter needs and interests. There can often be a better way for the incumbent decision-makers to allocate resources to most people and interest groups with stronger needs and interests. From time to time, free and open markets should reward subject matter experts who often offer special talents and insights.

In most democratic systems, it can be quite expensive to turn out. To some extent, votes register only marginal strength of preferences. In America, for instance, the close political contest between Democrats and Republicans reflects the empirical fact that the minority party tends to turn out more often than the majority party. In light of this major defect, many experts suggest that it would be important for both bureaucrats and lawmakers to better balance minority representation and rational voter ignorance.

Posner and Weyl propose the radical remedies of quadratic votes or storable votes in lieu of ordinary votes. With quadratic votes, the cost of votes is quadratic in the number of votes cast in a multi-issue election where each voter can purchase votes. With storable votes, each voter retains an initial endowment of votes and then can allocate them between different elections or candidates in multi-outcome elections. In the alternative market design system of quadratic or storable votes, voter effort is proportional to value (so that the outcome with the highest aggregate value wins). With many candidates in a primary election, for example, the chances of remaining pivotal are orders of magnitude less for candidates who are not among the top pair. Only the top pair would go to a run-off after the first round. In the special case, only the top 3 candidates matter since none of the others have a chance of making the run-off.

This coordination problem is quite similar to the typical beauty contest. The beauty contest is an early example of multiple equilibrium in the iterative game of market coordination. In this game, the winner is not necessarily the person that individual judges regard as most attractive. Instead, the winner often tends to be the one that most judges predict to be favorable in the eyes of their colleagues with their animal spirits, sunspot beliefs, self-fulfilling prophecies, or capricious investor sentiments. It is quite important for politicians to apply mechanism design to substantive issues of political economy. U.S. Constitution has stood the test of time quite well. In stark contrast, Brexit referendum allows only 35% of the population to force a dramatic change from the extant British-European institutions to an unknown alternative. A legitimate referendum over some dramatic institutional change would be open to controversy (even if a slender majority passes this referendum). Posner and Weyl propose the radical reforms of quadratic or storable votes in order to better reflect both the collective wisdom and intensity of voter needs and interests.

 

Facilitative immigration laws can help attract high-skill knowledge workers, foreign investors, and entrepreneurs to improve business vitality in most rich countries.

Posner and Weyl support more restrictive immigration laws. Although immigration offers enormous advantages to the migrants themselves, their families back home, employers, capital owners, and other high-skill coworkers, immigration offers few benefits to most workers in rich countries. Migration can even impose substantial costs on these workers who are already left behind by the fundamental forces of global trade, automation, and the recent rise of stock ownership concentration. In practice, law enforcement against future illegal migrants would have to be stricter to avoid undermining the basic human rights of both many legal migrants and their hosts. Clear and transparent rules and regulations help draw a distinction between lawful immigration and illegal entry.

The current U.S. immigration system attracts many foreigners who pursue higher education in America. This system further helps retain the best talents via both the work visa and green card processes. High-skill academic researchers, scientists, economists, doctors, lawyers, entrepreneurs, and so forth can choose to reside in America for long-term business and life opportunities. However, the random lottery screens out many foreign knowledge workers who would otherwise qualify as high-skill migrants. These high-skill immigrants can contribute to economic growth and prosperity in finance, trade, technology, and urban business development. It would be better for the current U.S. immigration system to take into account the merits of new migrants who would qualify as high-skill income earners and business builders for maximum sustainable employment in the American economy. In essence, this alternative merits-driven reform helps revitalize U.S. economic growth with minimal disruption due to illegal entry, law enforcement, and tedious bureaucracy etc. From a fundamental perspective, new immigrants should be free to embrace life, liberty and the pursuit of happiness in the American dream.

 

By taking strategic stock positions in rival firms, institutional investors inadvertently promote oligopolistic practices.

It can be anti-competitive and even illegal for passive indexers, mutual funds, and other institutional investors to place large stock bets in specific industries with high market concentration. Recent empirical evidence shows that institutional investors often coordinate their stock selection to promote oligopolistic behaviors in airlines, mega banks, telecoms, semiconductors, and even Internet service providers. It is illegal for passive institutional investors to buy-and-hold large equity stakes in less competitive industries with high concentration (for instance. there are only 4 major national champions in the U.S. airlines industry). In contrast, passive indexers can be safe and secure from antitrust concerns if most other institutional investors stop buying the shares of multiple public companies in specific sectors with high product market concentration.

If institutional investors such as index funds and mutual funds can hold shares of multiple public corporations in some target industries, the oligopolistic companies would tend to compete less vigorously with one another (in terms of transfer prices, product features, bundles, services, or other disruptive elements). As most senior executive managers tend to make business decisions in the best interests of their institutional shareholders, this basic rationale suggests less fierce product market competition and more price discrimination for consumers in addition to the private benefits of portfolio diversification. The probable result would be more stable share prices and more favorable rents and returns to these passive indexers and mutual funds. The exorbitant power of core institutional investors may adversely affect the overall quality of corporate governance.

Although many critics may disagree with this novel thesis, it is quite controversial to determine whether it is legal for institutional investors to retain substantial equity stakes in oligopolistic public corporations in some U.S. industries with high product market concentration. In due course, this new stock portfolio strategy may attract antitrust scrutiny. Whether large institutional stock ownership causes oligopolistic or even collusive behaviors and practices remains open to controversy.

 

Big data exchange should protect user privacy and open market integrity.

Nowadays many end users take advantage of online information services available on social media platforms such as Facebook, Instagram, Pinterest, Reddit, Twitter, and WhatsApp etc. These platforms gain all the upside of the market value of user data. In exchange, end users enjoy free and valuable information services on these social media platforms. Posner and Weyl refer to this contemporary online system as technofeudalism. This voluntary arrangement by which we allow the use of our data in exchange for valuable information services is akin to a feudal system where serfs are bound to land by the threat and actuality of violence.

The social media platforms enjoy the profitable fruits of data economy by exploiting user data. This empirical fact pervades most open democratic rich countries such as America, Britain, France, Germany, Japan, Singapore, and Spain. Users often pay in the form of personal data exchange rather than money, and this alternative data currency represents another kind of exploitation. The market power of social media giants relies on artificial intelligence for mass content curation. This natural monopoly can arise from the exponentially increasing returns to the scale of data ownership. In response, Posner and Weyl propose the radical solution to this social problem of exploitation in the form of an online trade union of data exchange. This online trade union can help induce most social media outlets to negotiate monetary payments in exchange for the continual flow and provision of personal data.

Paying for online data provision may signal to many users that online interactions are not only pure entertainment but also labor available on siren servers. This labor benefits social media platforms primarily due to positive viral network effects, scale economies, and information cascades. In this fundamental sense, the social media platforms should compensate prolific users for personal data exchange.

Positive network effects often arise from the broader business context where social media revenue increases exponentially with the number of end users (who tend to interact with one another for better content curation and information exchange). In addition, scale economies emerge from substantial decreases in average costs as social media platforms continue to expand the size of online networks. Moreover, information cascades virally spread newsworthy content from Internet influencers and key opinion leaders (KOL). From a contractual perspective, most social media platforms should pay for user data and newsworthy content from traditional media outlets and publishers.

However, most social media platforms may suggest that such monetary payments undermine the likely motives of social collaboration that often yields social rewards to users for being part of an online community. On the darker side, these monetary payments would further undermine the intrinsic value of both online entertainment and content curation by specifying the contractual nature of the economic relation between social media platforms and their users. The ultimate result can turn out to be the worst-case scenario where most social media platforms remain reluctant to pay for user data and newsworthy content from traditional media publishers.

Breaking up tech titans would punish innovative tech enterprises that have already successfully created tremendous economic value. From Facebook and Google to Amazon, Apple, IBM, Intel, Microsoft, Nvidia, and Tesla etc, these tech titans have become quasi-monopolies that necessitate a fresh set of public utility regulations. These new regulations help better protect user privacy and personal data usage. In practice, these regulations should obstruct the capitalistic overreaches of most tech titans in order to safeguard the general public against economic exploitation. Their extant tech infrastructure makes it extraordinarily difficult for new entrants to provide competitive levels of consumer utility. These mega tech titans can skillfully extract consumer currency on the basis of personal data and attention. Moreover, these tech pioneers extract consumer currency on one side of the online platform, and then exchange such currency for revenue at high margins on the other side of the same platform. This subtle but corrosive form of economic exploitation seems objectionable to several major regulatory agencies worldwide (such as U.S. Justice Department, Federal Trade Commission, Senate-House Judiciary Committee, and European Commission etc). These regulatory agencies either break up tech titans into smaller business organizations, or establish new rules and regulations in order to better ring-fence big tech assets in their most productive public uses.

 

This analytic essay cannot constitute any form of financial advice, analyst opinion, recommendation, or endorsement. We refrain from engaging in financial advisory services, and we seek to offer our analytic insights into the latest economic trends, stock market topics, investment memes, personal finance tools, and other self-help inspirations. Our proprietary alpha investment algorithmic system helps enrich our AYA fintech network platform as a new social community for stock market investors: https://ayafintech.network.

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